New consumer agency won’t survive if it focuses only on making rules

Introduction

With Republicans angling to strip power from the new Consumer Financial Protection Bureau, Elizabeth Warren said the agency won’t succeed in curbing unfair and abusive lending practices if it gets bogged down in making too many rules.

“Goliath may have lost, but unlike in the Bible, this is not a one-round fight. To survive, this agency will need clear goals that make sense to the American people,” Warren told the Consumer Federation of America today in an impassioned speech that was part strategy session and part rallying cry.

Lenders, Warren said, are quick to find ways around new regulations. For example, when Congress banned sudden hikes in interest rates on credit cards, she said issuers swiftly responded by upping the rates for everyone, then offering “discounts” that they could take away at any time.

“The problem is that thou-shall-not rules do not fundamentally change the credit markets,” said Warren, a White House advisor charged with getting the agency ready to formally open its doors next July. “I’m here to argue that we need fundamental change, not just narrow rules that ban the latest abuses.”

Consumers must understand loan terms

The former Harvard law professor’s strategy is to set priorities that few could quibble with. And her top priority is to make sure consumers understand the terms whenever they borrow money and to make it possible for borrowers to comparison shop for loans. The financial crisis of 2008 was built one incomprehensible mortgage at a time, Warren said.

Critics may say past attempts to require more disclosure of lending details hasn’t worked and has become a “code word for obfuscation,” Warren acknowledged. And she didn’t offer any explanation for how her vision of better disclosure would differ from past failed efforts.

However, she said, the new bureau can learn lessons from other federal agencies created to protect consumers, such as the Food and Drug Administration or the Federal Aviation Administration. Both stick closely to core principles.

“When was the last time you heard a friend or colleague – Republican, Democrat, libertarian, or vegetarian – complain that the Federal Aviation Administration should do less to prevent plane crashes?”

Warren spoke to the same consumer group two years ago to launch the campaign for a new financial protection agency. Backed by 200 advocacy groups, the creation of the Consumer Financial Protection Bureau survived intense lobbying efforts by the banking industry to keep it out of the Dodd-Frank financial reform bill passed earlier this year.

Fight ahead for agency survival

Warren choked up when she thanked the consumer advocates, but told them their work was only beginning if they want the bureau to succeed. “American families have the agency they need, but they may have to fight for its survival,” she said.

The Obama administration has yet to nominate a leader for the new bureau, a job that requires Senate confirmation. Warren has been meeting with bankers privately to mend fences over the past two months, and is viewed by some as a contender to run the agency.

Before Warren spoke, Rep. Randy Neugebauer, a ranking Republican from Texas on the House committee overseeing the Consumer Financial Protection Bureau, told the consumer group he fears new rules from the agency will end up hurting rather than helping consumers. So he wants to consider ways to give Congress more oversight of the agency and would how to change the funding mechanism that automatically gives the bureau around $500 million each year from Federal Reserve money to fund its activities.