WASHINGTON — The Federal Reserve Board has endured a barrage of criticism for its handling of consumer protection after the mortgage meltdown, but Chairman Ben Bernanke indicated Wednesday that the central bank is ready to make up for lost time.
Two months after proposing changes that would ban certain exotic loans, Mr. Bernanke told lawmakers the Fed will issue rules on unfair and deceptive lending practices by the spring. House Financial Services Committee Chairman Barney Frank, who threatened to strip the Fed of this rulemaking authority last year, took the promise as a sign that the central bank is warming to the cause of consumer protection.
"We are seeing a reversal," the Massachusetts Democrat told Mr. Bernanke. "I found [former Fed Chairman Alan] Greenspan's response on monetary policy to be a very thoughtful one … but in another area, I think he erred."
Mr. Bernanke is scheduled to visit Capitol Hill again today to offer his economic outlook to the Senate Banking Committee. These appearances are typically dominated by monetary policy, but the concern in Congress about the financial crisis was evident Wednesday as questions about interest rates took a back seat to mortgages and capital.
Fed officials have long said they were considering exercising their authority to define unfair and deceptive practices under the Federal Trade Commission Act. Despite a report in American Banker in August that the central bank was actively writing a proposal, the Fed has declined to confirm definitive plans until Wednesday. Mr. Bernanke offered no hints about the shape the proposal will ultimately take, what it will target, or exactly when it will be released.
Since the Fed is also finalizing credit card disclosure practices under Regulation Z, Mr. Bernanke said he would like to issue that rule and the proposal on unfair and deceptive practices at the same time to reduce implementation burdens on the industry.
Still, the proposal could significantly alter lending practices if the Fed decides to make it far reaching. Under the law, the central bank has the power to single out any practice across the range of the financial services industry — including those pertaining to credit cards, mortgages, and other types of consumer loans — and deem it unfair or deceptive.
The Office of Thrift Supervision, the only other banking regulator with the power to define such practices, issued a proposal last year asking for comments on what practices it should target.
But during several appearances before the House last year, Fed Gov. Randall Kroszner seemed reluctant to support a rule, arguing it could be ineffective or have unintended consequences. Such responses angered Rep. Frank, who at one point told Mr. Kroszner that the central bank "is not the best place for consumer protection."
Rep. Frank was far more sympathetic to the Fed on Wednesday, though he still blamed the financial crisis on the "ideology of deregulation."
"We're in the most significant economic troubles since at least 1998, and the single biggest cause was a failure of regulation to keep up with innovation," he said.
Mr. Bernanke acknowledged general weaknesses and said "the regulators are trying to evaluate what we've learned from this experience and see what we can do better. The industry is doing the same thing."
The Fed chief also offered cautious views on a $35 billion housing package from Rep. Frank that is expected to be offered next month. Rep. Frank is considering calling for $15 billion of government assistance to refinance distressed mortgages through the Federal Housing Adminsitration and $20 billion to provide assitance to states and localities to repurchase foreclosed properties.
Asked by Rep. Scott Garrett, R-N.J., about the plan, Mr. Bernanke said "it's worthwhile to be thinking about possible approaches one might take if the situation were to get much worse."
Mr. Bernanke added that he sees "a lot of practical difficulties."
"How would you, for example, determine who to help would be one question that would be important," he said. "How would you ensure that the loans bought were not the bad apples? There are a lot of technical problems. The Federal Reserve is working on issues like this to try to understand how these things might work."
Mr. Bernanke also addressed some Republicans' concerns that Regulation Z would result in reduced access to credit. "We don't want these markets to shut down," he said. "We just want them to work better."
He stressed the importance of capital during the current market hiccups and urged institutions to be more up front about their holdings, because investors have grown skeptical about bank assets.
"I've encouraged banks to continue raising capital so they can continue to lend, and they need to increase transparency so the market can know what these assets look like," Mr. Bernanke said.
Rep. Edward Royce, R-Calif., said the banking system has survived the turmoil because of its capital position, but he asked Mr. Bernanke whether the troubles warrant another look at the Basel II capital rule, which is slated to be implemented April 1.
"I still think Basel II is the right way to go," Mr. Bernanke said. "It's certainly true that some of the lessons we've learned from previous experiences require us to go back and look at Basel II and see if there are changes that can be made."
