Financial industry lobbyists are among those being asked to suggest who should replace Sandra Braunstein, the retiring Federal Reserve official who oversaw the regulator’s lackluster efforts to protect consumers in the years preceding the U.S. mortgage meltdown.
Braunstein, who has led the Fed’s consumer affairs division since April 2004, did not respond to an emailed request for comment. Her plan to leave the Fed has not been previously reported, nor has the Fed's outreach to identify potential replacements.
As Braunstein prepares to leave her post, concerns are mounting among consumer advocates that the Fed may pick a financial industry ally who may want to weaken consumer protections. Lonnie Taylor of Diversified Search, an executive search firm retained by the Fed, has asked financial industry lobbyists for recommendations on who should replace Braunstein, people familiar with the matter said.
“This is the department that needs to have a proven community leader and consumer advocate running it,” said John Taylor, president and chief executive of the consumer-focused National Community Reinvestment Coalition.
Lonnie Taylor referred questions to the Fed. The Fed declined to comment.
Consumer advocates said they, too, have been asked by the Fed and Diversified Search to recommend Braunstein replacements. Still, the fact that financial industry lobbyists were asked for suggestions by itself is troubling to some consumer groups.
Braunstein helped the Fed develop stronger rules to protect consumers in the aftermath of the financial crisis. But during the early years of her tenure, the Fed declined to use its vast powers to curb predatory or abusive lending, something that fellow regulator Sheila Bair, the former Federal Deposit Insurance Corp. chairman, has described as the “one bullet” that could have prevented the crisis.
“I absolutely would have been over at the Fed writing rules, prescribing mortgage lending standards across the board for everybody, bank and non-bank, that you cannot make a mortgage unless you have documented income that the borrower can repay the loan,” Bair said in September 2010, when asked by the congressionally chartered Financial Crisis Inquiry Commission what one thing she would have done to prevent the crisis.
That failure, consumer advocates said, allowed mortgage lenders to make loans that ultimately led to a cascade of defaults that triggered the most severe financial crisis and punishing economic downturn since the Great Depression.
Lawmakers and the Obama administration subsequently created the Consumer Financial Protection Bureau, the first federal regulator solely dedicated to protecting borrowers from abusive lenders. The CFPB took over much of the Fed’s supervision and rule-writing responsibilities.
Perhaps humbled by their failures, Braunstein and the Fed in the years after the crisis have implemented rules and written letters to lenders advising them of best practices that largely have delighted consumer advocates. The Fed’s moves to address consumer protection failures in credit card and mortgage markets have served as a template for congressional action and for rules issued by the CFPB, said Michael Calhoun, president of the Center for Responsible Lending and a former member of the Fed’s since-discontinued Consumer Advisory Council.
Consumer groups’ fears that the Fed may turn to an industry ally to lead its consumer division are partly based on the Fed’s record in policing lenders that have been accused of making abusive loans.
In the years leading up to the financial crisis, the Fed’s consumer protection record was “absolutely dismal,” said Taylor of the National Community Reinvestment Coalition.
Congress gave the Fed the authority and responsibility to oversee mortgage lenders and to prohibit certain transactions, Calhoun said, but the Fed “deliberately refused to exercise that authority.” When it finally did, he added, it was “after the damage had already been done.”
Braunstein’s “heart was in the right place,” Taylor said, but she lacked the support of the Fed’s Board of Governors, led by Alan Greenspan for nearly 20 years until Ben Bernanke took over in 2006. Her division worked with the Fed’s legal staff to write rules designed to protect consumers, which were then voted on by the Fed’s board. President Barack Obama has nominated Janet Yellen, Fed vice chairman, to replace Bernanke, who is retiring.
“For the longest time, Sandra didn’t have the support she probably wanted,” said Taylor, who has advised regulators on consumer protection policy. “It’s not that Greenspan and Bernanke didn't care. It just wasn’t a priority.” Had they acted more forcefully to protect consumers from abusive mortgage lending, “they would have avoided much of the stress on the global financial system. We really could have nipped this in the bud.”
Calhoun said Braunstein made “critical contributions," but they came after the Fed’s “willful failure to police the mortgage and consumer market.” Braunstein deserves credit for pushing the Fed to curb so-called deposit-advance loans by banks, which are short-term, small-dollar credits that resemble payday loans, Calhoun added.
Part of the reason behind the Fed’s lack of focus on protecting consumers is its historical emphasis on maintaining banks’ profitability, said Kirsten Keefe, senior staff attorney at the Empire Justice Center and another former member of the Fed’s Consumer Advisory Council. But since the crisis, Calhoun said, the Fed has recognized the connection between consumer protection and financial stability. Keefe said she’s been “pleasantly surprised” by some of the Fed’s recent rules.
It’s unclear how big a role Braunstein played in the Fed’s apparent conversion to a pro-consumer regulator. The Fed’s reputation was badly damaged by the financial crisis. Its banking supervision division was overhauled, Greenspan left, and the Fed faced congressional pressure to beef up its consumer protection rules. All those factors may have influenced the Fed’s recent moves.
In a 2010 interview with the Financial Crisis Inquiry Commission, Braunstein was asked whether the Fed should have done more in the early 2000s to rein in unfair or deceptive mortgage practices.
“I really don’t remember having thoughts along those lines,” Braunstein responded.
UPDATE: Jan. 3 -- In a Friday statement, after this story was published, the Fed said that Braunstein will retire April 1.
"Sandy’s vision, energy, and dedication served the board well during a particularly challenging period in its history,” said Bernanke, the Fed chairman. "She has demonstrated strong leadership in the development and implementation of policies and practices to promote community development, safeguard consumers, and ensure that financial institutions comply with federal consumer protection laws."