Consuming Debt: Structuring the Federal Response to Abuses in Consumer Credit
Consuming Debt: Structuring the Federal Response to Abuses in Consumer Credit
Heidi Mandanis Schooner 0 1
0 Heidi M. Schooner Consuming Debt: Structuring the Federal Response to Abuses in Consumer Credit , 18 Loy. Consumer L. Rev. 43 (2005). Available at:
1 Prof. of Law, Columbus School of Law, Catholic University of America
Part of the Consumer Protection Law Commons Recommended Citation
Follow this and additional works at: http://lawecommons.luc.edu/lclr
Predatory lending is an avaricious fraud that demands
attention. Several states have enacted new laws to combat predatory
lending. Moreover, the battle against predatory lending and other
abusive practices has focused attention on the overall structure of
consumer credit laws. The current structure is dual; both state and
federal governments play significant roles in combating credit fraud.
The dual structure has been the source of controversy as federal
regulators have claimed the power to preempt state law. This article
furthers the structural debate and the effort to combat predatory
lending by examining the architecture of consumer credit laws within
the federal system. The responsibility for enforcing federal consumer
credit laws is divided among many federal agencies. This is
confusing and inefficient. To compound the problem, much of the
enforcement of consumer credit laws is in the hands of bank
regulators rather than consumer protection agencies. The principal
role of a bank regulator is to protect the solvency of a bank. The
principal role of a consumer protection agency is to protect the
consumer. While these two roles can be synergistic, they can also
clash. Therefore, tasking the bank regulator with the job of consumer
protection creates an intra-agency conflict. This article proposes a
range of alternative regulatory structures that could provide for more
efficient and fair consumer protection.
. Professor of Law, Columbus School of Law, The Catholic University of
America. My thanks to the Columbus School of Law, The Catholic University of
America, for financial support for this project. I received valuable insights and
generous assistance from Professor Ralph Rohner; Dr. Alice Mandanis, Professor
Steven Schooner, Dr. Michael Taylor, Professor William Vukowich. Many thanks
to Brendan Fitzgerald, Cecily Rose, and Diana Norris for excellent research
The proliferation of subprime' lending markets means that
most Americans, even those with less than stellar credit ratings, have
access to credit. A friend revels in the story of applying for a credit
card in the name of his Labrador Retriever-who promptly received
new plastic with a generous credit limit. Credit is so widely available
that in 2004, total consumer debt rose above two trillion dollars, an
almost 500-billion-dollar increase in just five years. 2
Naturally, there is a dark side to all of this free flowing credit.
Common sense suggests that the current unprecedented levels of
consumer debt are unsustainable and may even pose a threat to the
world economy. Consumer bankruptcy filings have reached record
levels in recent years. 3 Moreover, many subprime customers pay
more than they should for the credit that they receive (even fiven
their risk profile) and, too often, are the victims of serious fraud.
Congress has passed no legislation that addresses the recent
proliferation of abuses in consumer credit.5 In April 2005, Congress
1 Subprime lending is "'the extension of credit to higher-risk borrowers who
do not qualify for traditional, prime credit, [m]ost often [because of] borrowers'
tarnished credit records or uncertain income prospects ....Subprime loans
naturally feature pricing and other contract terms that either compensate for or are
intended to lessen some of these risks."' Susan Lorde Martin, The Litigation
FinancingIndustry: The Wild West Should Be Tamed Not Outlawed, 10 FORDHAM
J. CORP.& FnN. L. 55, 65 (2004) (quoting Edward M. Gramlich, Federal Reserve
2 See FEDERAL RESERVE 2004 REPORT ON CONSUMER CREDIT, 1 (2004),
http://www.federalreserve.gov/releases/G 19/20040908/g 9.pdf.
3 For calendar year 1990, non-business bankruptcy filings totaled 718,107.
Bankruptcy Filing Statistics, http://www.uscourts.gov/bnkrpctystats/
statistics.htm#calendar (last visited Sept. 23, 2005). By 2003, total non-business
filings reached a record high of 1,625,208. Id. Non-business filings were down
slightly for calendar year 2004, with non-business filings totaling 1,563,145. Id.
5 In 1994, Congress imposed restrictions on high-cost loans by passing the
Home Ownership and Equity Protection Act, an amendment to the Truth in
Lending Act. The Home Ownership and Equity Protection Act, Pub. L. 103-325 §§
151-158, 108 Stat. 2190-2198. Several agency reports have recommended
legislative action to protect consumers from abusive lending. See Board of
Governors of the Federal Reserve System and Department of Housing and Urban
Development, Joint Report to the Congress Concerning Reform to the Trust in
Lending Act and the Real Estate Settlement ProceduresAct (July 1998);
passed the Bankruptcy Abuse Prevention and Consumer Protection
Act of 2005, comprising the most sweeping bankruptcy reforms in
twenty- five years. The new law will make it more difficult for some
debtors to secure the protections that bankruptcy provides.6 The bill
enjoyed strong support among banks and other lenders, but critics
complain that it does little to abate abusive practices by lenders. In
other words, Congress focused on the wrong side of the lending
State legislators have been far more aggressive in their
attempts to combat fraud in consumer credit transactions. Recently,
several states have passed laws 7 aimed at responding to the problem
of predatory8 lending and other unfair lending practices. State
attorneys general have focused their enforcement resources on the
problem. Moreover, in contrast to Congress' relative lassitude,
federal agencies have displaed fresh commitment to combating such
abuses. Banking agencies such as the FDIC and the OCC
Treasury Task Force on Predatory Lending, Curbing PredatoryHome Mortgage
Lending: A JointReport (June 2000). In 2005, Congress considered several bills
addressing abusive lending practices. See Responsible Lending Act, H.R. 1295,
109th Cong. (2005); The Prohibit Predatory Lending Act, H.R. 1182, 109th Cong.
6 See Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 11
U.S.C. § 101 (2005).
7 N.J. STAT. ANN. § 46: 1OB-22 (West 2003); 2003 Ark. Acts 2598; CAL. FIN.
CODE § 4970-4979.7 (West 2003); GA. CODE ANN. § 7-6A-1-13 (2003); 2003 Il.
Laws 93-561; 2003 N.M. Laws 436; 2001 N.Y. Laws 11856; N.C. GEN. STAT. §
24-1. l e (2003); 2003 S.C. Acts 42; 2003_N.C. Sess. Laws 24-10.2.
8 "Predatory" lending is a term often used but difficult to define. Professors
Engel and McCoy developed one oft-cited definition. They define predatory
lending as "a syndrome of abusive loan terms or practices that involved one or
more of the following five problems: (1) loans structured to result in seriously
disproportionate net harm to borrowers, (2) harmful rent seeking, (3) loans
involving fraud or deceptive practices, (4) other forms of lack of transparency in
loans that are not actionable as fraud, and (5) loans that require borrowers to waive
meaningful legal redress." Kathleen C. Engel & Patricia A. McCoy, A Tale of
Three Markets: The Law and Economics of PredatoryLending, 80 TEX. L. REV.
1255, 1260 (2002).
9 The federal banking agencies are the Federal Deposit Insurance Corporation
(FDIC), the Office of the Comptroller of the Currency (OCC), and the Federal
Reserve Board (Federal Reserve). The FDIC is the primary federal regulator for
state-chartered commercial banks that are not members of the Federal Reserve
System. See 12 U.S.C. § 1813(q)(3) (2005). The OCC is the primary federal
regulator for all federally chartered commercial banks. See 12 U.S.C. §§ 26, 93a
(1988). The Federal Reserve is the primary federal regulator for bank holding
companies and state-chartered commercial banks that are members of the Federal
prominently feature their extensive efforts at consumer protection.' 0
Despite significant efforts at the state level and by federal
agencies, state and federal authorities have failed to achieve the
benefits of a "two heads are better than one" approach. Serious
conflict has emerged between federal and state authorities regarding
the authority of each to regulate and enforce the consumer credit laws
that apply to banks." Last year, despite much criticism, the OCC
issued regulations that seek to preempt the application of many state
laws, including many consumer protection laws, to national banks
and their subsidiaries.' 2 National banks applaud the OCC's policy as
allowing them the opportunity to operate under a single federal legal
standard as opposed to varied state standards.' 3 Conversely, state
banks, state regulators, and state attorneys general deride this policy
as allowing national banks, the state banks' competitors, to avoid
more stringent state-law standards. 14 New York Attorney General
Eliot Spitzer filed suit directly challenging the OCC's preemptive
authority. 15 Pending Senate and House bills would explicitly repeal
the OCC's rule.' 6 Moreover, an appropriations amendment would
thoavdeefpernedvethneteldegtahleityDoepfathrtemOenCtCo'sf rJuulset.i1ce7 ("DOJ") from using funds
Reserve System. See 12 U.S.C. §§ 248, 184
10 See the FDIC's website at www.fdic.gov and OCC's website at
11 While banks are by no means the only issuers of consumer credit, they hold
the majority of such assets. See FEDERAL RESERVE 2004 REPORT ON CONSUMER
CREDIT, supranote 2.
12 Bank Activities and Operations; Real Estate Lending and Appraisals, 69
Fed. Reg. 1904 (Jan. 13, 2004) (codified at 12 CFR pt. 34).
13 See Consumer Bankers Association, CBA Strongly Supports OCC
Preemption Rules, available at http://www.cbanet.org/news/Press%20Releases/
OCCPreemption/OCCl.htm ("The OCC rules address the need for greater
uniformity and predictability for national banks operating in multiple jurisdictions
nationwide.") (last visited Nov. 7, 2005).
14 Bureau of National Affairs, Banking - Predatory Lending: Attorney's
GeneralActivists Decry OCC Rules On Preemption ofPredatoryLendingLaws, 72
U.S. LAW WEEK, 2199, 2199 (Oct. 14, 2003).
Attacks on the OCC's preemption policy typically derive
from either objections to the OCC's legal authority to preempt state
law, or reactions to a perceived laxity in agencies' consumer
protection policy. This article does not seek to address the already
well-debated question of whether the OCC has the legal authority to
preempt state law.'8 Federal regulators will likely continue to play an
important role in the future of consumer credit. Moreover, this article
idmoepslemneont tastieoenk otor eantftoacrckemtheent foefdecroalnsuamgeenrcipersoteacstiolnax stiantuttehse.1ir9
Instead, this article considers the effectiveness of the current federal
regulatory structure, identifies important defects, and proposes
alternative structures that would better support the implementation of
federal consumer credit laws.
