As proposals proliferate to address the subprime mortgage crisis, and as the crisis itself spreads beyond subprime loans, it may help to step back and ask a fundamental question: What government agency is responsible for regulating consumer credit transactions?
The answer, unfortunately, is almost as complicated as the mortgage crisis itself -- and that in turn has contributed to the problem.
At the head of the list is the Federal Reserve Board, which has the power to bar some predatory lending practices and also fashions rules governing what lenders have to tell borrowers about loan terms. The theory is that these disclosures will enable consumers to avoid unwise borrowing (worked well, didn't they?).
These disclosure rules are enforced by the Office of the Comptroller of the Currency (OCC), the Fed itself, the Federal Deposit Insurance Corp. (FDIC), the Office of Thrift Supervision (OTS), the National Credit Union Administration Board (NCUA) and the Federal Trade Commission (FTC), among others. The OCC also claims the power to prohibit some lenders from engaging in predatory lending. The FDIC originated the Bush administration plan to freeze so-called "teaser rates," while the Treasury Department shepherded the plan through.
Confused yet? It gets worse. When states attempted to prohibit predatory lending, the OCC, OTS and NCUA all ruled that the state laws did not apply to federal lenders. Federal courts have upheld this position, while state lenders, which preferred to be free of the state laws, surrendered their state charters and became federal lenders, immunizing them from state law.
All this leaves consumers with two problems (aside from the obvious one of trying to make sense of it all). First, the diffusion of power makes it difficult for a single agency to have the understanding and authority necessary to anticipate and prevent consumer credit crises. Indeed, turf fights have worsened the problem: Regulators have at times seemed more interested in preventing state inroads on their power than in preventing predatory lending.
Second, for many of these agencies, consumer protection is not the primary focus, nor should it be. A president choosing a Fed chief is understandably more concerned with the candidate's mastery of economics than consumer protection rules. It is hardly a coincidence that Alan Greenspan's memoir, "The Age of Turbulence," devotes chapters to China, Russia and Latin America but overlooks predatory lending, which he actually regulated.
Similarly, federal regulators of financial institutions may be more interested in monitoring the safety and soundness of bank practices than in protecting consumers from abusive loan terms. But the result is that consumer credit protection rules may become an administrative afterthought.
Dividing up authority over consumer credit transactions among a variety of agencies charged with other tasks has not helped it receive the attention it merits. Indeed, the subprime debacle is not the only recent failure of our consumer credit system.
Identity theft, which continues to trouble millions of Americans, is in part a creature of consumer credit as well.
A single agency, charged with monitoring consumer credit transactions and suggesting and enforcing suitable rules might have headed off the subprime mess.
If we create such an agency now, we might be able to avoid the next consumer credit crisis.