To protect, de-Fed

Fed/consumers: Ben Bernanke hasn’t solved the Federal Reserve’s consumer problems. Ever since the subprime debacle, the Fed has fought hard to kill the perception that it puts big banks first. Its proposal to weaken homeowners’ negotiating leverage with lenders does it no favors. Better the central bank punt the matter to the new consumer protection agency.

The proposed change is arcane, but the outcome could have a profound impact on borrowers struggling to stay in their houses. Under current Truth in Lending regulation, a homeowner can effectively tear up a contract with a lender if the terms of its loan weren’t adequately disclosed. This doesn’t mean a mortgage holder walks away scot free; the balance of the loan must still be paid. But the lender can’t seize the property for lack of payment.

The whole point of the rule is to keep lenders honest. It has opened the door for frivolous claims against the banks, as well, and the Fed cited litigation costs as a factor driving its thinking on the matter. But without it, loan disclosure is apt to become sloppy, an outcome few would welcome given the shenanigans that led to the current housing mess.

Outraged consumer groups in November called on the Fed to drop the matter entirely and Democrats on the Senate Banking Committee this week asked the central bank to reconsider its proposal. After devoting 10 months to reviewing credit disclosures, it’s understandable the Fed won’t be quick to stand down.

Yet the Fed has a terrible track record when it comes to consumer protection. Alan Greenspan’s affection for adjustable-rate mortgages comes to mind. What’s more, the central bank is fighting to preserve its credibility as the nation’s monetary authority after deciding to run the printing press. This mortgage matter is better left to the agency created specifically to look after consumer interests, the Consumer Financial Protection Bureau. The agency was created precisely because regulators did so little to protect the little guy. This is a good time and place for the Fed to cut its losses.