Historically, the regulation of consumer credit was an issue
left exclusively to the states. Beginning in the late 1960s, however,
Congress began to pass laws like the Truth in Lending Act 20 that
sought to protect credit customers. In entering the consumer credit
arena, Congress did not seek to federalize all consumer credit law,
but rather invited the states to continue to legislate in the area.22 As a
result, a dual federal and state system was born. Moreover, at the
federal level, Congress opted for a complex division of regulatory
responsibilities. Rather than assigning responsibility for enforcement
to one agency, Congress chose a primarily institutional approach by
assigning responsibility according to the type of institution issuing
the credit. Authority over banks was assigned to the federal bank
funded by appropriations. See infra Part III. The amendment, introduced by Rep.
Brad Sherman, was later withdrawn. See Bureau of National Affairs, Preemption:
Legislation to Bar Justice From Defending OCC PreemptionRules Withdrawn in
House, 73 U.S. LAW WEEK at 2022-23.
18 See Arthur E. Wilmarth, Jr., The OCC's Preemption Rules Exceed The
Agency's Authority And Present A Serious Threat To The Dual Banking System
And Consumer Protection, 23 ANN. REV. BANKING & FIN. L. 225 (2004); Howard
N. Cayne & Nancy L. Perkins, NationalBank Act Preemption: The OCC's New
Rules Do Not Pose A Threat To Consumer Protection Or The Dual Banking
System, 23 ANN. REV. BANKING & FIN. L. 365 (2004).
'9 As discussed in Part II, laxity is not apparent.
20 See infra Part I for a discussion of federal consumer protection statutes.
21 The most recent example of the consumer protection trend is the
GrammLeach-Bliley Act of 1999 (GLBA), which imposes significant privacy
responsibilities on financial institutions. See 15 U.S.C. § 6801(a) (1999).
22 See 15 U.S.C. § 1610 (2000).
regulators 23 and non-banks to the Federal Trade Commission
("FTC").24 Congress did, however, recognize the need for
rulemaking and assigned that responsibility to the Federal Resuernvifeo. r2m5
This complex division of regulatory responsibility, which
places the bulk of responsibility for rulemaking and enforcement on
bank regulators, ignored the significance of adding a consumer
protection mandate to the job of bank regulators. Traditionally, a
bank regulator's job is to protect the safety and soundness of bank
institutions. 26 The purpose of a consumer protection agency,
however, is quite different, i.e., protecting the interests of individual
consumers. 27 While these two types of regulatory goals are often
complementary, they also can be at odds. Moreover, the means for
achieving these two goals are traditionally quite distinct. This article
examines the nature and significance of the conflicting policy goals
and of the differences in the means for pursuing those goals.
Part I provides a brief overview of the theoretical foundations
of consumer protection versus the regulation of banks and their
activities ("prudential regulation"). The important distinctions
between the two goals serve as an underpinning for the remainder of
the Article. Part II discusses current federal consumer protection
legislation and examines the resources expended in the
implementation of those regulations by the federal banking
Part III examines whether laws seeking consumer protection
versus prudential regulation should be implemented in the same
23 See 15 U.S.C. § 1607(a) (2000) (describing enforcement authority over
banks under TILA).
24 See 15 U.S.C. § 1607(c) (2000) (describing enforcement authority over
nonbanks under TILA).
25 See 15 U.S.C. § 1604(a) (2000) (describing rulemaking authority under
26 The OCC website logo reads "Ensuring a Safe and Sound National Banking
System for All Americans." See http://www.occ.treas.gov/.
27 The mandate of the FTC's Bureau of Consumer Protection is "to protect
consumers against unfair, deceptive or fraudulent practices." Guide to the FTC,
http://www.ftc.gov/bcp/conline/pubs/general/guidetoftc.htm (last visited Sept. 23,
The FTC also has an antitrust division, the Bureau of Competition that "seeks to
prevent anticompetitive mergers and other anticompetitive business practices in the
marketplace. By protecting competition, the Bureau promotes consumers' freedom
to choose goods and services in an open marketplace at a price and quality that fit
their needs .... " Id.
fashion and by the same agencies. For example, prudential regulation,
to the extent it is established to prevent systemic crisis, is enforced
prophylactically. Although banking agencies also have broad
enforcement powers, they are typically referred to as "supervisors."
As supervisors, banking agencies seek to secure compliance before
violations occur or become serious. This ex ante exercise in
regulatory control relies heavily on annual examinations of individual
banks. By contrast, consumer protection agencies are not supervisors
but enforcement agencies. An enforcement system employs various
means of investigating potential violations and a range of sanctions
for violators (which in turn serves to deter future violations), but does
not conduct regular examinations of firms in the industry." Part III
thus challenges the wisdom of combining prudential regulation and
consumer protection and concludes that the combination may be
inefficient and less effective than a regime in which the functions are
Part IV proposes a range of alternatives to the current
regulatory structure. A modest approach would address the structural
flaws identified in Part III by operational changes within the existing
agencies. Bolder approaches involve not only operational changes but
also reassignment of regulatory responsibilities among the existing
bank regulators or transfer of those responsibilities to the FTC. Each
alternative could enhance the fairness and efficiency of the current
Foundations for Consumer Protection versus
In a society that relies on free-market principles, regulation
intrudes upon the free market and, therefore, must be justified.
Financial regulation is justified on the basis of market failures, i.e.,
defects in the efficient operation of the market. 29 The idea is that
without government intervention financial markets cannot operate
efficiently and therefore cannot achieve welfare maximization.
Importantly, not all market failures are alike. Consequently, the
regulatory responses to such failures must differ. Below is a brief
discussion of the market failure addressed by consumer protection
28 See infra Part II.B. (discussing the method of regulation employed by the
FTC and other consumer protection agencies).
29 An inefficient market can be described as one in which at least one person
can be put in a better position without putting anyone else in a worse position.
laws versus the failure addressed by traditional bank regulation, i.e.,
A. Consumer Protection and Asymmetric Information
The market for consumer goods and services fails to provide
consumers with adequate and/or understandable information
regarding the products or services that they seek. Without such
information, consumers lack the freedom to obtain the maximum
value for those goods and services. Professor Cartwright describes
the informational deficits in the case of consumers of financial
First, it is extremely difficult for a consumer of financial
services to identify the characteristics of a product prior to
purchase. Second, financial products tend to be technically
complex, and so even if the consumer received accurate
and detailed information prior to purchase, it would be very
difficult for that consumer to understand the information.
Third, the effects of financial products are often not known
until the future (a pension being a good example) ....
Consumers are said to suffer from 'bounded rationality'.
This means that 'the capacity of individuals to receive[,]
store, and process information is limited'.30
To the extent that the rationale for consumer protection stems
from the consumer's lack of information, much consumer protection
legislation comes in the form of required disclosures.3" Such
disclosure seeks to correct the information asymmetry between the
consumer and the service provider (here, the bank). Other types of
consumer protection regulation are more positively regulatory in that
they may prohibit a bank from charging a particular interest rate (e.g.,
usury laws) or prohibit the inclusion of a particular clause in a loan
agreement (e.g., prohibitions on the inclusion of confession of
B. Prudential Regulation and Systemic Risk
While consumer protection is important, it is not the driving
30 Peter Cartwright, Consumer Protection in FinancialServices: Putting the
Law in Context, in CONSUMER PROTECTION IN FINANCIAL SERVICES 10 (Peter
Cartwright, ed., 1999).
31 See infra Part II.A.
force behind bank regulation. At the heart of bank regulation beat two
important concepts: the importance of banks to the macro-economy
and the financial fragility of banks. Both concepts contribute to
systemic instability - a market failure that is distinct from the
information asymmetry discussed above.
First, banks often are described as "special" because of the
unique role that they play in the macro-economy. 32 A well-known
essay by E. Gerald Corrigan, a former president of the Minneapolis
Federal Reserve, describes what makes banks special:
Reduced to essentials, it would appear that ... three
characteristics.., distinguish banks from all other classes
of institutions - both financial and nonfinancial. They are:
Banks offer transaction accounts.
Banks are the backup source of liquidity for all other
Banks are the transmission belt for monetary policy. 33
Corrigan explained that only banks offer transaction accounts,
i.e., accounts in which customers may access their funds on demand
and at par.34 If transaction accounts become unavailable to customers,
the ripple effects throughout the economy are immediate. For
32 While the following discussion charts the traditional "banks are special"
argument, it should be noted that the specialness of banks is not beyond debate.
See e.g., Catherine England, Are Banks Special?, 14:2 REGULATION (Spring 1991)
available at: http://www.cato.org/pubs/regulation/regl4n2a.html. The extent to
which the specialness of banks is used to justify the cost of regulation is significant
to the overall regulatory regime, but is beyond the scope of this article.
33 E. Gerald Corrigan, Are Banks Special?, 1982 ANNUAL REPORT ESSAY,
available at http://minneapolisfed.org/pubs/ar/arl982a.cfmn. For Corrigan's
revisitation of his earlier essay, see E. Gerald Corrigan, Are Banks Special? A
Revisitation, The Region, Special Issue 2000, Federal Reserve Bank of
Minneapolis, available at
34 E. Gerald Corrigan, Are Banks Special?, 1982 ANNUAL REPORT ESSAY,
available at http://minneapolisfed.org/pubs/ar/arl982a.cfm. Corrigan does qualify
this statement by noting that money market mutual funds bear very close
resemblance to traditional bank accounts. Id.
example, if your bank refuses to honor the check you wrote to your
landlord, then your landlord lacks the funds to make her mortgage
payment, etc. This disrupts the smooth functioning of the economy.
Further, Corrigan noted that banks serve as a backup source of
liquidity, which means that when bus3i5nesses lack capital, they secure
bank loans to shore up their liquidity.
Finally, and perhaps most importantly, Corrigan identified
banks as the transmission belt for monetary policy.36 As discussed
below, banks' operations are constrained, inter alia, by reserve
requirements that prohibit them from lending out all of the money
they receive in deposits. 37 Setting the amount of the reserve at a
particular level can expand or contract the money supply. In other
words, if you require banks to hold greater reserves, the money
supply will contract. If you allow banks to hold smaller reserves than
before, the money supply expands. In this way, the Federal Reserve
(the authority responsible for setting reserve ratios) can use banks to
expand or contract the money supply. Similarly, to the extent that
banks borrow money from the Federal Reserve, the Federal Reserve
can expand or contract the money supply by lowering or raising the
interest rates that it charges banks for loans.
