WASHINGTON — Democratic leaders have turned the Federal Reserve Board into their favorite punching bag on Capitol Hill, blaming the central bank for not doing enough to curb predatory lending, reform card practices, or finish the implementation of the Fair and Accurate Credit Transactions Act.
The Fed was always liable to be a prime target of Democrats when they won control of Congress in November. But the situation only worsened when the scope of problems in the subprime mortgage market gained publicity in February.
Observers disagree on how the Fed will respond to the growing criticism, but they agree it has lost much of its clout among lawmakers. Senate Banking Committee Chairman Chris Dodd has accused the Fed of "foot-dragging" in response to problems in the subprime market, and House Financial Services Committee Chairman Barney Frank pointedly told Gov. Randall Kroszner last month that his recent testimony reinforced his position that the agency "is not the best place for consumer protection."
But Rep. Carolyn Maloney, D-N.Y., best summed up the view of the Fed from Capitol Hill.
"This committee and my subcommittee have held a number of hearings of which one of the problems identified seems to be that the Fed has not used its mandate to protect consumers, or if they do use it, they do it very late," Rep. Maloney told a top Fed official. "Whether the issue is subprime lending or credit card practices or bank fees or today's credit reports, the problem of Fed inaction seems to be a consistent theme."
Fed officials say they understand the frustration that has swelled in Congress, but they insist they have a strong record of protecting consumers in a way that does not create economic consequences.
"Consumer protection matters are very important to the Fed and always have been," Sandra Braunstein, the director of the Fed's division of consumer and community affairs, said in an interview last month. "We have had a robust consumer protection program at this agency for over 30 years."
Despite the tough talk in Congress, the Fed prides itself as an independent agency and does not appear to be bowing to the pressure. Just a day after being dressed down by Rep. Frank, Mr. Kroszner held a hearing under the Home Ownership and Equity Protection Act to discuss its authority to curb abusive lending. The daylong hearing ended with few conclusions and no hint on where the Fed was going next.
Ms. Braunstein said that regulators are working on consumer regulations, but that the rulemaking process does not happen quickly. "Rulemaking is a very deliberate process."
But observers said the barrage of criticisms is putting the Fed on the defensive. They traced the growing congressional attacks to several factors, including former Fed Chairman Alan Greenspan's retirement two years ago. Though Democrats did criticize Mr. Greenspan, his stock in Congress remained high. His successor, Ben Bernanke, has had little time to develop the same pull.
Observers also note that the central bank's governors, all of whom were appointed by President Bush, cling to free-market principles that demand scant regulatory interference — a philosophy that can make the Fed seem aloof.
Ken Thomas, a lecturer in finance at the University of Pennsylvania's Wharton School, said the central bank is not helped by a sense among Democrats that it is in the industry's pocket.
"The most pro-bank regulator in terms of any of the regulators is the Fed," he said.
But Wayne Abernathy, the executive director of financial institutions policy and regulatory affairs at the American Bankers Association, disputed that view, noting that the industry has sparred with the Fed over the Basel II capital rules, among other things.
"We have plenty of disagreements with the Fed," he said.
Many industry observers chalked up the friction between the Fed and Congress to simple politics and said the agency is behaving appropriately by reacting with caution. "The world has changed, and I think it takes time for any institution to recognize there has been a sea change and to figure out what to do," said Gil Schwartz, a former Fed lawyer who is now in private practice. "You're seeing a backlash for all those years that Democrats weren't able to force them to do things."
Kurt Pfotenhauer, the senior vice president for government affairs and public policy at the Mortgage Bankers Association, agreed with that view. "There's a good reason the Fed is an independent agency. It's supposed to be somewhat immune from congressional pressure... It's been doing exactly what it should be doing."
But other banking regulators have made a point of not defending the Fed's perceived inaction on consumer issues. Federal Deposit Insurance Corp. Chairman Sheila Bair has emerged as a leader on consumer issues — often at the expense of the Fed, industry representatives said.
"Sheila Bair's clear alignment with consumer advocacy organizations has put pressure on the other federal regulators," Mr. Pfotenhauer said. "The rest of the regulators are taking a more traditional approach."
In the past month Ms. Bair has criticized the advanced approach to the proposed Basel II rule that the Fed champions, and urged it write rules governing subprime mortgages for all lenders.
Both she and John Dugan, the Comptroller of the Currency, have endorsed an idea Rep. Frank offered at a recent hearing to give their agencies the power to define unfair and deceptive practices. Currently only the Fed and the Federal Trade Commission have that power.
The hearing was a clear warning to the Fed that Congress would consider shifting or diluting its regulatory authority over banks if it fails to act.
Some industry representatives said such a threat is more rhetorical than anything else. "It's not unusual for congressional pressure to be presented in those terms," Mr. Abernathy said. "You have a tension with every independent agency between independence and accountability. … The agency needs to defend its independence, and Congress needs to hold the agency accountable."
But others say the Fed would do well to pay close attention to the emotions on Capitol Hill, especially after the Treasury Department said last week that it would review bank regulatory powers in the coming months. Mr. Bernanke and other Fed officials have given speeches touting the benefits of the central bank's remaining a regulator.
"As long as … [Mr. Bernanke] believes in that role of the Fed, he's got to be responsive to Congress," Mr. Thomas said. "If this is the will of Congress — to be more pro-consumer — then he's got to be more concerned about it."
