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Testimony
Governor Randall S. Kroszner
The role of federal banking agencies in strengthening federal financial
consumer protection
Before the Committee on Financial Services, U.S. House of Representatives
June 13, 2007
Chairman Frank, Ranking Member Bachus, and members of the Committee, I appreciate the
opportunity to appear today to discuss the Federal Reserve Board's role in protecting consumers in
financial services transactions.
Introduction
An important part of the Federal Reserve's statutory mandate is promoting the availability of credit
throughout the banking system. In the case of consumer credit, equally important with promoting its
availability is the Federal Reserve's responsibility for implementing the laws designed to protect
consumers in financial services transactions. Many of these laws are based on ensuring that
consumers receive adequate information in the form of disclosures about the features and risks of a
particular product.
Information is critical to the effective functioning of markets. A core principle of economics is that
markets are more competitive, and therefore more efficient, when accurate information is available
to both consumers and suppliers. When information on alternatives is readily available, product
offerings have to meet customers' demands and offering prices have to reflect those of market
competitors. If consumers are well informed, they are in a better position to make decisions that are
in their best interest. Information helps and empowers individual consumers by improving their
ability to compare products and to choose those that will help them meet their personal goals.
With the aid of technological advances, financial institutions have been able to offer innovative
products that are increasingly diverse but also increasingly complex. While this has expanded
consumers' access to credit and their options, it also presents a challenge in ensuring that consumer
disclosures about these more complex products are effective. To be effective, disclosures must give
consumers information at a time when it is relevant, and in language they can easily understand. The
information must also be in a format that allows consumers to identify and use the information that
is most important to them. In a nutshell, because effective disclosure gives consumers information
they notice, understand, and can use, it empowers consumers and enhances competition.
The Board is committed to developing more effective disclosures, but even well-designed
disclosures can only be useful if they can be understood by consumers who have the necessary
financial knowledge. Accordingly, we must promote financial education, and having been an
educator for many years, I am very pleased that the Board is actively involved in this area.
The Board is keenly aware, however, that disclosures and financial education may not always be
sufficient to combat abusive practices. Indeed, the consumer financial services laws implemented by
the Board contain a number of substantive protections, reflecting carefully considered legislative
judgments that certain practices should be restricted or prohibited. The Board also has the
responsibility to prohibit other practices by issuing rules, for example, if the Board finds they meet
the legal standard for "unfair or deceptive" practices under the Federal Trade Commission Act (FTC
Act) or the Home Ownership and Equity Protection Act (HOEPA). We must be mindful, however,
of unintended consequences.
Crafting effective rules under the "unfair or deceptive" standard presents significant challenges.
Whether a practice is unfair or deceptive depends heavily on the particular facts and circumstances.
To be effective, rules must have broad enough coverage to encompass a wide variety of
circumstances so they are not easily circumvented. At the same time, rules with broad prohibitions
could limit consumers' financing options in legitimate cases that do not meet the required legal
standard.
This has led the Federal Reserve to focus primarily on addressing potentially unfair or deceptive
practices by using its supervisory powers on a case-by-case basis rather than through rulemaking.
The FTC, which has authority to prohibit unfair or deceptive practices for financial services firms
that are not depository institutions, has taken a similar approach. Because the prohibition on unfair
or deceptive acts or practices applies to all depository institutions as a matter of law, the banking
and thrift agencies can and do enforce this prohibition using their supervisory enforcement powers.
The Board also addresses concerns about some practices under other statutes, such as the Truth in
Lending Act (TILA) or Truth in Savings Act (TISA). For example, the Board used its HOEPA
authority to address the "flipping" of high-cost mortgage loans. Under TILA, we recently proposed a
rule prohibiting credit card issuers' from describing their rates as "fixed" unless they specify a period
where the rate is not subject to change for any reason. The Board also revised its TISA rules to
address concerns about overdraft protection programs. The Board is committed to addressing
abusive practices and will consider how it might use its authority to prohibit specific practices
consistent with the legal standards in appropriate cases, such as when there are widespread abuses
that cannot be effectively addressed through case-by-case determinations in the supervisory process.