Taken by itself, banks' special role in the economy might not
justify the comprehensive regulatory regime that governs banks.
Added to banks' "specialness" is the fact that banks, as institutions,
are fragile. This inherent fragility stems from the fact that banks, as
discussed above, maintain only fractional reserves, i.e., banks keep
on hand only about one dollar for every ten dollars deposited by their
customers. Banks lend the remaining nine dollars to other customers.
Further adding to this fragility is the fact that a bank's assets
(primarily loans) are typically illiquid, meaning that if a bank's
creditor (e.g., a depositor) demands payment on a debt owed by the
bank, the bank may not readily turn its assets into cash to satisfy that
debt. The result is that a "bank run," a situation in which many
depositors demand access to their funds at one time, can cause
serious financial trouble for a bank, even a solvent one. Even worse,
a run on one bank, even if caused by bad news solely regarding that
bank, can prompt runs on other banks. Runs on many banks can
cause problems for other businesses and result in a systemic crisis.
Therefore, the combination of the special place that banks
3 See id.
36 See id.
17 See infra Part I.B.
occupy in the economy and their inherent fragility creates an
incentive for the government to prevent bank runs. Depression-era
legislation provides the most poignant example of such government
intervention. In 1933, following the tidal wave of bank runs and
failures that coincided with the 1929 stock market crash, Congress
created a comprehensive scheme of federal deposit insurance. 38 Since
that time, and despite periods of significant bad news regarding
banks, the United States has avoided contagious bank runs.
A regulatory system that attempts to protect an institution
from failure is often referred to as "prudential regulation," or
sometimes, "safety and soundness regulation." As will be discussed
in Part II, it is important to bear in mind that prudential regulation is
quite distinct from forms of regulation that seek to protect individual
consumers. While bank customers may benefit from prudential
regulation 39 because their deposits are guaranteed, prudential
regulation seeks to protect the bank, not its customers.
Federal Consumer Protection Regulation and its
Implementation by Federal Banking Regulators
Beginning in the 1960s, increasing complexity of financial
products and the potential for resulting harm to consumers led
legislators in the United States and other countries40 to enact various
types of consumer protection laws. With regard to banks, most such
laws related to credit services, which are the focus of this article.
Banks, however, are subject to other categories of consumer
protection regulation as well. As discussed below, in addition to
consumer credit compliance, banks are subject to regulations that
seek to protect deposit customers or, more generally, seek to protect
the privacy of customer information.4 1 Moreover, the federal banking
38 For further discussion of Depression era bank legislation see Heidi
Mandanis Schooner & Michael Taylor, Convergence and Competition: The Case of
Bank Regulation in Britain and the United States, 20 MICH. J. OF INT'L L. 595
39 Bank customers may also suffer from prudential regulation to the extent that
the costs of the comprehensive regulatory regime are passed onto consumers.
40 For a discussion of the law in the United Kingdom and the European Union,
see Peter Cartwright, Consumer Protectionin FinancialServices: Putting the Law
in Context, in CONSUMER PROTECTION IN FINANCIAL SERVICES (Peter Cartwright,
41 The article is limited in its discussion to those consumer protection statutes
that are aimed at addressing the problem of asymmetric information. Therefore, I
agencies have devoted substantial resources to ensuring compliance
with consumer protection laws and to punishing violators of such
A. Overview of Federal Consumer Protection Legislation
The most prominent example of the federal laws that regulate
the extension of credit by banks is the Truth in Lending Act
("TILA"),42 which requires lenders to disclose the terms and cost of
the loan. Various amendments to TILA provide additional consumer
protections. The Fair Credit Billing Act requires lenders to correct
promptly mistakes on credit card bills. The Home Equity Loan
Consumer Protection Act of 198844 requires disclosure and regulates
advertising of home equity loans. The Equal Credit Opportunity Act
prohibits discrimination in credit transactions.4 5 The Fair Credit
Reporting Act 46 regulates the maintenance of credit histories by
credit bureaus and their use by lenders. The Fair Credit and Charge
Card Disclosure Act 47 requires issuers of credit cards to disclose
information relating to interest rates and other fees. The Home
Ownership and Equity Protection Act 48 mandates disclosure
regarding the terms of certain mortgages. Finally, the Consumer
Leasing, Act requires disclosure of the terms of personal property
Federal laws also govern consumer protection in
deposittaking transactions. The Truth in Savings Act 50 requires depository
have excluded discussion of statutes like the Community Reinvestment Act, Home
Mortgage Disclosure Act and the Fair Housing Act. While compliance with such
laws may have a positive impact on the members of affected communities, their
overall purpose is to promote policies related to the fair allocation of credit and/or
discrimination as opposed to problems of asymmetric information.
42 15 U.S.C. § 1601-93r (2000); 12 C.F.R. § 226 (2003).
41 15 U.S.C. § 1666 (2000).
44 15 U.S.C. §§ 1637a, 1665b, 1647 (2000).
45 Equal Credit Opportunity Act, 15 U.S.C. § 169la-c (2000).
46 Fair Credit Reporting Act, 15 U.S.C. § 1681 (2000).
47 Fair Credit Charge Card Disclosure Act of 1988, 15 U.S.C. § 1637 (2000).
48 Home Ownership and Equity Protection Act of 1994, 15 U.S.C. § 1639
49 Consumer Leasing Act of 1976, 15 U.S.C. § 1601(b) (2000).
institutions to make uniform disclosures regarding various terms of
the deposit, including interest rates, annual percentage yields, and
fees. The Expedited Funds Availability Act of 1987 requires
depository institutions to make deposits available to customers within
specified periods of time and to disclose their funds availability
policies. 5' The Electronic Fund Transfer Act 52 establishes consumers'
rights with regard to electronic funds transfer services. The Check 21
Act, effective October 28, 2004, allows for electronic check clearing
and provides consumers with the right to an expedited re-credit to
their account under certain circumstances. 3
In addition, the information age has spurred interest in the
privacy of consumers' financial information. In 1999, Congress
passed the first federal law seeking to protect personal financial
information. Title V of the Gramm-Leach-Bliley Act of 1999
("GLBA"), provides that: "it is the policy of the Congress that each
financial institution has an affirmative and continuing obligation to
respect the privacy of its customers and to protect the security and
confidentiality of those customers' nonpublic personal
information." 4 Prior to the GLBA, Congress had restricted
government access to financial information pursuant to the Right to
Financial Privacy Act.55
B. Implementation of Consumer Protection Laws by Federal
From the outset, Congress recognized that consumer credit
laws would require extensive agency rulemaking in order to achieve
full implementation. The difficult task was choosing the most
appropriate agency to perform the task. Professor Ralph Rohner
explains that the "reluctant choice was the Federal Reserve Board
partly because it was within the jurisdictional sphere of the
Congressional banking committees from which the Truth in Lending
Act originated, and partly because the other likely choice-the
Federal Trade Commission-was then being criticized for
5' Expedited Funds Availability Act, 12 U.S.C. §§ 4001-4010 (2000).
52 Electronic Fund Transfer Act, 15 U.S.C. §§ 1693, 1693a-1693r (2000).
53 Check Clearing for the 21st Century Act, 12 U.S.C. §§ 5001-5018 (2004).
54 Gramm Leach Bliley Act, 15 U.S.C. § 6801(a) (2000).
ineffectiveness. 56 With regard to the enforcement of such laws,
Congress determined to spread authority among the various banking
supervisory agencies with the FTC having enforcement responsibility
for non-banks. Professor Rohner explains that the "rationale is that
the agency which has general jurisdiction over an organization should
oversee its consumer credit activities. The FTC is given enforcement
authority with respect to everyone who does not fit into any one of
the other neat regulatory pigeonholes. '57 The current division of
responsibility for enforcement of consumer protection laws among
the federal agencies and within a banking organization is provided in
It is important to bear in mind, however, that bank regulators
are in a unique position with regard to consumer protection. Part I
discussed the raison d'etre of bank regulation as prudential, i.e.,
protecting the safety and soundness of a bank. Bank regulators
implement prudential laws through a supervisory system that relies
on both onsite and offsite periodic examination, as well as an
56 Ralph J. Rohner, "ForLack of a NationalPolicy on Consumer Credit... ";
Preliminary Thoughts on the Need For Unified FederalAgency Rulemaking, 35
Bus. LAW. 135, 136-37 (1979). Note that the Federal Reserve does not have sole
rulemaking authority under Gramm-Leach-Bliley's privacy provisions. That
authority is shared among the federal banking agencies, the National Credit Union
Administration, the Secretary of the Treasury, the Securities and Exchange
Commission, and the FTC. 15 U.S.C. § 6804(a)(1) (2000).
5' Rohner, supranote 56, at 142.
58 Bank regulators are. required by statute to "conduct a full-scope, on-site
enforcement system.59 This is quite distinct from the method of
regulation employed by the FTC and other consumer protection
agencies 60 that rely primarily on an enforcement regime.x In other
words, most consumer protection agencies employ various forms of
investigation and engage in other activities designed to root out
compliance failures, while the banking agencies are unique in that
they regularly examine individual banks. This unique quality
distinguishes an enforcement regime from a supervisory regime. The
supervisory regime allows banking agencies the opportunity to
determine compliance of consumer protection laws ex ante, i.e.,
possibly before harm has accrued, rather than ex post and through
investigations and administrative enforcement proceedings.
The FTC's description of what triggers action by the agency
illustrates the ex post nature of most consumer protection regimes:
"[l]etters from consumers or businesses, premerger notification
filings, Congressional inquiries or articles on consumer or economic
subjects may trigger FTC action." 62 Apart from the premerger
notification filings, 3 all the triggering events postdate injury to the
consumer. In contrast, the Federal Reserve identifies bank
examinations as its "primary means of enforcing bank compliance
with consumer protection laws." 64 Bank examinations, in which the
examination" at least once every 12 months for most banks and every 18 months
for certain small banks. 12 U.S.C. §§ 1820(d)(1), 1820(d)(
'9 12 U.S.C. § 1818 (2000).
