WASHINGTON If the Federal Reserve Board wants to keep its role in consumer protection, its best hope to convert skeptics may come today when it meets to propose amendments to Regulation Z, which implements the Truth-in-Lending Act.
The changes, which will likely enhance disclosures related to closed-end mortgages and fees paid to loan originators, would seem mundane at any other time. But as Congress considers taking consumer protection oversight away from the Fed and other banking regulators, there has rarely been a more important time for the central bank to demonstrate its commitment.
"They're going to be more aggressive than they would be if left to their own devices," said Gerald O'Driscoll, a former vice president of the Federal Reserve Bank of Dallas who is now a senior fellow at the Cato Institute. "They probably won't be aggressive enough to satisfy critics, but still more aggressive than financial institutions would wish."
The proposal comes at a time when Fed officials have started to acknowledge the agency's failure to sufficiently police consumer issues in the lead-up to the financial crisis.
"We did not see the abuses as widespread as they were and were slow to react to them," Fed Vice Chairman Donald Kohn told a House Financial Services subcommittee this month.
During two days of congressional testimony this week, Fed Chairman Ben Bernanke was repeatedly asked why the central bank did not do more. He pointed to today's proposal as an example of the elevated role consumer protection now enjoys at the Fed but shed little light on what changes may be offered.
The proposal "will include new, consumer-tested disclosures as well as rule changes applying to mortgages and home equity lines of credit," he told lawmakers on the Senate Banking and House Financial Services Committees. "In addition, the proposal includes new rules governing the compensation of mortgage originators."
Consumer advocates are gunning for far-reaching changes.
David Berenbaum, the executive vice president of the National Community Reinvestment Coalition, said the Fed should address bloated home values.
"There was pressure to inflate the numbers so there would be profits in the transaction," he said. "With regard to new originations, that could be addressed by more detailed instructions for the institutions the Fed oversees. It's just a matter of having the political will to do it."
But Robert Gnaizda, of counsel for the Black Economic Council, said he hopes the Fed does not get bogged down by banning particular activities.
"They should focus less on the nitty-gritty and less on banning outright instruments and instead on developing scrutiny and enforcement," he said.
As the Fed considers the fees paid to loan originators, consumer advocates are pushing the Fed to zero in on yield-spread premiums.
"We would like to see a ban on yield-spread premiums across the board," said Julia Gordon, a senior policy counsel at the Center for Responsible Lending. "We would be willing to permit financing a cost of fees through the rate, but only in cases where there aren't up-front fees."
Joshua Silver, the community reinvestment coalition's vice president of research and policy, said the premiums could be paid in installments.
"You draw a third after X number of years and another third after another number of years," he said.
Others said it is far more likely for the Fed to focus more on toughening disclosures than banning any particular practice. For instance, the Fed could specifically warn a borrower about the yield-spread premiums and that a closed-end loan means it cannot be repaid before it matures even in instances of refinancing.
"They could probably come up with far more significant disclosures," said Gil Schwartz, a former Fed lawyer now in private practice. "What if you put a big red warning requiring a mortgage broker to give warnings that you should think twice before signing on to this product?"
Asked at a hearing Wednesday if the Fed would consider banning yield-spread premiums, Bernanke said the central bank is "going to ban the practice of tying the compensation to the type of mortgage having prepayment penalties, for example."
"The purpose of the regulation would be to provide no incentive to brokers to steer borrowers into inappropriate, high-cost" products, he said.
Oliver Ireland, another former Fed lawyer, who is now a partner at Morrison & Foerster LLP, said "you could disclose things in a way that kills them."
Still, others contend that disclosures accomplish only so much.
"If you go back some time, there was a lot more confidence that disclosure was an effective deterrent," said Richard Spillenkothen, the Fed's former director of supervision, who is now a partner at the Deloitte Center for Banking Solutions. "The lesson over the last several years is that disclosure by itself does not work."
Gordon of the Center for Responsible Lending said that for some practices, such as yield-spread premiums, no amount of disclosure will reveal the complexities.
"Yield-spread premiums are a difficult concept and hard to understand," she said. "Most consumers aren't really equipped to do that kind of analysis on their own."
No matter what the Fed does, its battle to retain consumer protection powers is likely to be an uphill one, observers said. President Obama and top lawmakers seem committed to stripping the Fed of consumer protection and giving it to a new agency.
"The die is cast," Schwartz said. "The popularity of the [consumer financial protection] agency really has steamrolled through the Hill. People on the Hill seem to think there's a crying need for it."