House Financial Services Committee Chairman Barney Frank (D-MA) today released a report card demonstrating the poor record of the Federal Reserve in using the tools provided by Congress to protect consumers from abusive financial industry practices. Only after being prodded by the Democratic Congress did the Federal Reserve respond with a number of consumer protection rules and regulations. In contrast, the Financial Services Committee has held 18 hearings since 2007 on mortgage reform, subprime mortgages, credit cards and overdraft practices, passed two bills in the House to regulate subprime mortgage practices, and passed legislation to regulate credit card practices that President Obama signed into law in May.
Issue: Democrats Act: The Fed Responds:
Mortgages and HOEPA
In 1994 the Democratic Congress passed the Home Ownership & Equity Protection Act (HOEPA), which included a host of specific consumer mortgage protections and authorized the Federal Reserve to issue comprehensive rules ending abusive lending practices.
3/27/07: Committee action on mortgage reform begins with a Financial Institutions Subcommittee hearing and continues through 2007.
10/22/2007: H.R. 3915, legislation to regulate subprime mortgages, is introduced in House.
11/9/2007: H.R. 3915 passed by the Financial Services Committee. H. Rept. 110-441.
11/15/2007: H.R. 3915 passed by the House: 291-127 (Roll no. 1118).
5/7/2009: The House approves similar legislation, H.R. 1728, to regulate subprime mortgages.
The Fed’s action on predatory and subprime lending followed
House action on the issue.
In June 2007, the Fed held hearings on changes to HOEPA.
The Fed issues its first proposal for new rules in December 2007, after the House passed its bill. The rules were made final in July 2008, and will take effect in October 2009.
Credit Card Rules
Similarly, like lending rules, the Federal Reserve has had the tools to restrict abusive and unfair industry practices under the Unfair and Deceptive Acts or Practices passed in the early 1970s.
Specifically, the Fed had UDAP authority pursuant to Section V of the Federal Trade Commission Act.
2/7/2008: H.R. 5244, the Credit Cardholders’ Bill of Rights Act, introduced in House
9/16/2008: H.R. 5244 is passed by the Financial Services Committee. H. Rept. 110-857.
9/23/2008: H.R. 5244 is passed by the House: 312-112 (Roll no. 623).
Consideration of credit card reform resumed in 2009, and the bill was signed into law on 5/22/09.
The Fed’s action followed House action on H.R. 5244, the Credit Cardholders’ Bill of Rights Act.
The Fed issued its first proposal for new rules in May 2008, after the bill was introduced in the House. The rules were made final in December 2008 and take effect in January and July 2010.
Abusive Overdraft Protections
Like subprime mortgages, the Federal Reserve has had the power for many years, in two different statutes, to regulate overdraft services that banks offer to consumers who overdraw their balance. These overdraft services, which are often considered to be loans, many times come with hefty fees and outrageous interest rates.
2/18/07: Congresswoman Carolyn Maloney initiates H.R. 946 to “extend the protections of the Truth in Lending Act to overdraft protection programs and services provided by depository institutions, to require customer consent before a depository institution may initiate overdraft protection services and fees, to enhance the information made available to consumers relating to overdraft protection services and fees, to prohibit systematic manipulation in the posting of checks and other debits to a depository account for the purpose of generating overdraft protection fees, and for other purposes.”
7/11/2007: The Financial Services Committee holds a hearing on overdraft protection and fair practices for consumers.
The Fed’s action followed House action on H.R. 946, the Consumer Overdraft Protection Fair Practices Act.
12/18/2008: The Fed proposes rules to protect consumers that use overdraft services offered by their bank. The rule solicits public comment on proposed amendments to Regulation E (Electronic Fund Transfers) intended to provide consumers a choice regarding their institution's payment of overdrafts for automated teller machine withdrawals and one-time debit card transactions.
No further action was initiated by the Federal Reserve and the regulations have not been implemented.
Consumer Protection Pursuant to the Unfair and Deceptive Acts or Practices Act
Because the Federal Reserve never issues regulations to protect consumers to comply with UDAP, the other banking regulators were unable to use their existing authorities to better protect consumers.
Chairman Frank in 2007 asks the Federal Reserve to act on UDAP
Chairman Frank introduces legislation in 2007 calling on the Federal Reserve to implement the law. If the Fed did not want to use the UDAP authority, Congress would find federal regulators who would.
9/14/2007: H.R. 3526, to authority to issue UDAP rules to OCC and FDIC as well as FRB, OTS and NCUA, introduced in the House.
12/5/2007: H.R. 3526 is reported by the Committee on Financial Services. H. Rept. 110-472, Part I.
12/5/2007: H.R. 3526 is reported by the Committee on Energy and Commerce. H. Rept. 110-472, Part II.
12/5/2007: H.R. 3526 is passed by the House on motion to suspend the rules and pass the bill, as amended agreed to by voice vote.
The Federal Reserve’s inattention and inaction on consumer protection is a key reason why Democrats are working to create the Consumer Financial Product Agency in the coming weeks and months. As the above report card shows, consumer protection has long been overlooked by federal regulators, and their motivation to protect consumers has been driven more by congressional pressure rather than a sense of duty to the protect the American public.