60 The Securities and Exchange Commission is an example of a consumer
protection agency that operates primarily as an enforcement agency but also
conducts periodic examinations. The primary mission of the SEC "is to protect
investors and maintain the integrity of the securities markets." The Investor's
Advocate: How the SEC Protects Investors and Maintains Market Integrity,
available at http://www.sec.gov/about/whatwedo.shtml (last modified Aug. 19,
2005). The operations of the SEC, however, are beyond the scope of this article
because the SEC's jurisdiction is over securities products and not the traditional
61 According to the SEC, "[c]rucial to the SEC's effectiveness is its
enforcement authority. Each year the SEC brings between 400-500 civil
enforcement actions against individuals and companies that break the securities
62 Guide to the Federal Trade Commission, March (2004), available at
63 These relate to the enforcement of laws that restrict competition. Such laws
are not the subject of this article.
64 BOARD OF GOVERNORS FOR THE FEDERAL RESERVE SYSTEM, 9 0 th ANNUAL
REPORT 63 (2003), available at http://www.federalreserve.gov/boarddocs/
bank's operations and control systems are scrutinized, can prevent
consumer injury before it occurs. Therefore, a bank regulator's
approach to consumer protection is prophylactic. Moreover,
examinations can also serve the ex post function of uncovering
existing consumer harm.
Review of the federal banking agencies' operations reveals
extensive consumer compliance activities. In 2003, 65 the Federal
Reserve conducted 402 compliance examinations, of which 368 were
of state member banks, and 34 were of foreign banking
organizations.6 6 The same year, the OCC conducted 835 compliance
examinations 67 and the FDIC conducted 1,610 compliance/CRA
examinations and 307 compliance-only examinations. 68 In 2003, the
Federal Reserve received 2,644 consumer complaints,69 the OCC
received 68,104 complaints, 0 and the FDIC received 8 026
complaints, of which 4,047 were against state-chartered banks." In
2003, the federal banking agencies also initiated many administrative
enforcement actions sanctioning consumer compliance violations.72
65 The differences in the number of examinations reported is driven primarily
by the number of banks each regulator supervises. In 2003, the Federal Reserve
supervised 935 state member banks, the OCC supervised 2,001 national banks, and
the FDIC supervised 4,833 state non-member banks. See FDIC's Statistics on
Banking, availableat: http://www2.fdic.gov/SDISOB/pdf/soball.pdf.
66 FEDERAL RESERVE ANNUAL REPORT (2003), supranote 64, at 74.
67 OCC FISCAL YEAR 2003 ANNUAL REPORT 12 (2003),. available at
68 FDIC ANNUAL REPORT 15 (2003), available at http://www.fdic.gov/
69 FEDERAL RESERVE ANNUAL REPORT (2003), supranote 64, at 74.
70 OCC 2003 ANNUAL REPORT, supra note 67, at 9. Obviously, the OCC is
fielding many more consumer complaints than the other agencies. The possible
explanation, derived from anecdotal evidence only, is that most consumer
complaints derive from credit card transactions. If that is true, the OCC, as
regulator of national banks, would field most of those calls because many of the
major credit card issuers are national banks.
7' FDIC 2003 ANNUAL REPORT , supranote 68, at 17.
72 See e.g., In re Sedona Pac. Hous. P'ship, 2003 OCC Enf. Dec. LEXIS 163
These statistics demonstrate the depth of the federal bank
regulators' involvement in consumer protection. Not only are bank
regulators conducting regular compliance examinations, but they are
also responding to a significant number of consumer complaints and
initiating important enforcement proceedings. Not surprisingly, given
the resources involved, the bank regulators report a high level of
compliance in the industry. For 2003, the FDIC reported that only
one institution received a "four" rating for compliance, and that no
institution received a "five., 73 The OCC reported that 96% of
national banks received a consumer compliance rating of one or two
in 2003. 74 The Federal Reserve, which reports combined compliance
results on behalf of all the members of the Federal Financial
Institutions Examination Council ("FFIEC"), 75 also reported high
rates of compliance.76
III. The Structural Impact of Bank Regulation on
Examination of the division of consumer protection
responsibilities among the federal regulators is informed by a broader
issue of international debate. In recent years, a number of countries in
Europe and elsewhere adopted important structural reforms to their
financial regulatory regimes.77 Generally, such reforms intended to
address the blurring of boundaries that traditionally separated the
three financial sectors (banking, insurance, and securities).
Increasingly over the last several decades, firms in each of the three
sectors have begun to offer services that are functionally equivalent.
The blurring of boundaries can be traced to many roots including
Centennial Bank, 2003 FDIC Enf. Dec. LEXIS 120 (2003); In re First Am. Bank,
2003 FDIC Enf. Dec. LEXIS 218 (2003); In re First Am. Bank, 2003 FDIC Enf.
Dec. LEXIS 227 (2003).
73 FDIC 2003 ANNUAL REPORT, supra note 68, at 15. On the relevant scale,
one is the highest rating available and five is the lowest.
74 OCC 2003 ANNUAL REPORT, supranote 67, at 9.
75 The FFIEC is comprised of the Federal Reserve, FDIC, OCC, OTS, and
76 The Federal Reserve's statistics are broken down by statute. The lowest
compliance rate was seventy-eight percent compliance with Regulation Z (Truth in
Lending). See FEDERAL RESERVE ANNUAL REPORT (2003), supra note 64, at 69.
77 See generally Heidi Mandanis Schooner & Michael Taylor, United
Kingdom and United States Responses to the Regulatory Challenges of Modern
FinancialMarkets, 38 TEX. INT'L L. J. 317 (2003).
conglomeration, globalization, technological advances, and growing
sophistication of financial products. The blurring of boundaries
means that the traditional division of regulatory authority, which once
paralleled the three financial sectors, is obsolete.
Many countries have addressed this anachronism by
structuring their regulatory regimes to mirror the industry. In other
words, as the industry evolved towards conglomerate,
one-stopshopping financial firms, the regulatory agencies engaged in their
own consolidation. These agencies are commonly referred to as
"super regulators" or "unified regulators." 78 The United Kingdom's
Financial Services Authority ("FSA") is a noteworthy example. The
FSA is responsible for supervising financial firms of all types and for
implementing both consumer protection and prudential regulations.
Another approach to reform divides regulatory responsibility
by regulatory goal (or, as discussed in Part I, by type of market
failure). This approach is sometimes referred to as a "goals-oriented"
approach to regulatory structure. 79 A goals-oriented regime rejects
both the traditional division of regulatory responsibility by type of
firm (i.e., a bank versus an insurance company versus an investment
bank) and the consolidated approach of the super regulator. Instead,
under a goals-oriented regime, regulatory responsibility is divided by
regulatory goal, e.g., consumer protection versus prudential
regulation. The Australian regulatory scheme exemplifies the
goalsbased approach. In Australia, one agency is responsible for consumer
protection for all financial products regardless of whether the
products are sold by a bank or another financial institution.8 ° A
different agency is responsible for prudential regulation for all bank
and non-bank financial services firms. 8' Obviously, the
goalsoriented approach utilizes a greater number of regulatory agencies
than the super-regulator approach. Although the goals-oriented
approach subjects financial firms to more than one financial
regulator, each regulator is responsible for implementing a. single
78 For a discussion of integrated regulators among OECD countries, see Heidi
Mandanis Schooner, The Role of CentralBanks in Bank Supervision in the United
States and the UnitedKingdom, 28 BROOKLYN J. OF INT'L L. 411, 423 (2003).
'9 Bert Ely, FunctionalRegulation Flunks: It Disregards Category Blurring,
AM. BANKER, Feb. 21, 1997, at 4.
80 The agency is the Australian Securities and Investments Commission
8' The agency is the Australian Prudential Regulatory Authority ("APRA").
The ASIC, however, is responsible for regulating securities firms.
The United States has not participated in the structural reform
that has been popular abroad. Instead, the U.S. system remains
largely institutional.82 In general, this means that banks are regulated
by bank regulators, securities firms are regulated by the Securities
and Exchange Commission, and insurance firms are regulated by
state insurance commissioners.83 With regard to consumer protection
issues, the institutional approach means that the federal bank
regulators, rather than other consumer protection agencies, are
responsible for banks' compliance with consumer protectioanl.s8o4
Several other federal regulators may also have overlapping
jurisdiction, such as the FTC, the DOJ, and the U.S. Department of
Housing and Urban Development ("HUD").85
Given the United States' failure to address the structural
issues that have provoked widespread reform abroad, it is appropriate
to consider the overall approach to the structure of financial
regulation in this country. 8 This article, however, focuses on only
one piece of the puzzle: the implications of the current regulatory
structure for the implementation of federal laws that seek to protect
consumers of credit. In particular, this Part considers whether it is
appropriate to grant consumer protection and prudential regulation
authority to a single regulator (following the "super regulator"
concept) or whether it is preferable to separate the functions into
distinct agencies (relying on the goals-oriented approach).
82 Although the Gramm-Leach-Bliley Act of 1999 purported to adopt a
"functional" as opposed to institutional approach to regulation, in reality the U.S.
system remains largely institutional. For an extensive discussion on this point, see
Heidi Mandanis Schooner, FunctionalRegulation: The Securitization of Banking
Law, in FINANCIAL MODERNIZATION AFTER GRAMM-LEACH-BLILEY 189 (Patricia
A. McCoy ed., 2002).
83 For a more detailed discussion of the division of regulatory responsibilities,
see Heidi Mandanis Schooner, Functional Regulation: The Securitization of
Banking Law, in FINANCIAL MODERNIZATION AFTER GRAMM-LEACH-BLILEY 189
(Patricia A. McCoy ed., 2002).
84 See infra Part II.B.
85 See generally GAO, Consumer Protection: Federal and State Agencies Face
Challenges in Combating Predatory Lending, GAO-04-280 (Jan. 2004).
86 See Schooner & Taylor, supra note 77; Heidi Mandanis Schooner,
RegulatingRisk Not Function,66 U. CIN. L. R. 441 (1998).
internal controls for safety and soundness reasons, why not also
monitor for consumer abuse?
ii. Synergies in Consumer Protection and Banking Agencies'
In addition to the overlap with safety and soundness concerns,
the bank regulators' role in protecting consumers overlaps with the
agencies' antitrust responsibilities. While non-bank firms are subject
to both the Sherman Act89 and the Clayton Act, 90 combinations by
banks are governed under the Bank Merger Act91 and the Bank
Holding Company Act. 92 Therefore, the federal banking agencies,
rather than the FTC, have the responsibility for approving bank
mergers. 93 Timothy Muris, former FTC chairman, noted the synergies
between competition and consumer protection policy:
There may be multiple ways to ensure that competition and
consumer protection policy work together .... The Federal
Trade Commission's experience suggests several synergies
from this arrangement. First, the consumer protection
function can provide useful insights about how to execute
competition policy.... [E]nforcement of laws concerning
advertising and marketing practices has improved the
Commission's understanding of how markets operate. For
example, the development of the agency's health care
antitrust agenda benefited from what we learned about the
manner in which truthfal advertising informs consumer
The more important form of osmosis runs from competition
to consumer protection policy. Because of its antitrust
responsibilities, the agency is well aware that robust
89 Sherman Act, 15 U.S.C. §§ 1-2 (2000).
90 Clayton Act, 15 U.S.C. § 18 (2000).
91 Bank Merger Act, 12 U.S.C. § 1828(c) (2004).
92 Bank Holding Company Act of 1956, 12 U.S.C. § 1842(a), (c) (2001).
93 But see 12 U.S.C. § 1828(c)(4), (6)-(7) (noting that once approved by the
appropriate federal banking agency, the DOJ conducts a second review).
competition is the best, single means to protect consumers.