The Board's Role in Protecting Consumers
In carrying out its mandate related to consumer protection in financial services, the Federal Reserve
has several roles that are carried out through four complementary processes. First, there is the
Board's role as rulewriter, in which we issue regulations, either alone or jointly with other federal
agencies, to implement the consumer financial services and fair lending laws. Second, there is the
Federal Reserve's role in examining the financial institutions that we supervise for safety and
soundness, as well as for compliance with consumer protection laws and regulations. This includes
taking supervisory action for the institutions under our jurisdiction, as appropriate, to enforce the
laws and resolve any consumer complaints. Third, the Federal Reserve actively promotes consumer
education through its publications and through a variety of partnerships with other organizations.
Finally, the Federal Reserve's Community Affairs Program supports the Board's objective of
promoting community development and fair and impartial access to credit by conducting outreach
activities in lower-income communities and traditionally underserved markets. Today, I would like
to discuss each of these four roles and some significant actions that the Board has taken in these
areas. I will also highlight how the Board is coordinating its efforts with the other federal and state
supervisory agencies.
The Board's Rulewriting Responsibilities
The Board has sole responsibility for issuing rules to implement a number of consumer financial
services and fair lending laws, including TILA, TISA, the Electronic Fund Transfer Act (EFTA),
Consumer Leasing Act, Equal Credit Opportunity Act (ECOA), and Home Mortgage Disclosure Act
(HMDA). In conducting these rulemakings, the Board reviews public comment letters and solicits
the views of other federal and state regulators who have valuable insights based on their own
experience and expertise in supervising financial institutions and protecting consumers. We often
obtain the views of other agencies on Board rulemakings through informal outreach efforts, but
sometimes we receive written comment letters, as was the case with the Office of the Comptroller of
the Currency's (OCC) recent recommendations for revised credit card disclosures. We receive the
views of state agencies through such organizations as the Conference of State Bank Supervisors
(CSBS), the American Association of Residential Mortgage Regulators (AARMR), and the National
Association of Attorneys General (NAAG), as well as from individual state regulatory agencies.
In addition to the statutes for which the Board has exclusive rulewriting responsibility, the Board
shares rulewriting responsibility with other agencies under certain laws, such as the Community
Reinvestment Act (CRA) and the Fair Credit Reporting Act (FCRA). Moreover, the Board and other
federal financial regulators sometimes play a consulting role in the development of consumer
regulations issued by other agencies such as the Department of Housing and Urban Development,
and the FTC. For example, most recently, the Board has consulted with the Department of Defense
(DOD), as Congress directed with respect to DOD's development of regulations governing loans to
members of the armed services and their families.
In addition to its rulemakings to implement statutory changes, the Board updates its regulations in
response to the changing marketplace and emerging issues. As markets change and products evolve,
questions arise about how existing rules apply in new circumstances. We often address these matters
with amendments that specifically target a particular issue, or by updating the interpretations
published in the commentaries to our regulations. That was the case with the Board's recent
revisions to the rules governing electronic fund transfers, which addressed electronic check
conversions and payroll card accounts. It was also the case with our recent amendments to the TISA
rules addressing overdraft protection programs.
As a matter of policy, the Board periodically conducts a comprehensive review of each regulation.
For the consumer financial services laws, one goal of our regulatory reviews is to develop more
effective consumer disclosures. Writing regulations always involves the challenge of crafting rules
that are, on the one hand, clear and specific enough to facilitate compliance and promote
consistency among financial institutions but, on the other hand, flexible enough to accommodate
market developments as products and pricing continue to change. We also consider ways to
eliminate unnecessary burdens consistent with consumer protection. By balancing these interests we
seek to avoid imposing undue regulatory burdens that could hinder innovation and raise costs
without producing offsetting benefits in consumer protection.
Over the last several years, the Board has completed several regulatory reviews. The Board
reviewed the regulations implementing HOEPA and issued revised rules in 2001. The Board's
review of the rules implementing HMDA was completed in 2002, resulting in expanded data
collection and reporting requirements, and the Board completed a review of the rules implementing
ECOA in 2003. Most recently, the Board initiated a review of the TILA rules, which are
implemented in the Board's Regulation Z. The initial phase of the Board's review of Regulation Z
focused on credit cards and other revolving credit accounts. Last month, the Board issued a proposal
for public comment that would substantially revise the rules governing credit cards and improve
credit card disclosures. Our review of the Regulation Z rules for mortgage transactions is now under
way as well.
