WASHINGTON — Congress gave the Federal Reserve the power to enact rules to protect consumers from unscrupulous mortgage lending in 1994. But as the years passed and risky subprime loans inflated the housing bubble, restrictions on lenders never came.
It wasn't until last summer, long after the bursting bubble triggered the deep recession, that the central bank adopted rules prohibiting unfair, abusive or deceptive lending practices.
The 14 years it took the Fed to act are now cited by Obama administration officials, consumer advocates and lawmakers as a key reason for scrapping a fragmented regulatory structure spread across multiple agencies and replacing it with a new Consumer Financial Protection Agency.
"Its inability to move quickly on consumer protection blocked reform in the mortgage market that could have helped avert this crisis," Michael Barr, assistant Treasury secretary for financial institutions, said of the Fed at a recent Senate hearing.
At the heart of the push for a new consumer agency are two basic bureaucratic realities:
* The priorities of agencies with a lot of responsibilities depend on who's in charge. By all accounts, former Fed Chairman Alan Greenspan didn't make consumer protection a priority. His successor, Ben S. Bernanke, has been forced to elevate it.
* Regulatory agencies are designed primarily to monitor the economy and oversee the health of banks and other institutions.
The Fed and other regulatory agencies have a long-standing culture that puts those responsibilities ahead of protecting consumers from an increasing variety of complex financial offerings, said supporters of a new agency.
"It is definitely second fiddle," Ellen Seidman, a former director of the Office of Thrift Supervision, said of consumer protection at that and other agencies. "I worked very hard to elevate it. And that says something important -- namely that somebody had to work very hard to elevate it."
Seidman, now a senior fellow at the New America Foundation, said she created an award for the best bank examiner on consumer affairs and compliance issues when she headed the agency from 1997 to 2001. Her successor eliminated it.
But it is the Fed that has become the prime example of the government's failures to protect average Americans from financial predators, and it stands to be the biggest loser if Congress creates the new agency.
The Obama administration has made the proposed consumer protection agency a centerpiece of its financial regulatory overhaul. Key congressional Democrats are strong supporters, and a House committee is poised to approve it in September.
But the proposal faces strong opposition from many Republicans and business groups. They argue it will add an unnecessary layer of bureaucracy and limit consumer access to lending and credit by discouraging innovative -- though often higher-risk -- loans and other financial products.
Stripping the Fed
Under the legislation, the central bank would be stripped of its ability to write rules covering mortgages, credit cards and other consumer offerings. The new agency would take over that job, as well as take authority from the Fed and other regulators for examining financial institutions for compliance with the rules and punishing those who violate them.
The Fed's struggles with writing consumer protection rules highlight the secondary position those responsibilities often take at financial regulatory agencies, including the Office of Thrift Supervision and the Securities and Exchange Commission, according to supporters of a new agency.
Consumer advocates, for example, have slammed the Office of the Comptroller of the Currency, which regulates national banks, for blocking oversight of those institutions by state attorneys general, many of whom are more aggressive than federal officials in protecting consumers.
The Supreme Court ruled in June that states could enforce some of their consumer protection laws against such banks, and Obama's regulatory plan would formally give states such a role.
And the dysfunctional nature of spreading consumer protection across eight agencies -- the Fed, the OTS, the SEC, the OCC, the Federal Deposit Insurance Corp., the National Credit Union Administration, the Department of Housing and Urban Development and the Federal Trade Commission -- has become clear in the fight over the Obama administration's proposal.
Some of those other regulators have endorsed the idea of taking away the Fed's rule-writing power while arguing to retain their own compliance and enforcement authority.
"I think one of the lessons learned in the crisis we're in is there were truly gaps," said John E. Bowman, acting OTS director. "Ideally you would have one agency that sets the rules, then delegates the enforcement of those rules to . . . bank and thrift regulators at the state and federal level."