Rivalry among incumbent producers, and the threat and
fact of entry from94new suppliers, fuels the contest to satisfy
In the same way, the banking agencies' role in competition
policy may benefit from their role in consumer protection. For
example, fostering a competitive lending market may protect
consumers by pushing out unscrupulous firms. In this way,
competition policy enhances consumer protection.
iii. Systemic Implications of Consumer Abuse
Even in instances in which consumer protection violations do
not implicate a bank's solvency, such violations will adversely affect
the institution's reputation. The Basel Committee on Bank
Supervision emphasized the importance of the compliance function,
stating that "[c]ompliance with laws, rules and standards helps to
maintain the bank's reputation with, and thus meet the expectations
of, its customers, the markets and society as a whole." 95 The Basel
Committee added that "a bank's reputation is closely connected with
its adherence to principles of integrity and fair dealing., 96 The
public's perception of a bank's integrity is important because the loss
of confidence in one bank can cause the reputation of all banks to
suffer. This, in turn, can create systemic crisis in the banking
industry, because the loss of confidence in banks could lead to a run
The OCC recently identified three types of credit card
practices that "may entail unfair or deceptive acts or practices and
may expose a bank to compliance and reputation risks. 97 First, the
OCC identified "up to" marketing, a practice in which a credit card
issuer advertises credit limits "up to" a maximum amount but rarely
94 Timothy J. Muris, The Federal Trade Commission and the Future
Development of U.S. ConsumerProtectionPolicy, GEORGE MASON U. L. & ECON.
RESEARCH PAPER No. 04-19, at 18-20 (2004), available at
95 THE COMPLIANCE FUNCTION IN BANKS 1 (Bank for Int'l Settlements, Basel
Comm. on Banking Supervision, Consultative Document, 2003), available at
extends that amount.9s Second, the OCC described the use of
promotional rates, such as reduced annual percentage rates, in cases
in which the application of the low rates is actually restricted.99
Third, the OCC identified situations in which credit card issuers
"reprice," or increase the charges to consumer accounts without proper
disclosure. 00 According to the OCC, all of these practices can,
among other things, "damage a bank's good name, and are contrary
to the standards under which the OCC expects national banks to
iv. Cost of Supervision
Are the costs of an ex ante system of compliance justifiable?
One answer is that the costs are not so great. Bank regulators,
constrained by their staff and budgets, demonstrate great sensitivity
to the costliness of traditional examinations. For example, the FDIC
and other bank regulators traditionally took a transaction-based
approach to examining banks for compliance with consumer
protection rules. Under this approach, bank examiners would review
actual bank transactions to determine compliance. Obviously, this
process is labor intensive and therefore expensive. In response to the
proliferation of new financial products combined with an increasing
burden with respect to implementing new federal laws, the FDIC
changed its approach. Today, the FDIC takes a risk-based approach
to compliance examinations under which the extent of transaction
testing is determined by an assessment of the risk of non-compliance
by the institution. The FDIC explained that its new examination
[A]ssesses how well a bank identifies emerging risks,
remains current on changes to laws and regulations, ensures
102 It appears that the OCC has also adopted a risk-based approach. The OCC
reports that it "supervises national banks' compliance with consumer protection
laws and anti-predatory lending standards through programs of ongoing supervision
that are tailored to the size, complexity and risk profile of different types of
banks . 0O.C.."C, PREEMPTION FINAL RULE QUESTIONS AND ANSWERS 10 (Jan.
7, 2004), available at
that employees understand compliance responsibilities,
incorporates compliance into business operations, reviews
operations to ensure compliance, and takes effective
corrective action to address violations of law or regulation
and weaknesses in the compliance program. Based on an
assessment of the quality of the compliance management
system, compliance examiners use transaction testing to
pinpoint regulatory areas for further evaluation. The
bank's risk profeixlete.'n0 t3 of transaction testing depend on a
Another way to view the question of cost is to consider
whether adding consumer compliance to the list of areas covered by
an examination really adds much more to what an examiner would
have to do when conducting a prudential exam. Perhaps the most
compelling factor is that prudential exams involve a great deal of
analysis of a bank's management systems and controls.' 0 4 As
discussed above, compliance exams focus on the same practices. To
the extent that the competency of management is critical to both
regulatory goals, it seems highly efficient to task the same agency
with both responsibilities.
v. Preventing Consumer Abuse
Bank regulators rarely miss an opportunity to report the
scarce evidence of consumer protection violations among banks and
their subsidiaries.10 5 It is not a stretch to conclude that the supervisory
approach to consumer compliance has succeeded in preventing
banking institutions from committing fraud. While an enforcement
regime is an alternative mechanism for addressing consumer abuse,
the fundamental problem with an enforcement regime is that it
operates ex post. In theory, the enforcement regime works to
compensate victims of abuse, but in practice, damages rarely provide
adequate compensation for the injury suffered. Moreover,
enforcement regimes generally do not seek to address every harm.
Rather, an enforcement regime relies on selective enforcement to
deter would-be offenders.
103 FDIC, Compliance Examinations: A Change in Focus, SUPERVISORY
INSIGHTS, Summer 2004, at 14, available at http://www.fdic.gov/
104 See supra note 88 (discussing the CAMELS rating system).
105See supra Part II.B.
vi. Agencies' Expertise and Rulemaking
Ensuring compliance with existing consumer protection laws
and regulations is not the only responsibility of a banking agency. As
discussed in Part II, consumer protection statutes require
implementation through agency rulemaking. The Federal Reserve is
responsible for Regulation Z, which implements both the
Truth-inLending Act and its amendments.' °6 Responsibility for rulemaking
under GLBA's privacy provisions is divided among all the federal
banking regulators and other agencies.' 0 7 More recently, the OCC
engaged in a significant and controversial rulemaking process that
not only staked out the OCC's position on the preemption of state
consumer protection laws, but also clarified the agency's policies on
predatory lending. 10 8 The banking agencies' expertise with bank
operations makes them well-suited to create regulations that
implement Congressional intent.
B. Disadvantages of Federal Bank Regulators' Role in
The advantages of tasking federal bank regulators with
consumer protection responsibilities emphasize the synergies
between prudential bank regulation and consumer protection. The
disadvantages of such a combination of regulatory responsibilities are
found in the differences between the two regulatory goals. The
discussion below illustrates that while consumer protection and
prudential regulation may overlap, the differences between the two
are quite significant. The theoretical analysis of these differences
suggests the need for some empirical study. Such study might show
that the current system costs too much and achieves suboptimal
Conflict Between Consumer Protection and Prudential
The prime disadvantage of combining consumer protection
with safety and soundness regulation is that such a regime fails to
appreciate the fundamental differences between these two regulatory
106 12 C.F.R. § 226 (2005).
107 15 U.S.C. § 6801(a) (2001).
108 Bank Activities and Operations; Real Estate Lending and Appraisals, 69
Fed. Reg. 1,904 (Jan. 13, 2004) (to be codified at 12 C.F.R. pts. 7 & 34).
goals. Decades ago, in Gulf Federal,°9 the Fifth Circuit considered
the propriety of the Federal Home Loan Bank Board's (the
"Board")" 1 use of its cease and desist authority to "enter the
consumer protection field.""' A federal banking agency's cease and
desist authority is typically triggered by the agency's finding of an
"unsafe or unsound" banking practice.'" The Fifth Circuit considered
whether Gulf Federal's failure to compute and charge interest in
accordance with the loan documents in over 400 loans was unsafe or
unsound. While the opinion centered on what Congress meant by the
phrase "unsafe or unsound,"'"13 the court made several interesting
observations regarding the difference between prudential regulation
and consumer protection.
The Fifth Circuit found that "unsafe or unsound" practices
were limited to "practices with a reasonably direct effect on an
association's financial soundness."' 14 Given that constraint, the court
found that Gulf Federal's overcharging of interest did not constitute a
financial risk to the institution. The court explained that:
the only risks the Board has identified are Gulf Federal's
potential liability to repay overcharged interest, and an
undifferentiated 'loss of public confidence' in the bona
fides of Gulf Federal's operations. Such potential 'risks'
bear only the most remote relationship to Gulf Federal's
financial integrity and the government's insurance risk ....
While the potential liability for repayment of the difference
in interest charges could lead to a minor financial loss for
Gulf Federal, the Board's order would consummate this
'risk' immediately by forcing Gulf Federal to repay the
interest forthwith, whether or not it is owed. We fail to see
109Gulf Fed. Sav.& Loan Ass'n of Jefferson Parish v. Fed. Home Loan Bank,
651 F.2d 259 (5th Cir. 1981).
110 The Board was the federal regulator.of savings and loan associations prior
to the creation of the Office of Thrift Supervision in 1989.
...Gulf Fed. Sav. & Loan Ass'n of Jefferson Parish, 651 F.2d at 261.
112 12. U.S.C. §1818(b) (2000).
113 For a discussion of the meaning of "unsafe or unsound banking practices,"
how the Board can safeguard Gulf Federal's finances by
making definite and immediate an injury which is, at worst,
contingent and remote.11 5
Gulf Federal offers an example of an instance in which the
goals of consumer protection and prudential regulation are at odds.