The Board's Efforts to Improve the Effectiveness of Credit Disclosures
The Board has recently undertaken an innovative approach to improve the effectiveness of credit
disclosures--namely, using consumer surveys and testing to assess consumers' needs and develop
our regulatory proposal. Having taught at the University of Chicago's business school for many
years, I am well aware of the types of consumer testing that firms have long employed: surveys,
focus groups, and so-called "mall intercepts" in which shoppers are interviewed at random.
However, it is relatively novel to systematically use such techniques to develop regulatory proposals
to improve the effectiveness of disclosures requirements.
Consumer testing can help the Federal Reserve address the considerable challenge of making
disclosures more effective by providing insight into consumers' understanding of financial products
and their decision-making process. Given the complexity of certain products, such as credit card
products with multiple features and nontraditional mortgages, we have to be mindful of the pitfalls
of information overload. We must seek to carry out the responsibilities Congress has given us to
design disclosures that are not only accurate, but also clear and simple enough that they are
meaningful and useful to consumers. Pages of fine print that provide comprehensive descriptions
might satisfy lawyers, but the legalese needs to be translated into something consumers can use.
This requires the Board to make judgments about which credit terms are most important to highlight
and which could be eliminated. We plan to make these judgments with the benefit of surveys of
actual consumers and extensive consumer testing. We recently completed several rounds of
consumer testing (7.7 MB PDF) for credit card disclosures, and that testing was critical to our effort
to redesign and, I believe, dramatically improve those disclosures in the proposed regulations
recently published for comment.
The substantial investment we have made in developing and testing revised credit card disclosures
has given us insights that will contribute to our ability to make mortgage disclosures more effective.
We are finding that it is tremendously beneficial to listen to consumers so that we can learn more
about how they use information and how we can simplify disclosures and enhance consumers'
understanding. Through our testing, we learned firsthand what information consumers find useful
when making credit decisions and what information they ignore. Second, we learned what
information consumers comprehend and what information they do not. Third, we saw the impact
that different formats and presentation can have on consumers' ability to notice and use the
information.
The Board's proposal for credit card accounts would revise the format and content of various credit
card disclosures to make them more meaningful and easier to read, and to highlight the various
costs. The disclosure table accompanying credit card applications and solicitations would highlight
fees and the reasons penalty rates might be applied, such as for paying late. Creditors would be
required to use the same type of disclosure table to summarize key terms at account opening and
when the account terms change. In addition, format changes to periodic statements--such as
grouping fees, interest charges, and transactions together--would make them more understandable.
As I noted earlier, card issuers would be prohibited from describing their rates as "fixed" unless they
specify a time period where the rate cannot be changed for any reason, or if the rate is fixed for the
life of the program.
The proposal to revise the credit card rules would also expand the circumstances under which
consumers receive advance notice of changes in their account terms, including advance notice
before a penalty rate is applied. Creditors would be required to send notice of a rate increase or other
change in terms forty-five days before the change becomes effective, instead of the current fifteen
days. The proposal would also revise the rules governing the advertising of open-end credit to help
consumers better understand the credit terms being offered.
As I mentioned earlier, the Board plans to conduct extensive consumer testing as part of its review
of mortgage disclosures. Like credit cards, mortgage products have become more diverse and more
complex. In some cases, creditors are using pricing strategies similar to those used for credit cards,
for example, offering customers discounted introductory rates that will be replaced in a short time
by a much higher rate, often a variable rate. Of course, there is an inherent difficulty in adjustable
rate mortgage (ARM) disclosures because future interest rate changes are not known. Consumer
testing is needed to determine whether, for example, consumers would find disclosure of the "worstcase" payment useful given that such a payment might never occur or might not occur for several
years or more, by which time the consumer's own financial circumstances may have changed.
