WASHINGTON — With the subprime mortgage crisis showing no signs of easing, Sandra Braunstein has found herself in a difficult position — defending what many lawmakers see as poor protection of consumers by the Federal Reserve Board.
Ms. Braunstein has worked on consumer issues at the Fed for two decades and has led its consumer and community affairs division since 2004.
But her prominence has grown dramatically since the subprime woes developed; she made seven appearances before Congress last year, versus just one the previous year.
Though she often finds herself arguing against charges that the Fed is beholden to the industry, she said in an interview last month that the central bank is sympathetic to both bankers and consumers.
“I don’t think being pro-bank and being pro-consumer are mutually exclusive,” she said. “We need to make sure the banking industry is healthy and credit is available to people, and at the same time we have a very strong interest in protecting consumers.”
Before taking the Fed post in 1987, Ms. Braunstein was a community activist herself, serving as director of a community development organization and often protesting bank applications. When she was approached to join the Fed, she said, she was unsure she would stay for long.
“Frankly, at the time I thought I’d stay here for a couple of years and move on,” she said. “It never occurred to me that I’d be here this long — never in a million years.”
Despite her hesitation, Ms. Braunstein said she found the Fed to be “actively engaged in consumer protection” and has watched as her division’s staffing has grown to more than 100.
“Certainly some things have changed, like the large portion of financial services that are now offered by nondepositories, the complexity of the issues, and the number of staff the Fed has devoted to consumer protection,” she said. “We have a lot more people, but the one thing that hasn’t changed is that the Fed was committed to consumer protection back then and still is now.”
Even though some who have worked with Ms. Braunstein describe her privately as progressive on consumer issues, the Fed itself came under fire as never before last year for its lack of consumer protection bona fides. Both House Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Chris Dodd singled the Fed out for its failure to write rules under the Home Ownership and Equity Protection Act.
When the central bank unveiled a plan late last month, both lawmakers, and many others, derided it as too little, too late.
Robert Gnaizda, the policy director for the Greenlining Institute, agreed that consumer protection is a low priority for the Fed, and he argued that no one within the central bank is pressing the case for consumers.
“The Fed historically views itself as a monetary policy institution and feels that consumer issues are an annoyance,” he said. “As to whether … [Ms. Braunstein] is a driver of the Federal Reserve’s response, my answer would be no, largely because the role of the director of consumer affairs is more of a symbolic role, not a policy role.”
But some have seen signs of change. Kenneth Thomas, a lecturer in finance at the University of Pennsylvania’s Wharton School and a longtime critic of the Fed’s response to consumer problems, says its attitude toward consumers is changing under Chairman Ben Bernanke, though other regulators, such as the Federal Deposit Insurance Corp., remain far more sympathetic.
The Fed is “becoming more consumer friendly, but it’s all relative,” Mr. Thomas said. “The other agencies are light-years ahead. … The Fed is always dragging up the rear.”
Ms. Braunstein insists that her division is a fundamental part of the Fed, even though her office — like those of many other employees — is separated from the central bank’s headquarters by three city blocks. “We are very much in the mainstream of this organization,” she said.
She acknowledged that the Fed’s response to consumer issues has left some disappointed. Nevertheless, “we keep focused on what it is we need to do and keep moving forward,” she said. “We have an important role in writing rules to make sure that consumer rights are protected and consumers get the information they need to make good decisions.”
The Fed tried to do that last month with its HOEPA proposal. Though lawmakers and consumer groups attacked the plan, it went further than any previous proposal, targeting practices in underwriting and other areas, such as advertising.
“We think it’s very much a step forward,” she said. “We have provided some consistent standards that hopefully will help responsible subprime lending come back, but at the same time we’ve addressed what we saw as the egregious practices in this marketplace.”
Policymakers worked to balance competing interests as they designed the plan, she said. “Our primary objective in the proposed HOEPA rules was to strike the right balance — to address abuses while at the same time avoiding unintended consequences that restrict legitimate credit.”
Rep. Frank also has criticized the Fed for failing to use its authority under the Federal Trade Commission Act to define unfair and deceptive lending practices. Ms. Braunstein said that even though the Fed has not ruled out using its powers, invoking HOEPA made more sense for stemming abusive lending.
“For mortgage lending, it was important for us to use the authority in HOEPA, because it covers the whole industry,” she said. “If we had used the authority in the FTC Act for mortgages, it would have only covered banks.”
Though some have criticized the Fed for failing to take any public enforcement actions related to consumer protection, Ms. Braunstein said nonpublic enforcement actions are sufficient.
“Depending on the circumstances, it may not have been necessary,” to take public action, she said. “Our major goal with any of the enforcement we do is to make sure victims receive restitution.”
Ms. Braunstein said she does not expect the problems in the market to taper off soon.
“Consumer issues generally will be in the forefront, especially mortgage lending,” she said.
