WASHINGTON — The Federal Reserve Board has defended its consumer-protection record — and made the case that it does not need to write rules defining unfair and deceptive practices — by saying regulators are addressing issues on a case-by-case basis through enforcement actions.
But the Fed has never taken an enforcement action related to unfair and deceptive practices; fellow banking regulators have issued 29 such orders in the past seven years.
Fed officials have argued that much of their work has been behind the scenes, and the central bank reportedly has reversed course and is now drafting an unfair practices regulation. But the enforcement statistics do raise the question whether the Fed is doing enough to police abusive lenders.
"There's no deterrent effect if you don't have public enforcement," said Gil Schwartz, a partner in the Schwartz & Ballen LLP law firm in Washington. "If you do it informally, how will people know this is inappropriate behavior?"
The Fed is the only regulator that has never acted under the Federal Trade Commission Act, which gave the central bank and the Office of Thrift Supervision the power to write rules defining unfair and deceptive practices for banks and thrifts.
Though the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. lack such rule-writing authority, they have been the most active in enforcing the law.
In June 2000, the OCC became the first banking agency to take an enforcement action under the FTC Act, accusing Providian National Bank of unfair and deceptive marketing practices. (The company ultimately agreed to repay more than $300 million to customers.) The agency has taken nine more actions against banks, the most recent against Laredo National Bank in November 2005 citing lending practices, including significant increases in fees at closing and underwriting without regard to a borrower's ability to repay.
The FDIC has taken 15 actions, while the OTS has taken four. The thrift agency's most recent was against AIG Federal Savings Bank in June, which it said had failed to manage and control the loan origination services outsourced to an affiliate.
Against nonbank lenders the FTC has brought 21 actions targeting allegedly deceptive and unfair practices mainly related to mortgage lending and with a focus on the subprime market.
Fed officials argue that it is unfair to equate no enforcement actions with inaction.
"We have cited violations for [unfair and deceptive practices] in the exams," said Sandra Braunstein, the director of the Fed's division of consumer and community affairs. "We have not seen anything that merited a public enforcement action, or we would have taken it."
Some observers agreed. L. Richard Fischer, a Washington partner in the Morrison & Foerster law firm, said case-by-case enforcement is not necessarily less effective.
"The way they have elected to approach this is through the examination process, which is not public," he said. "That doesn't meant they are not doing things. I can tell you from personal experience: They do it, they do it very forcefully, and they get the result they are looking for."
But Mr. Fischer and others agreed the record looks bad politically for the Fed.
"Private enforcement is very effective … , but once you get to a policy debate, the absence of public enforcement actions can sound very loud," Mr. Fischer said. It "can raise questions."
This is especially true now, when the Fed has been under fire from House Financial Services Committee Chairman Barney Frank for its refusal to write a rule defining unfair and deceptive practices.
The central bank has argued that case-by-case enforcement is the most effective way to deal with the issue, but observers said that, without numbers to bolster its case, it is treading on thin ice.
Rep. Frank will "see through these weak numbers," Mr. Schwartz said. The Fed's "argument of case-by-case basis will fall by the wayside soon. It would be very hard for them to do the status quo."
Deborah Goldstein, an executive vice president at the Center for Responsible Lending, said that even the Fed's behind-the-scenes efforts are deficient. She pointed to rising mortgage delinquencies and foreclosures as proof.
"It really does illustrate that public enforcement through regulation is not working when these abusive subprime loans were being made," Ms. Goldstein said. "There should have been more attention to these loans, and now we're seeing [the] cost of that lack of oversight."
The Fed, she said, should write a rule defining unfair and deceptive practices. "It just reinforces that the Fed has been very slow to respond, and it makes it even more important now that they put … rules in place," Ms. Goldstein said.
Rep. Frank, meanwhile, in June threatened to strip the Fed of its authority to write rules defining unfair and deceptive practices and hand it to the OCC and FDIC instead. In an interview Aug. 3, he gave the Fed until September to act.
The OTS is moving forward and reportedly has invited the Fed to write a joint rule. But on Aug. 3 the thrift agency went ahead on its own and released a broad proposal asking the public how best to define unfair and deceptive practices.
The Fed has not acknowledged that it is considering writing its own rule. Fed Gov. Randall Kroszner in June warned that any rule must not be overly broad or limiting.
"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. "The banking and thrift agencies can and do enforce this prohibition using their supervisory enforcement powers."
The debate was stirred in 2000 when the OCC took the first action under the FTC Act. Industry lawyers at the time questioned the OCC's authority because it lacked the power to define unfair and deceptive acts. The agency defended its move, and soon the FDIC and OTS followed the OCC's lead.
To be sure, many industry lawyers and representatives say the Fed is acting appropriately. "The fact that the Fed has not arrived at a point where its supervisory measures have had to accelerate to a public enforcement action doesn't mean that somehow state member banks don't get the message," said Richard Riese, the director of the American Bankers Association's center for regulatory compliance.
Ronald Glancz, a partner at Venable LLP in Washington, said people should not read too much into the enforcement numbers. "You shouldn't blame a regulator for fewer enforcement actions because they are able to achieve compliance through their normal supervision."
But Mr. Schwartz and Ms. Goldstein said it is impossible for other institutions to learn anything from nonpublic actions unless the Fed offers more guidance.
"The burden is on them to say, 'These are the behaviors we've been fixing,' " Mr. Schwartz said. "If you don't want to reveal the bank, that's fine, but you can certainly reveal the kinds of activities they were engaged in that were criticized by the Fed."