The wider marketing of payment-option mortgages presents another challenge. Consumers have the
choice of making low minimum monthly payments that increase the overall cost of the credit and
ultimately lead to higher payments. Just as with credit cards, however, disclosing a consumer's
repayment obligation and the cost of the credit is more complex when there are unknowns--such as
the future rate if it may vary based on an index, the amount of the consumer's monthly payment, and
the possibility of negative amortization. When the Board reviews mortgage disclosures, it will
consider these developments and conduct extensive consumer testing to determine how the features
and risks of today's mortgage products can be communicated effectively.
The Board has already taken some initial steps in its review of mortgage disclosures. Last summer,
the Board held a series of four public hearings on home-equity lending, where we gathered views on
the impact of federal and state predatory lending laws and on the adequacy of mortgage disclosures,
particularly those concerning nontraditional mortgage products. Following those hearings, the Board
revised the consumer handbook that creditors are required to provide with applications for all
ARMs. The revised handbook gives consumers a better explanation of the features and risks of
nontraditional ARMs, especially "payment shock" and the risk of increasing loan balances, also
known as "negative amortization."
The recent problems in the subprime mortgage market have prompted the Board to hold a fifth
hearing, which I will chair tomorrow, here in Washington, D.C. The purpose of the hearing is to
gather information to evaluate how the Federal Reserve might use its rulemaking authority to curb
abusive lending practices in the subprime mortgage market in a way that also preserves incentives
for responsible lenders. Specifically, hearing participants will discuss concerns about prepayment
penalties, escrows for taxes and insurance, "stated-income" loans, and lenders' standards for
determining that consumers can afford to make the scheduled payments. Some of these concerns
may call for more effective disclosures. However, we will also seriously consider whether there are
mortgage lending practices that should be prohibited under HOEPA.
We must be careful, however, not to curtail responsible subprime lending or beneficial financing
options for consumers. A robust and responsible subprime mortgage market benefits consumers by
allowing borrowers with non-prime or limited credit histories to become homeowners, access the
equity in their homes, or have the flexibility to refinance their loans as needed. Under HOEPA,
lenders are subject not only to regulatory enforcement actions but also to private lawsuits to redress
violations. Thus, any rules should be drawn sharply with bright lines to avoid creating legal and
regulatory uncertainty, which could have the unintended effect of substantially reducing consumers
access to legitimate credit options.
Supervisory Activities
Examination and Enforcement
The Board has responsibility for enforcing compliance by state-member banks and certain foreign
banking organizations with consumer financial services laws, the fair lending laws, and the CRA.
Because of the complexity of consumer regulatory requirements, the Board has had a specialized
consumer examination program since the late 1970s. The Federal Reserve System has a trained
cadre of examiners dedicated solely to this function.
The scope of the consumer compliance examination program has evolved and grown significantly
over the years. In 1977, the program covered just nine federal consumer protection laws and
regulations. Today the program covers compliance with more than twenty federal laws related to
deposits, credit, and the privacy of consumers' financial information. Consumer compliance
examinations assess the bank's compliance with ECOA, HMDA, TILA, TISA, RESPA, the EFTA,
FCRA, and CRA, section 5 of the FTC Act, and other federal consumer protection laws.
Examinations and other supervisory activities conducted as part of the Board's consumer
compliance program follow a risk-focused approach and are tailored to fit the risk profile of the
bank. This approach ensures that supervisory resources are directed to the products, services, and
areas of the bank's operations that pose the greatest risk to consumers. In addition to assessing an
institution's compliance with particular laws and its performance under the CRA, examinations
evaluate a bank's processes for identifying, measuring, monitoring, and controlling its risk exposure.
Examiners routinely analyze consumer complaints submitted to the Federal Reserve regarding the
bank being examined, looking for any trends, issues, or areas of possible risk. The examiners also
analyze any consumer complaints received directly by the bank. The results of this analysis are
factored into examiners' decisions regarding the scope of the compliance examination. We view this
analysis of consumer complaint activity as an integral component of the examination scoping
process. Moreover, consumer complaints can serve as an early warning signal about emerging or
potential compliance problems or new industry practices.
The frequency of examinations is a function of an institution's size and prior supervisory ratings.
