The Federal Reserve plays a key role in protecting consumers when they seek financial services. That role revolves around four pillars: rulemaking, enforcement, community affairs and consumer education.Consumer protection

Sharon K. Blei

English

Research Papers in Economics

R
ecent problems in the subprime mortgage  
markets highlight the importance of con-
sumer protection in the financial services sec-
tor.  Financial services are an essential part of 
everyday life.  Deceptive and unfair financial 
practices can cause serious problems for con-
sumers and threaten to undermine confidence 
in the financial services industry.
Nearly every aspect of this industry is 
covered by consumer protection laws that 
are designed to promote the availability of 
financial services to all consumers without 
discrimination, prohibit abuse of customers 
by financial institutions, and ensure effec-
tive and adequate disclosure of information 
to customers about the features and risks 
embedded in financial products.
Consumer protection laws are enforced by 
state regulators (mainly, state attorneys gen-
eral) and a range of federal regulatory agen-
cies.
1  These regulators differ with respect to 
jurisdiction, authority, budget, agenda and 
approach, producing a most intricate and 
multifaceted structure.
Federal regulatory agencies, including the 
Federal Reserve Board, have been entrusted 
with a certain degree of rulemaking authority 
under federal consumer laws; these agencies 
enforce compliance by financial institutions 
within their jurisdiction.
2
The Federal Reserve’s role in consumer 
protection consists of four pillars: rulemaking, 
enforcement, the Federal Reserve’s Commu-
nity Affairs program and consumer education.
Rulemaking
The Federal Reserve’s Board of Governors 
has been entrusted by Congress with the 
exclusive mandate to write and interpret 
regulations designed to put into effect many 
of the major federal consumer protection 
laws.  These regulations apply not only to 
the banks under the Board’s jurisdiction, 
they also address mortgage brokers, finance 
companies and certain businesses, such as 
retailers and automobile dealers.  The table 
lists major consumer protection laws that 
are implemented by Board regulations.
Under other federal laws, such as the Com-
munity Reinvestment Act, the Federal Reserve 
Board shares rule-writing responsibility with 
other regulators.  In addition, the Board is 
responsible for crafting rules prohibiting 
practices that fall under the legal standards  
for “unfair or deceptive.”
The formation of consumer protection reg-
ulations poses significant challenges due to the 
diversity and complexity of financial products 
and to the undesirable consequences of over-
regulation.  Overly simplistic regulations 
are also undesirable because they can easily 
be avoided.  Given these challenges, the 
Board has often opted to adopt a case-by-
case approach rather than use its rulemak-
ing authority in tackling certain seemingly 
“unfair and deceptive” practices.
3
The dynamic nature of financial markets 
poses yet another regulatory challenge.  To 
keep up with financial innovation, market-
place developments and changes in existing 
legislation, as well as to address emerging 
circumstances and problems encountered 
by customers, regulations are being subject 
to recurrent revision and updating—mostly 
in the form of amendments to existing regu-
lations (see table) or revised interpretations 
to existing regulations.
4
In executing its role in consumer protec-
tion, the Board seeks the advice of consumer 
advocates and other supervisory agencies, 
reviews comments from the public, and 
conducts occasional consumer surveys and 
testing.  The Board is also assisted by its 
Consumer Advisory Council.
5  Meetings 
of the council are held three times a year as 
public hearings at the Board’s headquarters 
in Washington, D.C.
Enforcement
The Federal Reserve enforces compliance 
with more than 20 federal consumer protec-
tion laws by the financial institutions under its 
jurisdiction through examinations, handling 
of consumer complaints, investigation of 
alleged violations and punitive actions against 
delinquent institutions.
6
On-site consumer compliance examina- 
tions are the responsibility of the Banking 
Supervision and Regulation division of each 
Federal Reserve bank, carried out by specially 
trained examiners.  When examinations 
reveal consumer compliance deficiencies, the 
findings are communicated to the institution’s 
management.  In the rare cases where institu-
tions do not address the deficiencies brought to 
their attention, the Federal Reserve can wield 
a variety of enforcement tools, ranging from 
informal supervisory actions to formal actions 
and cease and desist orders.  In particularly 
severe cases, the Federal Reserve appeals for 
intervention by the Department of Justice.
7
Depository institutions under the Federal 
Reserve’s jurisdiction are also assessed for 
their performance under the 1977 Com-
munity Reinvestment Act (implemented by 
regulation BB); the CRA encourages deposi-
tory institutions to help meet the credit needs 
of the communities in which they operate. 
An important tool for monitoring institu-
tions between examinations is the analysis 
of consumer complaints.  An established 
By Sharon K. Blei
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continued on Page 16
The Federal Reserve Seeks 
To Protect Consumers
FINANCIAL SERVICES
Carol Mondesir participates in a protest in front of ocwen Financial,  
a subprime loan servicer, sept. 26, 2007, in West Palm beach, Fla.
14   The Regional Economist  |  April 2008endnotes