The court noted that Gulf Federal's financial condition might actually
suffer if the Board sought to protect the contract rights of Gulf
Federal's customers. While this finding might shock common
sensibilities, itis. consistent with avoiding systemic instability which
is the market failure addressed by bank regulation. The purpose of the
regulatory scheme is ultimately tied to the macro financial system
and, accordingly, is not focused on individual harm. 116 Instead, the
prudential regulatory system is concerned with the financial
soundness of individual institutions only because of the potential for
contagion. In other words, bank regulators care about the financial
soundness of small banks (i.e., banks that on their own are not
systemically important) only to the extent that their financial status
might affect other banks and, ultimately, the whole system.
ii. Supervision Versus Enforcement
Traditional consumer protection is conducted by law
enforcement agencies rather than supervisors. Supervisory schemes,
which rely on ex ante examinations, are both costly and intrusive.
Therefore, a political system that rankles at government intrusion and
government spending should seek strong justification for the
implementation of supervisory regimes. Even in such a political
environment, a supervisory regime will be favored in cases in which
noncompliance with applicable law will lead to harm which is
difficult to compensate or is otherwise intolerable. A good example is
the federal scheme for approval of new drugs. Relying on an ex post
enforcement system for administering drug laws would work to
punish companies that distribute harmful drugs. The obvious problem
is that the resulting harm to consumers' health may be inadequately
compensated through traditional damages and may offend our sense
of justice. Therefore, the Food and Drug Administration reviews new
drugs prior to their release to the public. 117 The regulatory system for
116 See infra Part I.B.
117 The need for a prophylactic system of regulating new drugs was
illuminated by a consumer protection crisis: "[iun 1937, a public health disaster
the approval of new drugs seeks not only to punish for
noncompliance, but also to prevent harm from occurring.
Traditional prudential bank regulation operates under a
similar premise. As discussed in Part I, the prudential regime that
applies to banks serves to prevent systemic crisis. Bank failures that
would occur without government intervention are considered
intolerable because bank failures can cause system-wide irreparable
Not all consumer protection regimes require an ex ante
approach. The question here is whether traditional banking services
do. With regard to deposit taking, the prudential side of bank
regulation has a forceful consumer protection effect. The Supreme
Court has said that Congress established deposit insurance for the
purpose of "ensuring that a deposit of 'hard earnings' entrusted by
individuals to a bank would not lead to a tangible loss in the event of
a bank failure."' 18 Given the existence of deposit insurance, however,
it is not clear that consumers need costly ex ante protection from
fraud by deposit takers. If a bank fails to disclose the minimum
balance requirement on a checking account, the depositor can be
adequately compensated through damages.
Moreover, the analysis with regard to consumer credit fails to
yield a strong justification for an ex ante system. If a bank charges
excessive fees, the borrower can be compensated with damages. If
this were not true, then the laws that apply to non-bank lenders would
be in need of reform. In other words, lenders that are not banks or
subsidiaries of banks are not subject to a supervisory regime. Rather,
they are regulated under ex post enforcement regime implemented by
tragically drove home the need for a stronger federal law. Sulfanilamide, the first
'wonder drug' and a popular and effective treatment for diseases like strep throat
and gonorrhea, was formulated into an Elixir of Sulfanilamide and marketed for use
in children. But the liquid formulation contained a poison, the same chemical used
in antifreeze, and it killed 107 people, most of them children. The earlier law did
not require the drug's manufacturer to test the formulation for safety before it was
sold .... Congress corrected this weakness in the law the next year when it passed
the Federal Food, Drug, and Cosmetic Act. This law, for the first time, required
companies to prove the safety of new drugs before putting .them on the market."
Overview of the FDA, http://www.fda.gov/oc/opacom/fdal01/sldOI3.html (last
118 Fed. Deposit Ins. Corp. v. Phila. Gear Corp., 476 U.S. 426, 433 (1986).
The justification for prudential regulation tells us that the real _purpose behind
deposit insurance is that it avoids systemic instability by protecting banks from
deposit runs. The fact that individual consumers are protected is an external good,
but it is not the goal of the scheme. See infra Part I.B.
the FTC.' 19 If such a system is good enough for non-bank lenders, it
is hard to argue that the same system is not good enough for bank
iii. Agency Independence and Capture
Consideration of an agency's independence is important to
structuring any regulatory regime. Independent agencies differ from
other agencies in that the President may remove the head of the
agency for cause only (as opposed to at will). 2 ° But the removal
feature is just one aspect of independence. The question of
independence ranges from the extent to which lawmakers have
delegated substantive legal authority, to the governing structure of the
agency, to the agency's funding. With regard to regulators of
financial markets, the issue of political independence is often raised
in the context of the structuring of a central bank.121 Monetary policy
is seen as a function best served without expedient political
influences. 122 For that reason, the United States' Federal Reserve
System serves as a model of an independent central bank.123
Although rarely discussed in detail, the question of
independence is also important to the structure of prudential
regulation. 124 Some have argued, for example, that lack of agency
independence was a contributing factor in the 1980s savings and loan
crisis. 25 While the federal bank regulators enjoy many features of
independence, the OCC lacks the independent status of the FDIC and
119 See infra Part II.B.
120 See generally Geoffrey P. Miller, Introduction: The Debate Over
IndependentAgencies in Light ofEmpiricalEvidence, 1988 DUKE L. J. 215 (1988).
121See generally Michael Taylor, Central Bank Independence: The Policy
Background, in BLACKSTONE's GUIDE TO THE BANK OF ENGLAND ACT 10 (1998);
Geoffrey Miller, An Interest-group Theory of Central Bank Independence, 27 J.
LEGAL STUD. 433 (1998).'
122 See Schooner, supra note 78 at 434 (discussing international support for
central bank independence).
123See id. at 435 (discussing the independence of the Federal Reserve).
124 For an extensive discussion, see Steven A. Ramirez, Depoliticizing
FinancialRegulation, 41 WM. & MARY L. REv. 503 (2000).
125See Rosa Maria Lastra, Central Banking and Banking Regulation, 55
LONDON SCH. ECON. 329 (1996) (in which Lastra contends "that the US Savings
and Loan Associations' debacle might have been prevented or at least mitigated
had non-political considerations more firmly prevailed in their supervision").
Federal Reserve.' 26 Unlike the other federal banking regulators, the
OCC resides within the executive branch as a bureau of the United
States Treasury. Still, the OCC enjoys some characteristics of
independence that might not otherwise be found in an executive
agency. The Comptroller is appointed by the President, with the
advice and consent of the Senate, for a five-year term. 2 ' The
Comptroller may be removed by the President "upon reasons to be
communicated by [the President] to the Senate."12 The Secretary of
Treasury is prohibited from delaying or preventing the issuance of
any OCC rule.' 29 The OCC enjoys certain fiscal independence in that
it does not rely on appropriations to fund its operations. Rather, its
operations are funded by
revenue from its investment ianscsoesmsem.'e3n0ts on national banks and on
While the broad question of prudential regulator
independence is beyond the scope of the present discussion, the
OCC's link to the executive branch has undoubtedly inflamed the
already heated debate over the OCC's position on preemption of state
126 The FDIC and the Federal Reserve are independent agencies. The Board
of Directors of the FDIC is comprised of five members: the Comptroller of the
Currency, the Director of the OTS, and three members appointed by the President,
with advice and consent of the Senate. 12 U.S.C. § 1812(a)(1) (2000). No more
than three members of the Board may be members of the same political party. 12
U.S.C. § 1812(a)(2) (2000). Board members serve a six year term. 12 U.S.C. §
1812(c)(1) (2000). The President appoints the Chairperson for a term of five years.
12 U.S.C. § 1812(b)(1) (2000). The Board of Governors of the Federal Reserve
System is comprised of seven governors. 12 U.S.C. § 241 (2000). Each is
appointed by the President with advice and consent of the Senate for a 14 year
term. Id. "In selecting the members of the Board... the President shall have due
regard to a fair representation of the financial, agricultural, industrial, and
commercial interests, and geographical divisions of the country." Id. The
President, with the consent of the Senate, chooses the Chairman and the Vice
Chairman from among the board members for a term of four years. 12 U.S.C. § 242
(2000). Both agencies enjoy fiscal independence. The FDIC's operations are
funded by premiums paid for deposit insurance and earnings on its U.S. Treasury
securities. The Federal Reserve's operations are funded primarily through earnings
on its U.S. Treasury securities but also from fees paid by banks for services
provided by the Federal Reserve (e.g., check clearing, loans).
127 12 U.S.C. § 2 (2000).
129 This provision was added in 1994 and states that "[t]he Secretary of the
Treasury may not delay or prevent the issuance of any rule or the promulgation of
any regulation by the Comptroller of the Currency." 12 U.S.C. § 1 (2000).
130 About the OCC, http://www.occ.treas.gov/aboutocc.htm (last visited Nov.
law.13' When the OCC engages in rulemaking, despite its statutory
independence from the Secretary of the Treasury, the rule is
susceptible to being labeled "the Bush Administration's" rule. 132 This
label has a tendency to infuse the atmosphere with political cynicism
that might not be as palpable if an independent agency issued the
rule. This cynicism remains even though the OCC's position on
preemption seems relatively consistent with its approach to similarly
heated legal issues during the Clinton Administration.'33 In other
words, the OCC has taken aggressive legal positions promoting the
value of the national charter across administrations. Despite this, the
OCC's link to the executive branch gives commentators the
opportunity to imply 134 that the OCC's position is nothing more than
an extension of a political platform.
Closely related to the question of independence is that of
regulatory capture. While agency independence tends to focus on the
influence, in particular, of the President, regulatory capture involves
the influence of the regulated over the regulator. The OCC suffers
particularly when it is under scrutiny for capture because the OCC's
operations are funded by the banks that the OCC supervises. The
simple notion that "one should not bite the hand that feeds you" leads
to a cynical view of the OCC's seriousness about combating
consumer fraud. This cynicism persists despite several high profile
enforcement actions addressing consumer compliance issues and the
OCC's quite vocal commitment to combating fraud.
131 See supranotes 12 - 17 and accompanying text.
132 See James C. McKinley, Jr., Spitzer Files Suit OpposingEffort by U.S. to
Limit Bank Oversight,N.Y. TIMES (January
) at C I; Spitzer Charges Feds
Conspiring to Shield Banks Against State Consumer Protection Laws (June 17,
2005), available at http://www.consumeraffairs.com/news0
occ-spitzer2.html; Spitzer Taking Aim At Preemption of Bank Rules (January 26,
2004), available at http://www.keepmedia.com/ShowltemDetails.do?item
133 See NationsBank of North Carolina, N.A. v. Variable Annuity Life Ins.
Co., 513 U.S. 251 (1995) (OCC advocated a broad interpretation of the "business
of banking" under the National Bank Act).
