The Federal Reserve Board has finally released its proposals for reforming the Truth in Lending Act (TILA). It comes right in the middle of a debate over whether a single consumer protection agency should be created to take over all consumer protection functions, including the administration of TILA.

Since the Fed has already indicated its strong opposition to the single-agency idea, it is tempting to view the TILA proposals as an attempt to protect its turf by polishing its consumer protection credentials. But that would be wrong, because the single-agency idea surfaced only this year, whereas the board’s TILA proposals have been in the works since 2004.

Whether or not the Fed ought to be in the consumer protection business ought to be based on the record of its performance over the last 30 years in administering TILA.

In my opinion, it has done a miserable job, not because it has not had the capacity — among the federal agencies, it usually attracts the best and the brightest — but because it has not had the will.

The Federal Reserve’s major priority has been monetary policy, and its second priority has been the safety and soundness of the banking system. Consumer protection has been a poor third, with the lowest claim to the board’s attention.

Those priorities are not going to change. Indeed, with the Fed assuming more responsibility for the stability of the nonbank financial sector, consumer protection is likely to have an even lower priority in the future.

The new proposals for reforming TILA provide striking evidence of the low priority the Fed has given to consumer protection. Many of the proposals are excellent and badly needed — but as long as 30 years late!

Perhaps the most striking example is the proposal to amend the definition of the annual percentage rate, or APR, which has been the centerpiece of TILA. The APR is supposed to be a single comprehensive measure of the cost of a loan, but in fact it has never been comprehensive because the original TILA legislation excluded some charges.

Title insurance required by the lender, for example, has never been included in the APR. …CONTINUED

When I queried Fed staff about this in years past, the typical response was that any change would require new legislation, and the board’s political capital was too valuable to use on this issue. But the current board proposals would eliminate the exclusions and make the APR the comprehensive measure it was always supposed to be.

Further, it turns out that this would not require new legislation — the board had the legal authority to do it all along!

Adjustable-rate mortgage (ARM) disclosures are another horrible example of the board’s historical unwillingness to confront the obvious. The volume of ARMs exploded in the early 1980s and the disclosure problems associated with them became glaringly evident soon thereafter.

The Fed response was to mandate that lenders show either historical or worst-case examples of what can happen to the rate and payments on a "representative" ARM — not the borrower’s ARM! In my assessment of ARM disclosures in 2005, I remarked that "the full absurdity of this is difficult to grasp."

In connection with the current TILA proposals, the board contracted with a consumer testing agency, which "indicated that consumers overwhelmingly find the current ARM loan program unclear and not useful … they would prefer more information specific to their potential loan." What a surprise!

Give the current board credit for facing up to the problem, but it took five years and is not an argument for its retaining authority over consumer protection.

The work done over that period could be taken over by a new agency, along with the board’s Division of Consumer and Community Affairs, which was largely responsible for developing the proposals.

Nest week: The Fed’s proposal to encourage borrowers to shop.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at


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