Fighting Words from the Visionary of the Consumer Financial Protection Agency

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“Without a watchdog in place, the big banks just keep slinging out uglier and uglier products.”

These are the words of Elizabeth Warren, a law professor at Harvard who has taken on as a crusade the creation of a national agency to protect consumers against confusing, deceptive, and dangerously debt-inducing financial products, most obviously including credit cards and mortgages. She writes in the WSJ:

Banks and brokers have sold deceptive mortgages for more than a decade. Financial wizards made billions by packaging and repackaging those loans into securities. And federal regulators played the role of lookout at a bank robbery, holding back anyone who tried to stop the massive looting from middle-class families. When they weren’t selling deceptive mortgages, Wall Street invented new credit card tricks and clever overdraft fees.

Most consumers, upon reading these sentiments, would nod their heads in agreement, I’d think, especially after what the average American has gone through in the last 18 months or so. So why has the idea of a Consumer Financial Protection Agency (CFPA) lost its steam, as the Washington Post wrote:

The origin of the CFPA proposal may help explain why it has become so controversial. The idea for a new agency with broad powers to police the marketplace for borrowing — mortgages, credit cards, payday loans and other forms of consumer credit — came from a 2007 article that Harvard Law professor Elizabeth Warren wrote for Democracy, a liberal policy journal with a circulation of 5,000.

Warren’s original article, published well before the recession, the real estate collapse, and reams of strategic mortgage defaults from underwater homeowners, mind you, begins:

It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street–and the mortgage won’t even carry a disclosure of that fact to the homeowner. Similarly, it’s impossible to change the price on a toaster once it has been purchased. But long after the papers have been signed, it is possible to triple the price of the credit used to finance the purchase of that appliance, even if the customer meets all the credit terms, in full and on time. Why are consumers safe when they purchase tangible consumer products with cash, but when they sign up for routine financial products like mortgages and credit cards they are left at the mercy of their creditors?

Sure, a lot of consumers make bad decisions, and no legislation can stop that entirely. But perhaps fewer people would make bad decisions if they had a better understanding of the true, long-term costs of their agreements with credit cards and banks. As Warren wrote, credit card debt isn’t just bad for the individual paying the fees and interest penalties month after month. Debt can also be bad for the economy as a whole:

Credit cards offer a glimpse at the costs imposed by a rapidly growing credit industry. In 2006, for example, Americans turned over $89 billion in fees, interest payments, added costs on purchases, and other charges associated with their credit cards. That is $89 billion out of the pockets of ordinary middle-class families, people with jobs, kids in school, and groceries to buy. That is also $89 billion that didn’t go to new cars, new shoes, or any other goods or services in the American economy.

And so Warren suggested the creation of a financial protection agency, originally called the Financial Product Safety Commission (FPSC):

Like its counterpart for ordinary consumer products, this agency would be charged with responsibility to establish guidelines for consumer disclosure, collect and report data about the uses of different financial products, review new financial products for safety, and require modification of dangerous products before they can be marketed to the public. The agency could review mortgages, credit cards, car loans, and a number of other financial products, such as life insurance and annuity contracts. In effect, the FPSC would evaluate these products to eliminate the hidden tricks and traps that make some of them far more dangerous than others.

There are many reasons why such an agency is now, at best, a back burner issue. Separate reforms have already passed regarding debit card overdrafts and credit cards, though there are certainly more than a few loopholes that leave consumers at risk. Health care reform and a jobs bill are seen as higher priorities. There are also plenty of forces actively fighting the creation of a CFPA, per the Washington Post:

Business groups — most vociferously the U.S. Chamber of Commerce and the American Bankers Association — have campaigned fiercely against what they describe as an unneeded, intrusive new agency that would increase the cost of doing business. ABA President Edward Yingling argues that a new agency would inevitably come into conflict with the “prudential” bank regulators that provide primary oversight of the nation’s banks — the OCC, the Federal Reserve, the Office of Thrift Supervision and the Federal Deposit Insurance Corp. Such conflicts could undermine the “safety and soundness” of the banks, he asserts.

In an interview, he said he could support a bill that mandates better consumer protections, provided it does not create a new agency.

That view exasperates consumer advocates. “For those of us who have watched 10 years of consumer protection failures, the point is you can’t put those who so dramatically failed in charge again,” said Travis Plunkett, legislative director of the Consumer Federation of America.

Would the CFPA just be another level of bureaucracy, as opponents charge? Warren says just the opposite in the WSJ:

The latest lie is that the CFPA is “big government.” The CEOs all know that the current regulatory structure, which they support, is big government at its worst: bureaucratic, unaccountable and ineffective. The CFPA will consolidate seven separate bureaucracies, cut down on paperwork, and promote understandable consumer products. In the process, it will stabilize the industry, rebuild confidence in the securitization market, and leave more money in the pockets of families. Complaining about short, readable contracts and efforts to slim down bureaucracy only further diminishes the banks’ credibility.

I shudder to think of how complicated it would be to “consolidate seven separate bureaucracies.” I wouldn’t think for a second that the workers and administrators entrenched in their little bureaucratic outposts would take kindly to being told that their jobs were being changed—or made obsolete. But something must happen. People are tired of being misled and screwed over, and they’re increasingly losing faith in our financial institutions. As Warren writes:

This generation of Wall Street CEOs could be the ones to forfeit America’s trust. When the history of the Great Recession is written, they can be singled out as the bonus babies who were so short-sighted that they put the economy at risk and contributed to the destruction of their own companies. Or they can acknowledge how Americans’ trust has been lost and take the first steps to earn it back.

A survey from this past summer said that 47% of people trust credit card companies less than they did the year before, and 50% of people trust national banks less than they used to. Also noteworthy, and an argument for the likelihood that nothing will come out of the CFPA debate: 48% of those surveyed said they trusted the federal government less than they did a year ago.

Why Are Banks and Credit Card Issuers Being So Nice?