134 See James C. McKinley Jr., Spitzer Files Suit Opposing Effort By U.S. to
Limit Bank Oversight, N.Y. TIMES (Jan.
), at Cl (referencing the OCC's
rule on preemption as a Bush Administration rule).
responsibilities among the federal regulators is that the current
system is unnecessarily complex. No one designing a consumer
protection regime from scratch would conceive of establishing
eight135 separate federal agencies, not to mention the fifty states and
the SEC (whose primary purpose is to promote consumer protection
in the securities markets) and the CFTC (whose primary purpose is to
promote consumer protection in the commodities markets). Without
an empirical study, one cannot qualify the costs of such complexity.
Yet common sense suggests that the costs are excessive.
Consider a consumer with a complaint about a loan obtained
from a lender that is a subsidiary of a national bank. Unless the
consumer is an expert in bank regulation, there is little chance that
the consumer will call the correct federal regulator on the first try.
Even an expert would labor to uncover several not-so-obvious facts
about the lender before she would be able to determine the
appropriate federal authority. First, the consumer would have to
determine whether the lender is the subsidiary of a bank. If so, then
one of the federal bank regulators would be the appropriate authority.
If not, then the appropriate authority is the FTC. Next, if the lender is
the subsidiary of a bank, then the consumer must determine whether
the bank holds a state or federal charter. If the bank holds a state
charter, the consumer must then determine whether the state bank is a
member of the Federal Reserve System. All this, just so the consumer
can place the first call!
Another aspect of the cost issue is the efficiency of combining
prudential and consumer protection responsibilities in the same
agency because both regulatory goals involve essentially an intense
review of management practices. While the observation is true, it is
and argument that (as law professors love to tell their first year
students) proves too much. Compliance with almost any regulatory
regime is reflective of management practices. Strict application of
this reasoning to bank regulators would require them to implement all
government regulation that applies to banks. Under such a regime,
bank regulators would even implement labor laws.
v. Systemic Implications of Consumer Abuse
The classical architecture of many bank headquarters speaks
volumes of the importance of a bank's image. A bank's reputation for
135 The eight federal agencies include the Federal Reserve, FDIC, OCC, Office
of Thrift Supervision ("OTS"), National Credit Union Administration ("NCUA"),
FTC, HUD, and DOJ.
integrity and stability is a considerable asset. No small part of the
justification for the separation between commercial and investment
banking in the 1930s was that a bank's involvement in the stock
market might damage the bank's reputation and spur a run on
deposits. Certainly, in the absence of deposit insurance, negative
information regarding the solvency of one bank can be highly
detrimental and can cause contagious runs on deposits.
Does public knowledge of consumer protection abuses have
this sort of systemic impact? Perhaps it should. Consumer protection
violations stem inherently from management failure or fraud. The
same type of behavior is often at the root of bank insolvency.137 Still,
anecdotal evidence suggests a very jaded public. A subsidiary of
Citigroup recently agreed to pay up to $70 million in penalties in
connection with consumer protection violations in subprime lending
programs.' 3 8 The lack of public outcry against the management of
Citigroup, or attacks on its reputation, was deafening. Perhaps the
public recognizes that the misdeeds of one subsidiary do not
implicate the good work of related companies. Perhaps the public is
apathetic because of extensive federal deposit insurance. Perhaps the
public does not read the newspaper. Whatever the reason, it appears
that the question of harm to reputation is complex.
Many events, after all, negatively impact reputation. Recently,
Boeing fired its chief executive, Harry Stonecipher, after learning
that Stonecipher was having a consensual, extramarital affair with a
Boeing employee. Apparently, Boeing's board was concerned,
among other things, that its government customers
"uncomfortable about doing business with notorious philanderers."1ar3e9
Reputation is everything. But, not every harm to a business'
reputation poses a safety and soundness concern. If Stonecipher had
been a chief executive of Wachovia Corporation, would the OCC
136 The United States Supreme Court explained that "Congress feared that the
promotional needs of investment banking might lead commercial banks to lend
their reputation for prudence and restraint to the enterprise of selling particular
stocks and securities, and that this could not be done without that reputation being
undercut by the risks necessarily incident to the investment banking business." Inv.
Co. Inst. v. Camp, 401 U.S. 617, 632 (1971).
137 FDIC, 1 HISTORY OF THE EIGHTIES - LESSONS FOR THE FUTURE 33-34
(1997), availableat http://www.fdic.gov/bank/historical/history/3-85.pdf.
138 Mitchell Pacelle, Citigroup Will Pay $70 Million to Settle Fed's Lending
Charges,WALL ST. J., May 28, 2004, at C3.
139 Steven Pearlstein, Ethics PedestalAssures Some HardFalls, WASH. POST,
find that his extramarital affair constituted an "unsafe or unsound
banking practice" because it would have the potential to harm the
reputation of the bank and thereby implicate the bank's financial
stability? Doubtful. So too, it is doubtful that the reputation risk
associated with the vast majority of consumer fraud implicates a
bank's safety and soundness.
At the very least, the potential for reputation harm should not
be used to justify the structure of a regulatory regime without
compelling empirical evidence. In this context, such an empirical
study would examine whether publicity of consumer fraud or other
abuse by one institution (as opposed to news of an institution's
insolvency) causes a run on or boycott of that institution and if, in
turn, the news causes runs on or boycotts of other financial
vi. Agencies' Expertise and Rulemaking
Bank regulators' consumer protection responsibilities are not
limited to supervision and enforcement. Bank regulators are also
responsible for interpreting consumer protection statutes and, in some
cases, issuing formal rules that implement Congress' intent. 140 As
discussed above, bank regulators' expertise with bank operations is
valuable to the rulemaking process in that bank regulators better
understand the practical impact of new rules on the business of
On the other hand, bank regulators do not embody any
particular expertise in consumer protection and probably have not
been given much incentive to develop it. 14 1 Consumer protection
140 See infra Part II.B.
141 Julie Williams, First Senior Deputy Comptroller and Chief Counsel, is a
frequent critic of current consumer compliance disclosure. She notes that
"disclosure is at the heart of our system of consumer protection. Lately, however,
there has been much criticism of the state of credit card disclosures and marketing
practices. Clearly, there is room for improvement." Examining the CurrentLegal
and Regulatory Requirements andIndustry Practicesfor Credit CardIssuers With
Respect to Consumer Disclosures and Marketing Efforts: Hearing Before the S.
Comm. on Banking, Housing, and Urban Affairs, 109th Cong. 2 (2005) (Statement
of Julie L. Williams, Acting Comptroller of the Currency), available at
http://www.occ.treas.gov/ftp/release/2005-49a.pdf). Williams is pushing for far
greater reliance on consumer testing to determine how to effectively convey useful
information to the consumers and frequently cites to the Food and Drug
Administration's Nutrition Facts as and example of successful consumer
laws, as discussed in Part I, have a different purpose from prudential
laws. Because consumer protection laws address asymmetric
information, such laws often mandate disclosure. Prudential laws,
however, have not traditionally relied on disclosure but rather have
sought to regulate positively the business of banking. In fact,
prudential regulators, as opposed to consumer protection agencies,
have traditionally operated under a system that relies on a great deal
of secrecy. 142 It was not until 1989 that bank regulators were required
regulators still do not disclose the results of bank examinationbsa.n4k3
to publicize their administrative enforcement proceedings and
Prudential regulation's focus on preventing bank failure is
inconsistent with disclosing bad news about banks.
It is therefore possible that: (1) bank regulators lack expertise
in consumer protection rules that require disclosure, and (2) other
agencies, like the FTC, would be better at writing those sorts of rules.
Indeed, when TILA was enacted, Congress only reluctantly chose the
Federal Reserve as the rulemaking agency. While the FTC was the
more logical choice, it lacked the reputation for effectiveness to
support the accumulation of new regulatory responsibilities. 144
Today, the FTC suffers no such lack of reputation. With respect to
the FTC's relative lack of experience with bank operations, that
deficit can certainly be replenished through the notice and comment
process. 45 Banks, unlike consumers, do not suffer a collective action
problem. Banks have the resources necessary to inform any regulator
of their particular concerns with regard to new rules. And, the fact
that a non-bank regulator, like the FTC, might be less responsive to
such concerns than a bank regulator is not necessarily bad for
IV. Structural Reform of Federal Consumer Protection
Part III suggested that, while there are benefits to combining
142 See Heidi Mandanis Schooner, The Secrets ofBank Regulation: A Reply to
ProfessorCohen, 6 THE GREEN BAG 2d 389 (2003).
143 See Meeting Notice, 61 Fed. Reg. 67,021 (Dec. 19, 1996).The CAMELS
rating is, however, disclosed to the board of directors of the bank under
'44 See Rohner, supra note 56, at 136-37.
141 See 5 U.S.C. § 553 (describing the procedures for notice and comment in
prudential regulation and consumer protection, serious doubt remains
as to whether it is the best arrangement. Assuming that an alternative
arrangement holds the potential for improved consumer protection,
this Part considers a range of alternatives that would realize the
benefits of separating the two regulatory functions.
A recent U.S. Government Accountability Office ("GAO") 46
report recommended that Congress consider expanding the Federal
Reserve's role in combating predatory lending. The GAO found that
the Federal Reserve.'s lack of supervisory authority over non-bank
subsidiaries of bank holding companies presented a weakness.
Specifically, the GAO concluded:
[t]o enable greater oversight of and potentially deter
predatory lending from occurring at certain nonbank
lenders, Congress should consider making appropriate
statutory changes to grant the... Federal Reserve... the
authority to routinely monitor and, as necessary, examine
the nonbank mortgage lending subsidiaries of financial and
bank holding companies for compliance with federal
consumer protection laws applicable to the predatory
lending practices. Also, Congress should consider giving
the Board specific authority to initiate enforcement actions
under those 1l4a7ws against these nonbank mortgage lending
The GAO's recommendations fail to analyze whether bank
regulators' supervisory approach to consumer compliance is really
superior to the FTC's enforcement approach. Indeed, if the GAO has
concluded that the supervisory approach is superior, then one must
wonder why the GAO's recommendations for increased supervisory
authority did not extend to independent mortgage lenders. In other
words, the GAO recommended that non-bank subsidiaries of
bankholding companies - which are currently subject to the FTC's
jurisdiction - be brought within the Federal Reserve's supervisory
regime. Why then should independent mortgage lenders - which are
146 Effective July 7, 2004, the GAO's legal name was changed to the
Government Accountability Office. See GAO's Name Change and Other
Provisions of the GAO Human Capital Reform Act of 2004, available at
http://www.gao.gov/about/namechange.html (last visited Oct.