 1 The eight federal regulators that are involved 
in consumer protection are the Federal Reserve 
Board, the Office of the Comptroller of the 
Currency (OCC), the Federal Deposit Insur-
ance Corp. (FDIC), the Federal Trade Com-
mission (FTC), the Securities and Exchange 
Commission (SEC), the National Credit Union 
Administration (NCUA), the Office of Thrift 
Supervision (OTS) and the Commodity Futures 
Trading Commission (CFTC).
 2 A table of regulatory authorities and their 
responsibilities is available with the online 
version of this article.  See www.stlouisfed.org/
publications/re.
 3 The most recent example is alleged predatory 
lending practices in the subprime mortgage 
market.
 4 The Home Ownership and Equity Protection 
Act, for example, is a 1994 amendment to the 
Truth in Lending Act.
 5 The Consumer Advisory Council is a Congress-
established council consisting of 30 members 
with diverse backgrounds; they have staggered 
terms and represent the interests of consumers, 
community groups and financial institutions.
 6 Institutions under the Federal Reserve’s 
jurisdiction include state member banks, bank 
holding companies, nonbank subsidiaries of 
bank holding companies, edge and agreement 
corporations and branches, and agencies of 
foreign banking organizations operating in the 
U.S. and their parent banks.
 7 The Department of Housing and Urban Devel-
opment (HUD) provides litigation assistance in 
cases pertaining to home loans.
 8  To help consumers identify the agency they 
should address their complaints to, the Federal 
Reserve has launched an online consumer com-
plaint system that automatically dispatches com-
plaints to the appropriate supervisory agency.  
The Board is also planning to establish an 
administrative center with a toll-free telephone 
number for handling consumer complaints.
 9 These publications focus on selected topics, 
such as bank accounts and services, credit 
cards, credit scores, identity theft, mortgages, 
vehicle leasing, checks, etc., and target consum-
ers’ special needs as indicated by consumer 
behavior research, surveys and testing.  Many of 
these publications are also available in Spanish.  
See www.federalreserve.gov/consumers.htm.
 1 0   The press release, background information  
and a form for submitting public comments  
are available at www.federalreserve.gov/ 
newsevents/press/bcreg/20071218a.htm.
 11   Bernanke’s semiannual Monetary Policy 
Report to Congress normally is dedicated to 
macroeconomic issues alone.  The fact that 
nearly one-third of his July testimony discussed 
the subprime-mortgage market and planned 
reforms to consumer-protection regulation 
underscores the high priority the Federal 
Reserve assigns to its consumer-protection 
responsibilities.  The testimony is available at 
www.federalreserve.gov/newsevents/testimony/
bernanke20070718a.htm.
RefeRences
    The online version of this article includes a 
lengthy list of web sites related to consumer 
protection.  See www.stlouisfed.org/publica-
tions/re.
In the wake of the recent subprime mortgage 
debacle, the Federal Reserve Board proposed and 
asked for public comment on changes to Regula-
tion Z (which implements the Truth in Lending Act, 
or TILA) on Dec. 18, 2007.10  The deadline for com-
menting is April 8, 2008.
The intent of the new rules is to better protect 
consumers from unfair or deceptive home-
mortgage lending and advertising practices.  When 
enacted—probably near the end of 2008—these 
changes will extend the guidelines of the Home 
Ownership and Equity Protection Act (HOEPA) to a 
much broader category of loans, defined as higher-
priced mortgage loans.  The proposed changes will 
require lenders to document and verify borrowers’ 
ability to repay high-priced loans, restrict the imple-
mentation of prepayment penalties, and require 
lenders to establish escrow accounts for taxes and 
insurance bills.  Additional changes will apply to all 
loans secured by a consumer’s principal dwelling.
These changes would prohibit lenders from 
compensating mortgage brokers with yield-spread-
premiums, prohibit lenders and brokers from coerc-
ing real estate appraisers to misstate a home’s 
value, impose restrictive criteria on loan servicers 
and ban misleading advertisements.  These new 
rules represent the most significant revisions to U.S. 
consumer-protection regulation in over a decade.
The impetus for revising Regulation Z’s 
mortgage-lending provisions was a widespread per-
ception that the subprime-mortgage market was 
malfunctioning.  Federal Reserve Board Chairman 
Ben Bernanke summarized the case for more and 
stronger consumer protections, and the Board’s  
intent to provide them, in his July 18, 2007, testi-
mony before Congress:
   [T]he recent rapid expansion of the subprime 
market was clearly accompanied by deteriora-
tion in underwriting standards and, in some 
cases, by abusive lending practices and outright 
fraud. ...By the end of the year, we will propose 
changes to TILA rules to address concerns about 
mortgage loan advertisements and solicitations 
that may be incomplete or misleading and to 
require lenders to provide mortgage disclosures 
more quickly so that consumers can get the 
information they need when it is most useful to 
them. ...[Also,] we plan to exercise our authority 
under  the Home Ownership and Equity Protec-
tion Act (HOEPA) to address specific practices 
that are unfair or deceptive. ...I expect that the 
Board will propose additional rules under HOEPA 
later this year.11  
Public Comment Sought on New Mortgage Rules
Federal law PurPose/ requireMents iMPleMentation
the truth in lending act (1968)  Requires lenders to clearly disclose lending terms and costs to borrowers. Regulation Z
