Fed Broadens Its Oversight To Include Subprime Lenders
Wednesday, September 16, 2009
The Federal Reserve announced Tuesday that it will extend its regulatory umbrella to cover a group of lenders that includes several major originators of subprime loans, policing whether they follow federal laws that protect consumers of mortgages, credit cards and other financial products.
Federal banking regulators already oversee companies that own banks, known as holding companies, along with the banks themselves. Under the new policy, the Fed will extend the same oversight to other businesses owned by those holding companies, such as units that make home-equity loans.
The policy places subprime lenders such as CitiFinancial, an arm of Citigroup, and Wells Fargo Financial, an arm of Wells Fargo, under Fed oversight for the first time. The same laws protect all borrowers, but until now, no federal agency watched to make sure non-bank subsidiaries followed the law.
The decision reflects a basic shift at the Fed, which is charged by Congress with protecting consumers from abuses during financial transactions. After leaving its power largely unused during the housing boom, the Fed has lately begun to assert itself, for example imposing new restrictions on mortgage and credit card lenders.
Fed officials say the change reflects a renewed conviction in the importance of protecting consumers, particularly after the collapse of the housing market showed that abusive lending can damage the broader economy. The policy announced Tuesday "responds to a need for more effective supervision and consumer protection," the Fed said in a statement.
But the Fed also is struggling to defeat an Obama administration proposal to strip its responsibilities, along with those of other banking regulators, in favor of a new agency solely devoted to consumer protection. Critics argue that the Fed's newfound fervor will fade if it succeeds in keeping its powers.
Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services Committee, and Sen. Christopher J. Dodd (D-Conn.), the chairman of the Senate Banking Committee, both have said that they support creation of the new agency, but some details face opposition from members of both parties. Frank's committee plans to complete work on the legislation in October.
The Fed said Tuesday that the new supervision program will begin immediately. But the details highlighted the degree to which the Fed is entering uncharted waters. Officials don't know how many lenders are covered by the new policy, so holding companies first will be asked to provide that information. In a letter to banks, officials wrote that they plan to schedule a first round of examinations by next summer.
The Fed also will begin to investigate complaints from consumers about transactions involving non-bank subsidiaries.
The announcement was expected. The new policy is based on a 2007 pilot project that involved reviews of several subprime lenders, in conjunction with other federal and state regulators. The pilot concluded last year, and Fed Governor Elizabeth Duke testified before Congress in July that the Fed planned to begin permanent oversight.
"The recent problems in the subprime mortgage market revealed gaps in supervision and enforcement with respect to non-bank mortgage lenders," Duke told the House Committee on Financial Services. "The Federal Reserve is fully committed to implementing its own program of supervision of non-bank subsidiaries of holding companies."
The Fed plans to use current staff to handle the initial round of examinations in 2010 but said it expected that staffing eventually would expand to cover the new responsibilities.
Lenders that are neither banks nor owned by holding companies remain beyond the reach of federal oversight. The Obama administration has proposed a single oversight framework for all lenders as part of its financial reform package.