Institutions with less than satisfactory compliance or CRA ratings, regardless of their size, are
typically examined every twelve months. Institutions with assets greater than $250 million and
satisfactory or better ratings are examined every twenty-four months. Small banks (those with assets
of less than $250 million) with satisfactory or better ratings are typically examined every forty-eight
to sixty months. The Federal Reserve Banks also monitor institutions between examinations looking
for indicators that could have implications for their compliance efforts and bear on the need for
more frequent supervisory intervention. For example, we analyze consumer complaints and consider
any changes in supervisory ratings, financial condition, corporate structure, or the institutions'
management.
Where Federal Reserve examiners observe weaknesses or compliance failures by supervised
institutions, examiners document them in a report to bank management. The required corrective
actions are stated in the examination report. We find that in the overwhelming majority of cases,
management voluntarily addresses any violations or weaknesses that we have identified without the
need for formal enforcement actions. In those rare instances where the bank is not willing to address
the problem, we have a full range of enforcement tools at our disposal and use them to compel
appropriate corrective action.
We also recognize that cooperation and coordination among the financial institution supervisory
agencies are essential to ensuring consistent and effective supervision. Financial institution
regulators share information and coordinate activities, such as the development of uniform
examination procedures and policies, through the Federal Financial Institutions Examination
Council (FFIEC) and other channels. Recently, the CSBS joined the FFIEC, but we have, for many
years, coordinated supervisory efforts through the CSBS State and Federal Working Group.
Enforcing the Prohibition Against Unfair or Deceptive Practices
This Committee has specifically asked the agencies to discuss their ability to pursue unfair or
deceptive practices by depository institutions. The prohibition on unfair or deceptive acts or
practices in section 5 of the FTC Act applies to all banks, thrifts, and credit unions as a matter of
law, and may be enforced by each of the federal banking agencies using their supervisory powers
under the Federal Deposit Insurance Act. This authority is independent from, and in addition to, the
banking agencies' authority to enforce any specific regulations the Board may promulgate.1 The
Board, the OCC, and the Federal Deposit Insurance Corporation (FDIC) have all issued written
guidance confirming this view of the agencies' broad authority to enforce the FTC Act. In fact, the
Board, OCC, and FDIC have each exercised their supervisory authority in recent years to address
the activities of particular banks that the agencies deemed unfair or deceptive.
The lack of rules under the FTC Act does not appear to be an impediment to the agencies'
enforcement efforts because a finding of unfairness or deception depends heavily on the facts and
circumstances, and must be determined on a case-by-case basis. Rules seeking to define all the
circumstances when a particular practice is unacceptable can be too narrow or too broad and, as a
result, they may be ineffective or have unintended consequences. In our view, enforcement of the
FTC Act on a case-by-case basis, reinforced by agency guidance that establishes standards and
recommended practices, is a more effective way to address these concerns.
The Board will, however, continue to assess whether there are unfair or deceptive practices that are
appropriately addressed by adopting rules of general applicability under the FTC Act or other
consumer protection laws. We will continue to consult with the OCC and FDIC on these matters.
We encourage our fellow bank regulators to bring to our attention particular practices that they
believe are unfair or deceptive that can best be addressed by rules of general applicability rather than
through the supervisory process.
Supervisory Guidance
The Federal Reserve and other financial institution regulators also use more informal means to
protect consumers and promote safe and sound practices by financial institutions. This includes
issuing principles-based guidance, which sometimes includes "best practices" that institutions
should adopt in following the recommendations contained in the guidance. Principles-based
guidance can often be a more flexible tool than rules for accomplishing regulators' goals. This
flexibility allows supervisory agencies to adapt the guidance to different situations.
Principles-based guidance is particularly useful when dealing with practices that may be
inappropriate in some circumstances but appropriate in others. An example of this is the guidance
concerning unfair and deceptive acts or practices ("UDAPs") issued jointly by the Board and FDIC
in 2004. The UDAP guidance outlines the legal standards the Board and FDIC use in carrying out
their responsibilities for enforcing the FTC Act's prohibition of unfair or deceptive acts or practices.
