Fed defends its consumer protection role

The Federal Reserve on Thursday attempted to snuff out a White House proposal that would remove some of its consumer oversight duties, arguing that the central bank's expertise would be difficult to rebuild elsewhere.

Fed member Elizabeth Duke told a House financial services subcommittee that there's a "compelling case" for leaving those consumer protection responsibilities at the Fed.  

But she also acknowledged "we need to do a better job for consumers of financial products," saying it is one of the fundamental lessons learned from the financial crisis that reached a climax last fall.

As part of a broader revamp of the nation's financial rule book, the Obama administration has proposed creating a new consumer-protection agency that would police the market for deceptive business practices in credit cards, mortgages and other products now scattered among the Fed as well as other federal agencies.

"The Federal Reserve has the resources, the structure and the experience to execute an ongoing comprehensive program for effective consumer protection in financial services," Duke argued.

"We believe that replicating in another agency the deep expertise and full array of functions embedded within the Federal Reserve and used to support our consumer protection program would be enormously challenging."

'Who gets pinched? The little guy. Who gets bailed out? Goldman Sachs' —Texas Republican and prominent libertarian Ron Paul

If approved by Congress, the Consumer Financial Protection Agency could curtail or ban a host of dubious — but lucrative — bank practices such as ballooning mortgages, excessive credit card interest rates and surprise overdraft fees.

The Fed's failure to crack down on abusive mortgage practices during the housing boom has irked Congress and consumer groups. The central bank's more recent decision not to speed up implementation of rules boosting consumer protections against abusive credit card practices also has annoyed some lawmakers.

Republican Ron Paul of Texas, a frequent Fed critic, complained that the central bank watches out mostly for Wall Street. "Who gets pinched? The little guy," he huffed. "Who gets bailed out? Goldman Sachs."

Lauren Saunders, managing attorney at the National Consumer Law Center, welcomed the creation of a new agency, saying it will "give consumer protection the attention and clear focus it deserves ... [and] provide consistent protection no matter who offers the product or service."

At the Fed, Duke said the agency plans next week to issue a comprehensive proposal that would require new consumer disclosures for home mortgages and home equity lines of credit. The proposal also will include new rules governing compensation for companies that originate mortgages.

Instead of taking away the Fed's consumer protection duties, Duke argued the central bank should not only keep them, but take other steps. Those could include having the Fed chair deliver a report to Congress on the state of consumer protection in the financial services industry, along the lines of the Fed chief's twice-a-year economic report to lawmakers. The Fed also could conduct periodic reviews of whether its consumer policies are sufficient.

Duke said the Fed's consumer duties provide it with insights about how households view the economy.

"The more granular view from Main Street is consistent with our regional presence and important to providing a view of economic and financial activity from multiple perspectives," she said.