147 GAO Report GAO-04-280, Consumer Protection: Federal and State
Agencies Face Challengesin CombatingPredatoryLending. Report to the S. Spec.
Comm. on Aging, 1 0 8th Cong.
), , available at http://www.gao.gov/
also currently subject to the FTC's jurisdiction - not be subjected to a
supervisory regime as well? The GAO's recommendation continues
the already troubling trend of treating consumers of products offered
by bank and bank-affiliated companies differently from consumers of
products offered by other companies.
The following reform proposals challenge the benefits of a
supervisory approach to consumer protection. In addition, they seek
the benefits of a goals-oriented approach to regulation. Several
alternative approaches are set forth below. They include: (1)
consideration of internal changes within the current agency structure,
(2) a proposal to rearrange the responsibilities of bank regulators, and
(3) a proposal to eliminate the bank regulators' role from consumer
A. An Enforcement Approach to Consumer Compliance by the
Federal Bank Regulators
Perhaps the least radical approach toward improving the
efficiency of consumer protection would be for the bank regulators to
consider the effectiveness of adopting an enforcement model similar
to that used by the FTC. Congress has not mandated that bank
regulators periodically examine banks and their subsidiaries for
compliance with consumer protection statutes. 148 Moreover, the FTC
does not employ a supervisory approach for independent
companies.14 9 Therefore, it seems reasonable to conclude that an
enforcement-based approach to consumer protection may be as
effective and less costly than the current supervisory approach.
Under such an approach, rather than conducting regular
examinations for compliance with consumer protection statutes, the
federal banking regulators would rely on consumer complaints,
media reports, and Congressional inquiries as a triggering mechanism
for investigations. 150 The federal banking regulators would then
employ their general administrative enforcement powers to address
148 Bank regulators are required to conduct full-scope, on-site examinations
once a year. See 12 U.S.C. § 1820(d)(1)(2004). Arguably, consumer compliance is
part of a full-scope examination, but to the extent that periodic examination is
primarily conducted to maintain safety and soundness, a compelling argument can
be made that Congress did not intend to require the federal banking regulators to
conduct yearly examinations for consumer compliance.
149 See infra Part II.B.
150 As indicated infra at Part II.B., this is the methodology employed by the
violations 151 or rely on specific statutory provisions within the
various consumer protection statutes to provide for other forms of
The primary objection to such reform is that it might lead to
an increase in consumer protection violations. Since the supervisory
system is prophylactic, it prevents fraud. Thus, if the supervisory
system is removed, fraud will likely increase. In answer to this
opposition, consideration must be given to the high levels of
compliance reported by the federal bank regulators under the current
scheme. Of course, it is quite possible that banks generally comply
with consumer protection laws because they face regular
examinations for compliance. On the other hand, it is quite possible
that banks achieve high rates of compliance because banks are
generally well-managed. And, banks are generally well-managed
because of the prudential regulatory scheme that protects their
solvency. Just as deposit insurance has an important, but ancillary,
effect of protecting depositors, 152 prudential regulation in general
may have the same ancillary effect.
Moreover, even if bank regulators shifted away from a
supervisory approach to consumer protection, regulators need not
abandon their examination of the general compliance function 153 of a
bank. In other words, bank examinations would continue to include
an assessment of a bank's ability to manage its compliance risk.
B. Consolidate Consumer Protection Within One Federal
In addition to adopting an enforcement approach to consumer
protection with existing agencies, further economies could be
achieved by reassigning the responsibilities of the existing bank
regulators. Under the current system, three federal banking regulators
share essentially the same supervisory and regulatory responsibilities.
The workload among the three regulators is divided according to type
of charter: the OCC supervises national banks, the Federal Reserve
supervises state-chartered member banks, and the FDIC supervises
151 See, e.g., 12 U.S.C. § 1818(b) (2000) (indicating that banking agencies can
bring an administrative cease and desist action for a violation of "a law, rule, or
regulation," and seek restitution under certain circumstances)..
152 See supranote 118 and accompanying text (discussing PhiladelphiaGear).
153 See The ComplianceFunctionin Banks, supra note 95, at 1.
state-chartered non-member banks. 154 The benefits of a
goalsoriented approach could be achieved by dividing responsibility
between the federal banking regulator according to regulatory goal
rather than bank charter.
One approach would be to designate one of the federal bank
regulators as the consumer protection agency for bank customers
without reassigning any of the current prudential responsibilities. For
example, the FDIC could be given responsibility for all consumer
protection issues regardless of the charter of the bank involved.
Assigning the FDIC this task avoids some of the independence and
capture problems that are implicated by the OCC's role in consumer
protection. 155 On the other hand, the OCC's significant commitment
to combating predatory lending suggests that it is already on the road
to developing an expertise in consumer protection issues in credit
A bolder approach would reassign both consumer protection
and prudential responsibilities among bank regulators. Regulatory
responsibility could be divided among federal regulators so that one
federal regulator would be responsible for prudential regulation of
individual banks, one for consumer protection, and, a third would
maintain overall systemic issues. The revolutionary aspect of this
approach is that it rejects the current institutional approach to
regulatory division and ignores charter distinctions in placing
regulatory responsibility at the federal level. For example, under this
scheme only one federal banking agency would implement federal
consumer protection laws for national banks, state-chartered member
banks, and state-chartered non-member banks.
The practical advantage of this approach is that it puts no
existing agencies out of business. Regulatory responsibilities (and,
presumably, personnel and other resources) would be reassigned in
FDIC could be designated as the prudential regulator for all banks.t1h5e6
accordance with distinct regulatory categories. For example,
The OCC might serve as the consumer protection agency for banks,
and the Federal Reserve could be designated the agency responsible
for overall systemic issues.
The practical disadvantage of this approach is that all banks
would be regulated by all three federal banking regulators. Under the
154 See supranote 9.
151 See infra Part III.B.
156 The FDIC's responsibility as administrator of the bank insurance fund
gives it strong ties to the prudential regulation of banks.
current system, an independent, 157 state-chartered non-member bank
is subject to FDIC supervision only. 158 This proposal would not be
popular with the president of such a bank. Most banks, however,
either because they are owned by a bank-holding company or because
they have a federal charter, are currently regulated by two of the three
federal bank regulators.'
C. Transfer Consumer Protection to the FTC
The most sensible approach to correcting the structural defect
in the current regime would be to eliminate entirely the federal
banking regulators' role in consumer protection. This approach has
the potential to enhance both the fairness and the efficiency of the
current system. This proposal would create a more fair system
because banks and non-banks would be treated alike. This would
level the playing field among providers of similar financial services.
In addition, this proposal provides many potential efficiencies that
derive from the recognition of consumer protection as a distinct
regulatory goal from prudential regulation. The FTC is a consumer
protection agency and maintains expertise in this field. This proposal
avoids the cost of developing and maintaining many expert agencies
to perform the same function. Moreover, this proposal eliminates
conflicting regulatory goals within an agency. Finally, the FTC
maintains independence from the industry in that it relies on
appropriations, rather than fees from the "regulates," to fund its
Of course, the FTC is an enforcement agency, not a
supervisor. Transfer of regulatory authority to the FTC-without a
major shift in the operations and appropriations of the
agencywould eliminate the supervisory approach to consumer protection in
the banking industry. As suggested above, however, it is not clear
that such a shift would harm consumers. Further study should focus
on the relative benefits of the supervisory versus enforcement
approach. If a supervisory approach is clearly superior, then
nonbanks should be subjected to a supervisory regime along with their
157 "Independent" in this context means not owned by a bank holding
158 See supraFigure 1.
Surging consumer debt and the growing complexity of
financial services mean that laws seeking to protect consumers will
continue to multiply and evolve. Moreover, the heated debate over
the role of federal authorities in consumer protection will not likely
lead to a diminished federal role.' 60 Rather, federal authorities will
expend greater resources to combat consumer fraud in response to
public and Congressional scrutiny.
While attempting to resolve the current argument over federal
preemption of state consumer protection laws, Congress and the
federal banking agencies should also consider whether the federal
scheme functions fairly and efficiently. If the federal scheme does,
the question of preemption is purely a turf battle between the federal
and state authorities, offering no benefit to consumers. If, however,
the federal scheme is deficient, then the debate should center
specifically on its failings and not purely on preemption. After all,
most consumers care little whether their interests are protected by a
state prosecutor or a federal agency.
Officials at the OCC recently advocated reform of the system
of disclosure under Truth In Lending laws.' 61 Current disclosures do
not appear to provide customers with the kind of understandable
information that they need. As lawmakers revisit the effectiveness of
Truth In Lending and other disclosure schemes, careful consideration
should be given to the structure of the regime. True reform of
consumer protection laws can only be achieved through an effective
mechanism for implementation and enforcement. Giving the job of
consumer protection to a consumer protection agency seems the most
logical choice. Asking bank regulators to do the job of a consumer
protection agency not only poses conflicts of interest and creates
inefficiencies, but could also distract bank regulators from their
mandate: to protect the solvency of banks.
160 With regard to the legal question of whether the OCC possesses the legal
authority to preempt state laws, the likelihood, given traditional deference to
agencies' interpretations of their enabling statutes, is that reviewing courts will
continue to side with the agency.
161 See supra note 141 (discussing speech by Julie Williams).
4 See Association of Community Organizations For Reform Now , Separate and Unequal 2004 : Predatory Lending in America, 44 available at http://www.acorn.org/index.php?id= 8071 (last visited Sept. 23 , 2005 ).
15 See Complaint , New York v. First Horizon Home Loan Corp., 2004 WL 353923 (N.Y. Sup. Ct . 2004 ) available at http://www.oag.state.ny.us/press/ 2004/jan/Horizon5.pdf (last visited Sept . 23 , 2005 ).
16 See S.J. Res . 31 , 108'h Cong. ( 2004 ); S.J. Res . 32 , 10 8th Cong. ( 2004 ); H.R. 4236 , 108 th Cong. ( 2004 ) ; and H.R. 4237 , 108 h Cong. ( 2004 ).
17 This measure was directed at the DOJ because the OCC's operations are not 97 Credit Card Practices , OCC Advisory Letter AL 2004 - 10 , (Sept. 14, 2004 ), available at http://www.occ.treas.gov/ftp/advisory/2004- 10 .txt.