the Fair Credit Billing act (1974)
enacted as an amendment to the truth in lending act.  Protects consumers from 
unfair billing practices by creditors and provides a mechanism for addressing 
billing errors, mostly in credit accounts, such as credit card or charge card accounts.
Regulation Z
the Fair Credit and Charge Card  
disclosure act (1988)
enacted as an amendment to the truth in lending act.  Requires disclosures on 
credit and charge cards issued by financial institutions, retailers and others. Regulation Z
the Home equity loan Consumer 
Protection act (1988)
enacted as an amendment to the truth in lending act.  Requires creditors to disclose 
the terms and costs for open-end credit lines secured by the borrower’s dwelling.  
Restricts the terms of such credit lines and the circumstances under which 
creditors may modify or terminate the terms of a home equity plan once opened. 
Regulation Z
the Home ownership and equity  
Protection act (1994)
enacted as an amendment to the truth in lending act.  establishes rules 
and disclosure requirements and prohibits abusive practices in connection 
to certain types of mortgages that carry high rates or fees.
Regulation Z
the Fair Credit reporting act (1970) Protects consumers from abusive credit reporting practices and requires credit 
reporting agencies to allow credit applicants to correct inaccurate reports. Regulation V
the equal Credit opportunity act (1974)
Protects consumers from discrimination by creditors on the grounds of familial 
status, sex, religion, race, national origin, age or because the applicant receives 
income from a public assistance program.
Regulation b
the Home Mortgage disclosure  
act (1975)
Requires the bulk of mortgage lenders located in metropolitan areas to collect 
data about home purchases, home purchase preapprovals, home improvement 
and refinance applications; to report the data annually to the government; and 
to make the information  available to the public.
Regulation C
the electronic Fund transfer act (1978) Requires disclosure of the terms and conditions of electronic fund transfers. 
Protects consumers against unauthorized transfer. Regulation e
the Consumer leasing act (1976) Requires disclosure of information about the costs and terms of vehicle leases. Regulation m
the expedited Funds availability act (1987) standardizes hold periods on deposits made to depository institutions and to 
regulate their use of deposit holds. Regulation CC
the truth in savings act (1991)
Requires disclosure of terms and conditions regarding interest rates and fees  
associated with savings accounts.  establishes uniformity in disclosure standards. Regulation dd
Major federal consumer protection laws and their implementation by the Board
The Regional Economist  |  www.stlouisfed.org   15policy framework specifies the procedures for 
addressing consumer complaints by trained 
staff of the Federal Reserve banks.
8
To address emerging issues, or in cases 
where strict rules might do more harm than 
good, the Federal Reserve uses principle-based 
supervisory guidelines, sometimes including 
best practices.
community Affairs program
The Federal Reserve’s Community Affairs 
activities promote community development 
and fair and impartial access to credit to tra-
ditionally underserved markets.  The Federal 
Reserve launched community development 
programs designed to advance financial insti-
tutions’ engagement in servicing their entire 
communities, educate low- and moderate-
income consumers, and encourage coopera-
tion among local governments, community 
leaders, financial institutions and nonprofit 
organizations with whom it collaborates 
closely and to whom it provides assistance, 
information and educational resources.  In 
so doing, the Federal Reserve studies and 
analyzes the special needs of underserved 
consumers—both at the national and the 
district levels.  The Federal Reserve also holds a 
community development research conference, 
designed to present studies and discuss current 
trends and developments, every two years.  
Another activity in which the Federal Reserve 
partakes (and sometimes hosts) is the National 
Consumer Protection Week: a yearly sympo-
sium for consumer professionals, designed to 
highlight consumer protection and education 
efforts and to discuss recent developments in 
consumer laws, policies and practices.
consumer Education
Informed consumers who know their rights 
and responsibilities and who understand their 
options can make better choices when shop-
ping for financial services.  The promotion 
of consumers’ financial literacy is, therefore, 
part and parcel of the Federal Reserve’s con-
sumer protection responsibilities.  Consumer 
education resources are released in the form 
of brochures and handbooks, which are also 
available on the Board’s web site.
9  
Sharon K. Blei is an economist in the Banking  
Supervision and Regulation division at the  
Federal Reserve Bank of St. Louis. 
ECONOmy AT A gLANCE
eleven more charts are available on the web version of this issue.  among the topics they cover are agriculture, commercial 
banking, housing permits, income and jobs.  much of the data is specific to the eighth district.  to go directly to these charts, 
use this URl:  www.stlouisfed.org/publications/re/2008/b/pdf/4-08-data.pdf.
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16   The Regional Economist  |  April 2008

The Federal Reserve seeks to protect consumers

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The Federal Reserve seeks to protect consumers

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Research Papers in Economics