WASHINGTON — House Financial Services Committee Chairman Barney Frank warned the Federal Reserve Board that he is tired of waiting for it to define unfair and deceptive practices, and that he is likely to give other regulators the power to act in its stead.
"It's use it or lose it. … If the Fed doesn't start to use that authority to roll out the rules, then we'll give it to someone who will use it," Rep. Frank told Gov. Randall Kroszner at a hearing Wednesday. "You reinforce my position that the Fed is not the best place for consumer protection."
Comptroller of the Currency John Dugan and Federal Deposit Insurance Corp. Chairman Sheila Bair, who testified last week that granting their agencies such rulemaking authority would be helpful, seemed even more enthusiastic about the prospect Wednesday.
Rulewriting authority "would be extremely helpful," especially in subprime mortgages, Ms. Bair said. "If you have a rule, you can have a definitive effect."
The focus on the Fed was a somewhat ironic twist for the hearing, which had been expected to center on OCC preemption of state consumer protection laws. Though some barbs were thrown at Mr. Dugan and the OCC, lawmakers spent much more time grilling Mr. Kroszner.
At issue is the Federal Trade Commission Act, which gave the Fed exclusive authority to promulgate rules for commercial banks that define unfair and deceptive practices. (The FTC was given rulewriting authority for nonbank companies, and the Office of Thrift Supervision has some rulewriting power for thrifts.)
Mr. Kroszner defended the Fed, saying that crafting such rules presents legal and practical challenges, and that all federal regulators can crack down on abusive practices when they find them.
"This has led the Federal Reserve to focus primarily on addressing potentially unfair or deceptive practices by using its supervisory powers on a case-by-case basis, rather than through rulemaking," he said. "Because the prohibition of unfair or deceptive acts applies to all depository institutions as a matter of law, the banking and thrift agencies can and do enforce this prohibition using their supervisory enforcement powers."
But Rep. Frank said he was not satisfied with that response and signaled he is losing patience.
"If the Fed were to do something right away that was acceptable, that would take some of the heat off," the Massachusetts Democrat told reporters after the hearing. "But if they don't, then we're going to be probably looking to changing the statute to share the authority."
Rep. Spencer Bachus of Alabama, the lead Republican on the House Financial Services Committee, agreed. "If the federal regulators... don't protect customers, I believe this committee will lose patience and will take action."
He steered some of the conversation back toward credit card practices, which he criticized last week. Though he said he was a strong supporter of the dual banking system, he said recent behavior by some card companies are "shark practices and unconscionable."
Even if more regulators win rulewriting authority, it is clear they would use it differently. After Rep. Bachus complained that practices such as universal default and double-cycle billing were unfair, Mr. Dugan responded they were not deceptive as long as they were adequately disclosed.
Ms. Bair disagreed. "I think those practices are highly troubling," she said. "But if we have thought these were unfair and deceptive, we would not have the ability to write rules saying that."
In written testimony, she offered a brief outline of deceptive mortgage practices. She said the Fed should write rules to require lenders to underwrite mortgages at the fully indexed rate and prohibit stated-income loans. Also, she said the Fed should discourage loans that exceed a debt-to-income ratio of 50% after taxes and insurance.
Other lawmakers also cited subprime mortgages as an area where regulators have failed to act. That failure, too, was laid at the Fed's doorstep. The central bank has been criticized for not writing rules under the Home Ownership and Equity Protection Act, which gives it the power to set standards for all lenders, not just banks.
The Fed is set to hold a hearing today on the issue and Rep. Frank said he was hopeful it would act. He also said Fed officials had said a stronger national lending law was necessary.
"I did have a good conversation with [Fed Chairman] Ben Bernanke, and I was pleasantly surprised with the extent to which we have certain general agreement on what to do, including legislation that restricts originations and has assignee liability, as long as it is very carefully and restrictively written," Rep. Frank said.
Though the hearing focused primarily on the Fed, preemption did get some attention. Rep. Frank lamented that a recent Supreme Court decision had solidified the OCC's position, but said there was little he could do.
"While I regret preemption, I cannot cut it back," he said. "That leaves us with the problem that we have — that the federal government has bitten off much more than we can chew. … I do not think the federal agencies are at present adequately staffed or legally structured to provide consumer protection."
Steven Antonakes, the Massachusetts commissioner of banks, and Iowa Attorney General Thomas Miller urged Congress to require the federal regulators to do more to protect consumers.
Mr. Miller criticized the OCC for not taking enough enforcement actions against national banks, but Mr. Dugan defended his agency by arguing such actions do not cover all the moves the agency makes.
"Our compliance regime is not enforcement only," he said. "Instead, it's better described as supervision first, enforcement if necessary — with supervision addressing so many problems early that enforcement often is not necessary."
During the hearing, regulators pledged to work together to improve consumer protection.
"There's a lot of frustration about the state of consumer protection," Ms. Bair told reporters.
"There are some serious problems out there, and we need to come to grips with that."