These standards are consistent with those articulated by the OCC and with long-established
standards articulated by the FTC in enforcing the FTC Act for non-bank entities. The UDAP
guidance outlines strategies for banks to use to avoid engaging in unfair or deceptive acts or
practices, to minimize their own risks and to protect consumers. The guidance also lists "best
practices" to address some matters seen as having the greatest potential for unfair or deceptive acts
or practices: advertising and solicitations; servicing and collections; and the management and
monitoring of employees and third-party service providers.
Through the issuance of principles-based guidance, backed-up with regular examinations, the
federal depository institution regulators are able to have a significant impact on institutions'
practices. Although the supervisory guidance issued by the banking and thrift agencies only applies
to depository institutions and their affiliates, state regulators can and sometimes do adopt the federal
regulators' guidance for independent nonbank providers of financial services. This was the case with
the interagency guidance on nontraditional mortgage products that was issued in 2006. We expect
similar action by state regulators for the interagency guidance on subprime mortgage lending that
was proposed in March 2007. The agencies are finishing their review of the comment letters
received and will work expeditiously to take final action on the proposed statement, including
coordinating with the CSBS.
Consumer Complaints
In 1976, the Federal Reserve established a system-wide program for receiving and handling
consumer complaints. Through this program, the Board addresses complaints about the banks under
its supervision (state-chartered banks that are members of the Federal Reserve System and certain
foreign banking organizations) and refers complaints regarding other financial services firms to the
appropriate federal or state agency, including the FTC. The Board has established uniform policies
and procedures for investigating and responding to consumer complaints, which are implemented by
staff of the twelve Federal Reserve Banks who have been specially trained for that purpose. In each
of the last two years, the Board has received about 1,900 complaints concerning state-member
banks, which number about 900. The Board maintains a database that enables us to track the
complaints filed for each institution and how they are resolved.
The Federal Reserve has consistently and promptly referred the consumer complaints we receive to
the appropriate state or federal regulator when they do not involve a bank under our supervision. We
also immediately notify consumers of the agency to which their complaint has been referred. Since
January 2002, the Federal Reserve System has received over 25,000 consumer complaints. Of these,
about 12,000 involved entities other than banks under our supervision and were referred to other
agencies. In virtually all of these cases (about 99 percent), the Federal Reserve referred the
complaints to the proper agencies and notified the complainants in an average of two business days.
Similarly, virtually all of the consumer complaints we received against state member banks and their
subsidiaries were promptly acknowledged.
We understand that consumers may face challenges in sorting out where to go for help with
questions about financial transactions and in determining where to send complaints. As indicated,
we facilitate the process for consumers by ensuring that the complaints we receive are routed
quickly and accurately to the right agency for handling. To further enhance our consumer complaint
handling process, we recently launched a new online consumer complaint system that creates a
single Internet web site for submitting complaints and inquiries to the Federal Reserve. Complaints
submitted through the web site are routed automatically to the appropriate Reserve Bank or other
supervisory agency.
One feature of the new online system that we plan to activate in the near future is a customer
satisfaction questionnaire that will provide us with feedback about consumers' experiences with the
Federal Reserve's processing of their complaints. This questionnaire will be an improved version of
the one we used for many years. The Board is also establishing a central location for the
administrative handling of complaints, which will establish a single mailing address and toll-free
telephone number that the public can use. These enhancements underscore our commitment to
ensuring the public has an effective and efficient means for resolving complaints. Our goal is to
make a consumer's submission of a complaint as easy and seamless as possible regardless of the
entity involved.
To enhance interagency cooperation and coordination in processing consumer complaints, the
federal banking agencies held a conference in April 2006 to share information about complaint
trends and issues, and learn about best practices in investigating and analyzing complaints. The
agency staffs also discussed ways to improve customer service and the potential ways complaint
data might be used to aid in the development of consumer education materials. Another interagency
conference is scheduled for later this year. In addition to these conferences, the agencies' staffs meet
periodically to share complaint data and to discuss emerging issues identified through the complaint
process.
Consumer Education and Research
The Federal Reserve is actively engaged in educating consumers about financial transactions so they
can better understand their options when shopping for various products. The education materials we
produce are based on surveys, consumer testing, and other research about consumer behavior. For
example, the Board has published brochures to assist consumers when they are shopping for credit
cards, mortgages or leasing a vehicle. We have also issued brochures to help consumers understand
their checking accounts and overdraft protection programs, and to educate consumers about the
effects of having their payments processed electronically. These publications are also available on
the Board's web site.
