Federal Reserve Chairman Ben Bernanke has been arguing hard for the Fed's continued control over consumer financial protection. Should the Fed still have such control?
No way, says Travis Plunkett, legislative director of the Consumer Federation of America, whose member organizations include Consumers Union, publisher of Consumer Reports.
In testimony presented earlier this month before a Congressional committee, Plunkett outlines numerous ways the Fed has failed in its duty to protect consumers in the financial arena over the last two decades. Millions of consumers are in an ever-deepening hole as a result, Plunkett says. And the only way to solve it is with a new regulatory sytem including a consumer financial protection agency whose only focus is on consumers.
From Plunkett's testimony and from Gail Hillebrand, a senior attorney in charge of Consumers Union's Financial Services campaign, here are a few examples of how the Fed, our central bank, has dropped the ball:
•Put off oversight of predatory loans. The Fed was granted sweeping anti-predatory mortgage regulatory authority by the 1994 Home Ownership and Equity Protection Act. Consumer groups sought to strengthen the regulations under the Act for years, but changes addressing some of the problems in nontraditional mortgages were only issued on July 30, 2008, as the economy was collapsing from the effects of predatory lending in the U.S.
•Kept silent as credit-card debt ballooned. The Fed and the Office of the Comptroller of the Currency, the federal agency responsible for overseeing the nationally chartered banks that issue most credit cards, were "largely silent" while credit-card issuers dramatically expanded their reach, the CFA reports. This credit-card expansion had disproportionately negative effects on the least-sophisticated, highest-risk, and lowest-income households.
•Helped banks avoid consumer protections. Consumers pay at least $17.5 billion a year on overdraft loan fees for debit card purchases or withdrawals that go through even when there's not enough money in their accounts. Plunkett says those transactions are essentially short-term overdraft loans that should be covered under the Truth in Lending Act (TILA) the same way that payday loans are handled. But the Fed treats them as service fees, which don't require the same level of disclosure or consent from consumers. (The Fed issued a proposal in December 2008 that would at least address the issue of consent, but it proposed one weak choice and one stronger alternative, and hasn't acted on either since the public comment period closed on March 30.)
•Has allowed a second-tier shadow banking system with missing consumer protections. After several years of pressure from Consumers Union and other consumer groups, the Fed said in 2006 that payroll cards–prepaid cards used to pay wages to individuals without bank accounts–fell under the Electronic Funds Transfer Act, which requires key disclosures of fees and requires statements of transactions, among other things. But the Fed failed to follow up by extending that same protection to prepaid cards that are used like bank accounts but not set up through employers. Essentially, the prepaid card economy is a shadow banking system unchecked by regulation, Plunkett asserts.
•Did next to nothing to speed up our access to funds. Electronic funds transfers shift money from place to place in an instant. But the Fed has dragged its feet on updating decades-old funds-availability rules regarding when consumers can get money from deposited checks. Those are the rules that allow banks to make you wait for your money even when your check already has cleared.
"Based on their track record rather than promises, it's very clear that the Federal Reserve has failed to address major consumer protections over a 20-year period," Plunkett told us. "We need action as opposed to rhetoric. In about a dozen separate areas of consumer finance, the Federal Reserve has either not acted or acted much too late.
Last week, the Fed unveiled a series of
proposed regulatory changes, designed to correct some of the most egregious problems in mortgage and home-equity lending. Plunkett suggested the action was intended to hold onto the Fed's institutional authority.
"I have to say the Fed has done better for consumers under Bernanke," Plunkett added. "But structurally, the Fed is unlikely to ever be as vigorous in watching out for consumers in the financial arena as they should be."
His solution: A consumer financial protection agency that focuses only on us, the consumers. That's a solution Consumers Union, publisher of Consumer Reports, supports, too. If you feel the same, comment below, and
send an e-mail to your members of Congress now.–Tobie Stanger
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