Elizabeth Warren and the CFPB: How to demonize an agency before it even opens

On the Consumer Financial Protection Bureau’s website, you can track the daily movements of former Harvard Law Professor Elizabeth Warren, the agency’s champion and, for now at least, its de facto leader.  Warren’s title is Assistant to the President and Special Advisor to the Secretary of the Treasury, an appointment which avoided – for a while at least – a Senate confirmation battle over her selection as the CFPB’s first director.

Warren’s calendar of meetings, phone calls, lunches, dinners and speaking engagements is listed online for all to see.  That’s not surprising, because Elizabeth Warren is all about transparency – specifically, seeing through the densely-worded financial contracts that Americans see every time they buy a car or a home, sign up for a credit card, or take out a loan.  But if some members of Congress have their way, Warren’s calls for transparency won’t be heard by many Americans.

According to the Bureau’s website, the CFPB will “enforce laws that outlaw discrimination and other unfair treatment in consumer finance” and “restrict unfair, deceptive or abusive acts or practices.”  The CFPB will also be a repository for consumer complaints about financial products, just as the Consumer Product Safety Commission hears (and compiles for public review) complaints about unsafe toys or household items.

But while Warren works to put down roots for the agency, setting its agenda and hiring staff, the agency won’t have the authority to start making rules affecting financial institutions until the middle of July.  In the meantime, some members of Congress are at work trying, in Elizabeth Warren’s words, to “delay, de-fund and de-fang” the agency or even “kill it outright.”  Warren says that while the fight to create the CFPB was waged in the open for all to see, a second fight – over what the bureau can actually accomplish – is being waged in the “back alleys” of Congress.

While Congress is unlikely to close down the new agency before it even gets started, the House Financial Services Committee recently approved a bill (H.R. 1121) that would replace the CFPB’s single director with a five-member bipartisan commission – a step that would dilute the authority of any individual member (such as Warren).  The same committee passed another resolution, H.R. 1314, that would give the Financial Stability Oversight Council, a new office at Treasury, greater authority to veto CFPB-issued regulations.  Yet another measure postpones the date for the transfer of functions to the CFPB if the Bureau does not have a director in place by the July 21 transfer date (H.R. 1667).

Recently, 44 Senate Republicans sent a letter to the White House urging some of those same changes to the CFPB, although they are unlikely to pass the Democratic-controlled Senate.

Ever since the Dodd-Frank Wall Street Reform and Consumer Protection Act that created the CFPB was enacted in July 2010, financial institutions have been lobbying Congress to dilute its power.  “The financial industry has spent $1 million on lobbyists per member of Congress, at a moment when there are four lobbyists per member of the House and Senate working on this issue,” former presidential advisor Lawrence Summers told a Washington audience in March 2010.   This same kind of financial muscle is behind derailing the CFPB – just the kind of influence that, as the Washington Post’s Michelle Singletary has written, the CFPB is supposed to counter on behalf of average Americans.

When the idea for the CFPB first arose – in the midst of America’s biggest financial crisis since the Great Depression – the reasons for establishing it were pretty clear.  As then-Sen. Christopher Dodd explained, “[t]his crisis started when people were given mortgages they didn’t understand and could never afford.  If there was a watchdog on duty, it didn’t bark.”  The CFPB, Dodd pledged, “will be there to protect consumers from the abuses we’ve seen become almost standard operating procedure: skyrocketing credit card interest rates, the explosion in checking account fees, predatory lending by mortgage firms, and more.”

Now there is resistance to reform — an all too familiar Washington scenario. “Typically regulation comes from some sort of disaster.  But when the crisis fades, then there is pushback,” explains Jeffrey Lubbers, professor of administrative law at American University’s Washington College of Law and an expert on regulatory policy.  The CFPB he says, is “a pretty extreme example” of this scenario, because it has inspired intense opposition before it has even opened its doors.

Wall Street is wary of government regulators looking over its shoulder.  So it has portrayed the CFPB, and its most prominent supporter, Elizabeth Warren, as enemies of a free market and obstacles to economic growth.  Just this week, mortgage bankers opposed simplifying mortgage documents, arguing that changes to the documents – as well as the Bureau’s recommendation that home owners receive copies of closing documents for real estate deals ahead of time – will cost money, which will be passed on to consumers, and thus could stifle innovation of financial products.

But Annamaria Lusardi, a professor of accountancy and economics at George Washington University and an expert on financial literacy says complexity – not simplification – adds to the cost.  She finds the degree of opposition to the Bureau paradoxical. “We put people in charge of their finances and then don’t protect them.”

Lusardi’s research has shown that consumers have very little financial know-how, even as financial documents have become more and more complex.  “The financial crisis happened because people didn’t understand the complicated financial documents they were signing,” she says.

Like novice drivers, consumers need education and regulatory rules of the road, Lusardi explains.  “If someone cannot drive, you do not give them a racecar.”

Her advice to the administration is “stand firm on this issue [of the CFPB].”  She believes it could end up being an important Obama administration legacy.

Prof. Lubbers of the American University Law School finds it “curious that there hasn’t been a stronger pushback” against the financial industry, including from the administration.  True, some consumer, labor and community groups have voiced their opposition to weakening the CFPB.  And Treasury Secretary Geithner, whose department presently oversees the Bureau, has advocated for it on Capitol Hill.

Lubbers says the weak defense of the CFPB is due in part to its being an issue that is hard to articulate, and to the strength of the financial lobby that opposes it.  Like the oil industry, “the financial industry is up at the top of financial contributors to political campaigns, and has considerable lobbying power,” Lubbers points out.

In Warren’s testimony before the House Financial Services Committee in March, she sought to debunk the notion that regulation undermines the free market.  To the contrary, Warren argued that everyone benefits in a fair and transparent financial marketplace.  But her plain talk about the good that the CFPB can do may not be enough.  Says Lubbers, the “main message about the Bureau – that it can help people – hasn’t gotten through.”

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