The Federal Reserve Seeks to Protect Consumers

Article excerpt

Recent problems in the subprime mortgage markets highlight the importance of consumer protection in the financial services sector. Financial services are an essential part of everyday life. Deceptive and unfair financial practices can cause serious problems for consumers and threaten to undermine confidence in the financial services industry.

Nearly every aspect of this industry is covered by consumer protection laws that are designed to promote the availability of financial services to all consumers without discrimination, prohibit abuse of customers by financial institutions, and ensure effective and adequate disclosure of information to customers about the features and risks embedded in financial products.

Consumer protection laws are enforced by state regulators (mainly, state attorneys gen-eral) and a range of federal regulatory agencies. 1 These regulators differ with respect to jurisdiction, authority, budget, agenda and approach, producing a most intricate and multifaceted structure.

Federal regulatory agencies, including the Federal Reserve Board, have been entrusted with a certain degree of rulemaking authority under federal consumer laws; these agencies enforce compliance by financial institutions within their jurisdiction.2

The Federal Reserve's role in consumer protection consists of four pillars: rulemaking, enforcement, the Federal Reserve's Community Affairs program and consumer education.

Rulemaking

The Federal Reserve's Board of Governors has been entrusted by Congress with the exclusive mandate to write and interpret regulations designed to put into effect many of the major federal consumer protection laws. These regulations apply not only to the banks under the Board's jurisdiction, they also address mortgage brokers, finance companies and certain businesses, such as retailers and automobile dealers. The table lists major consumer protection laws that are implemented by Board regulations.

Under other federal laws, such as the Community Reinvestment Act, the Federal Reserve Board shares rule-writing responsibility with other regulators. In addition, the Board is responsible for crafting rules prohibiting practices that fall under the legal standards for "unfair or deceptive."

The formation of consumer protection regulations poses significant challenges due to the diversity and complexity of financial products and to the undesirable consequences of over-regulation. Overly simplistic regulations are also undesirable because they can easily be avoided. Given these challenges, the Board has often opted to adopt a case-by-case approach rather than use its rulemaking authority in tackling certain seemingly "unfair and deceptive" practices.3

The dynamic nature of financial markets poses yet another regulatory challenge. To keep up with financial innovation, marketplace developments and changes in existing legislation, as well as to address emerging circumstances and problems encountered by customers, regulations are being subject to recurrent revision and updating-mostly in the form of amendments to existing regulations (see table) or revised interpretations to existing regulations.4

In executing its role in consumer protection, the Board seeks the advice of consumer advocates and other supervisory agencies, reviews comments from the public, and conducts occasional consumer surveys and testing. The Board is also assisted by its Consumer Advisory Council.5 Meetings of the council are held three times a year as public hearings at the Board's headquarters in Washington, D.C.

Enforcement

The Federal Reserve enforces compliance with more than 20 federal consumer protection laws by the financial institutions under its jurisdiction through examinations, handling of consumer complaints, investigation of alleged violations and punitive actions against delinquent institutions.6

On-site consumer compliance examinations are the responsibility of the Banking Supervision and Regulation division of each Federal Reserve bank, carried out by specially trained examiners. …