Regulatory Failures Show Clear Need for an Agency Dedicated to Common-Sense Financial Protections for Consumers


Center for Responsible Lending
July 13, 2009

A new policy brief by the Center for Responsible Lending chronicles the repeated failure of federal bank regulators over the years to rein in irresponsible lending practices. Example after example of regulatory delay or inaction demonstrates the need for a stand-alone, independent regulator focused solely on ensuring basic, common-sense safeguards for consumers. For the full report, please go here.

Here are some examples of the regulatory lapses documented by CRL in its policy brief, titled "Neglect and Inaction: An Analysis of Federal Banking Regulators' Failure to Enforce Consumer Protections:" 

  • The Federal Reserve failed to write rules curbing unfair and deceptive mortgage lending practices for more than a decade after Congress directed it to do so.
  • Office of the Comptroller of the Currency (OCC) examiners in 2005 found banks' standards for making mortgages had deteriorated; nonetheless federal bank regulators as a group did not issue guidelines for making or buying subprime loans for another two years, when it was too late to prevent the current fiasco.
  • The OCC did not exercise its consumer protection authority to address unfair and deceptive practices for twenty-five years.
  • Black and Hispanic communities received a disproportionate share of unfair and deceptive subprime home loans and as a result have suffered a disproportionate share of foreclosures and other financial distress. Even as subprime lending grew and peaked from 2000 to 2006, the Office of Thrift Supervision (OTS) made no referrals to the Justice Department for suspected race and national origin discrimination in mortgage lending.

CRL believes that these and other failures demonstrate the need for a newly configured regulatory framework, one that includes ONE agency equipped with the powers it needs to provide the common sense safeguards that will benefit consumers and business alike.

The Obama administration and several key lawmakers in Congress have called for such an agency, which the White House would call the Consumer Financial Protection Agency. For such an agency to succeed, it must be able both to ensure that consumer protection rules are written fairly and to vigorously enforce those rules first-hand, with onsite supervisory authority. 

Federal regulators at the OCC, the OTS and the Federal Reserve now say they understand that strong, sensible consumer protections are essential to a strong economy. But as the Senate Banking Committee holds a hearing tomorrow to examine the proposal for a new agency, lawmakers must keep in mind the repeated failures of the existing regulatory framework to stop numerous abuses. These failures show that fragmenting consumer protection responsibility among regulators whose primary focus is bank safety and soundness just doesn't work. 

The OCC and OTS, which are funded by fees from the banks they charter and regulate, have been reluctant to take actions that could cause an institution to switch to another charter and regulator. This has led to a classic race to the bottom, with each agency coming to view the banks it oversees as customers rather than entities to be regulated. That has led regulators to not only defend practices that hurt consumers, but also intervene to prevent state authorities from acting to stop such practices.  Even the Inspector General of the U.S. Treasury – home to the OCC and the OTS – has given these two regulators failing grades when it comes to ensuring that financial products won't blow up in the hands of consumers who buy them.

Regulators' failure to make consumer protection a priority has caused widespread economic disruption, at great cost to financially distressed borrowers as well as to taxpayers. From home loans to credit cards to bank overdraft fees, the financial services arena is replete with bad practices. Each is a painful reminder of why America needs to revamp its oversight of financial services: We must never again forget that strong consumer safeguards are the underpinning for a safe and sound banking system.

 

For more information: Kathleen Day at (202) 349-1871 or kathleen.day@responsiblelending.org; Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org; or Charlene Crowell at (919) 313-8531 or charlene.crowell@responsiblelending.org.

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About the Center for Responsible Lending

The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation's largest community development financial institutions.