Fed to Examine Op-Subs for Consumer Protection

WASHINGTON — Trying to prove it takes its consumer protection role seriously, the Federal Reserve Board on Tuesday said it would begin examining potentially hundreds of nonbank subsidiaries of bank holding companies for compliance with the same rules as their parent firms.

The move came a day after President Obama reiterated his support for a new agency to oversee consumer protection.

The Fed said its action stemmed from a pilot project in 2007 with the Federal Trade Commission and the Office of Thrift Supervision to look into nondepository units of banks with significant subprime operations.

But observers said the Fed's eyes were really on Capitol Hill, where Democratic leaders are pushing to create the administration's proposed Consumer Financial Protection Agency.

"Is this trying to make up for the vulnerable position they're in?" asked Cornelius Hurley, a professor at the Boston University School of Law and a former Fed lawyer. "It certainly sounds that way."

Jaret Seiberg, a financial services policy analyst for the Washington Research Group, agreed. "It certainly doesn't hurt the Federal Reserve's case that they're moving more aggressively to examine the nonbank subsidiaries of bank holding companies," he said.

The consumer protection agency envisioned by the White House would take away the power of the banking regulators to write and enforce consumer-related rules. The Fed has been the most vocal in its concerns, and after its move on Tuesday, the big question is whether Congress will appreciate its efforts.

Jim Carr, the chief operating officer of the National Consumer Reinvestment Coalition, said he hoped not. "Even if the Fed were proposing a regime that was as comprehensive as the law, it wouldn't take away the inherent conflicts between the Fed's support for the banks versus its protection of consumers," he said. "We think it's important that they try, but this doesn't supplant the need for an agency whose first priority is protecting consumers."

The ultimate scope of the policy action remains unclear.

"Almost everybody has moved their operations into the bank already," said Gil Schwartz, a former Fed lawyer who now works in private practice. "What does this authority benefit? From a consumer standpoint, I think you're going to find that there aren't that many being done outside of the bank because of the advantages of funding with deposits."

In a letter dated Monday to supervision officers and other leaders at the 12 regional Fed banks, Sandra Braunstein, the central bank's director of consumer and community affairs, said the policy is "designed to enhance our understanding of the consumer compliance risk profile of nonbank subsidiaries and to guide our supervisory activities for these entities."

She also wrote that the plan for implementing the policy "would be developed by consumer compliance examiners who have the appropriate experience, training and expertise to do so."

For the moment, Braunstein wrote, the Fed will not beef up its staff but more guidance would be included in the central bank's 2011 budget.

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