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The Federal Reserve, which currently handles most consumer financial regulation issues, has launched an investigation of non-bank financial institutions for consumer violations. These kinds of institutions are the mortgage mills that major banks had as unregulated subsidiary, independent non-bank mortgage lenders, etc., that helped drive the housing bubble with shoddy underwriting and aggressive securitization of sub-prime loans. Though these investigations are a good idea, this article in The American Banker (subscription only, I'm afraid), shows the real motive behind the Fed's current actions:
The move came a day after President Obama reiterated his support for a new agency to oversee consumer protection.The Fed said its action stemmed from a pilot project in 2007 with the FederTal Trade Commission and the Office of Thrift Supervision to look into nondepository units of banks with significant subprime operations.But observers said the Fed's eyes were really on Capitol Hill, where Democratic leaders are pushing to create the administration's proposed Consumer Financial Protection Agency."Is this trying to make up for the vulnerable position they're in?" asked Cornelius Hurley, a professor at the Boston University School of Law and a former Fed lawyer. "It certainly sounds that way."This only reinforces the need for an independent agency -- the Fed's actions right now are too little, too late. Housing so many different priorities in the Fed -- systemic risk regulation, monetary policy and consumer regulation -- let the latter fall by the wayside over the last decade. Only a massive crisis, one that should have been prevented, and ire from Congress is motivating the Fed to do now what they should have done years ago. If an independent agency, like the proposed Consumer Financial Protection Agency, had the sole authority to solve these problems, the financial system and economy would be in a much better position today. Though the Fed is trying to prevent this from happening, it's demonstration is only proof that it doesn't have the institutional ability to respond quickly to problems and prevent a crisis without massive outside pressure.
-- Tim Fernholz