Recently the Board has focused on helping consumers understand nontraditional mortgage products
and ARMs. For example, the Board recently published a consumer education brochure (InterestOnly Mortgage Payments and Payment--Option ARMs - Are They for You?) on interest-only
mortgages and payment-option ARMs. This brochure describes the loan terms and risks inherent in
such products and alerts borrowers to possible future payment increases. The Board's revised
Consumer Handbook on Adjustable Rate Mortgages, which creditors must provide with every ARM
application, also seeks to educate consumers about the features and risks of nontraditional mortgage
products.
The Federal Reserve's Community Affairs Program
The Federal Reserve's Community Affairs Program supports the Board's objective of promoting
community development and fair and impartial access to credit by focusing on low- and moderateincome consumers. We develop programs and build partnerships with organizations to help bring
consumers into the financial and economic mainstream. The Community Affairs function within the
Board and the Reserve Banks complements other regulatory and compliance activities with
programs that educate and equip low- and moderate-income consumers with the tools they need to
make better choices in establishing credit and building assets.
The Reserve Banks' Community Affairs programs are specifically focused on improving
understanding about low- and moderate-income consumers' needs for and access to financial
services. Toward this end, the Reserve Banks engage in research that explores issues relating to
consumers' use of financial services products and services. In addition, the Community Affairs
Offices convene a research conference every two years dedicated to generating and presenting
research that explores current trends in financial services and the implications for lower-income
consumers. For example, the most recent conference held this past March in Washington, D.C.,
offered research on predatory lending and payday lending.
The Federal Reserve Banks also collaborate with local and regional partners to explore opportunities
to create awareness of and solutions to address concerns about financial services issues as they
relate to lower-income consumers and communities. Several Reserve Banks have spearheaded
initiatives to respond to concerns about rising mortgage defaults and delinquencies, with the San
Francisco Federal Reserve Bank holding forums in six cities to discuss community responses.
Others Federal Reserve Banks have worked with nonprofit organizations and local governments to
develop strategies to improve lower-income consumers' wealth-building opportunities, such as
initiatives promoting savings and accessing tax credits.
All twelve Community Affairs Offices have initiatives to promote and support consumer financial
education. The Federal Reserve Banks have partnered with financial institutions, nonprofit
organizations, local governments, and community institutions to help improve consumers' access to
financial education materials and programs. Currently, the Board and the Philadelphia Reserve Bank
are conducting long-term research projects to better understand what makes particular consumer
counseling and education programs successful.
Conclusion
The Federal Reserve is committed to being proactive in addressing issues that affect consumers in
their financial services transactions. We seek to promote the availability of consumer credit while
ensuring that consumers receive the information they need to understand their options. Consumers
who do not have accurate information and an understanding of what that information means will
have difficulty choosing among competing products. Because information is critical to more
competitive, and thus more efficient markets, more effective disclosure also has the capacity to
weed out some abuses.
By using consumer testing systematically, the Federal Reserve is taking an innovative approach to
revising its regulations and improving the effectiveness of disclosures. At the same time, we will
continue our cooperation with educational and community organizations around the country to help
inform and support consumer education efforts. We recognize, however, that disclosures and
financial education may not always be sufficient to combat abusive practices. Because some bad
lending practices may require additional measures, the Federal Reserve will seriously consider how
we might use our rulemaking authority to address abusive practices without restricting consumers'
access to beneficial financing options and responsible subprime credit. We will, along with the other
supervisory agencies, also continue to actively use our other tools--such as supervisory guidance,
the examination process, and our enforcement powers--to address specific practices that are abusive
or otherwise inappropriate.
Footnotes
1. Section 18 of the FTC Act authorizes the Federal Reserve Board to issue regulations prohibiting
specific practices by banks that it finds to be unfair or deceptive. The Office of Thrift Supervision
and the National Credit Union Adminstration have the same authority for thrifts and credit unions
respectively. Return to text
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