Unlike many other consumer crusaders, Warren had the clout to get her ideas taken seriously. The head of the congressional panel overseeing TARP, Warren jawboned enough influential people to get a new government agency, the Consumer Financial Protection Agency, written into the regulatory reforms that the Obama administration has put before Congress. In the weeks since the proposals were unveiled, Warren has become the CFPA’s biggest champion — as well as the leading candidate to head the agency. She spoke with CBS MoneyWatch.com contributing writer Suzanne McGee.
Why do consumers need yet another agency to look out for them?
The big banks made billions of dollars from consumers who didn’t fully understand the products that (the banks) were selling. Credit-card agreements were as long as 30 pages, and some mortgage documentation ran into the hundreds of pages. The language in those credit agreements was impenetrable. No one could have compared four credit-card offers and picked out the one that was cheapest or riskiest. So you have a market that is broken.
And a broken market doesn’t just hurt consumers. It means that the playing field isn’t level for smaller players like community banks or credit unions. They may offer better products, but consumers never learn about them because they are drowned out by multimillion-dollar advertising campaigns for more profitable but more damaging products offered by bigger institutions.
A lot of agencies already oversee the financial system. Why add one more?
The CFPA will pick up powers that are currently scattered among seven different federal agencies (including the Federal Reserve, the Office of the Comptroller of Currency (OCC), and the Office of Thrift Supervision) and bring them all into one place. This will reduce the total amount of regulation and ensure rules protecting consumers are both effective and well enforced. The goal is to cut down or eliminate the regulatory overlaps and gaps that left us in the current nightmare. Some organizations — the Fed and the OCC are the clearest examples — had most of the tools to do this, but, in practice, they had no real interest in consumer protection. Their focus was broader.
But isn’t the SEC supposed to protect investors? Why not simply broaden the SEC’s role?
The SEC and insurance regulators have their own spheres of expertise. Someone in Washington needs to focus specifically on credit cards, mortgages, and other products being sold to the regular person. I find it ironic that someone who invests $100,000 gets better protection than someone who takes out a $100,000 mortgage. I think that Mary Schapiro (the new head of the SEC) will become a strong supporter of the agency, now that she’s clear that the creation of the CFPA wouldn’t cripple the SEC’s ability to function or hurt its resources. She has provided good advice about the CFPA’s formation and how to ensure it can enforce its regulations.
What about mutual funds, which are primarily bought by ordinary investors, just like mortgages?
The SEC already has the expertise to oversee investment products; therefore, the SEC should continue to regulate mutual funds. But, at the moment, there is no one in Washington with the expertise to regulate credit cards, car loans, and other products like that.
You have been one of the key forces behind the proposed CFPA. Have you been offered the job of running it?
So far, there is no job to offer! It’s too early for this kind of question. Anyway, I’ve got a great job right now. I plan to keep working on overseeing the TARP program in Washington and teaching at Harvard Law School.
Are you concerned that lobbying by big financial institutions may delay the CFPA?
The market for credit cards, mortgages, car loans, and other consumer credit products is broken. These seem like such sensible changes to me — creating simple, understandable, readable loan contracts. I don’t really understand how or why any financial institution would claim the current system works. And yet the big banks have powerful lobbyists and seem willing to declare all-out war on a readable contract and other minimal consumer protections. You probably need to ask someone who understands Washington better than I do if that will affect the creation of the CFPA, but I hope not.
Is there a risk that introducing a new regulator might stifle innovation in the financial-services arena?
I think the CFPA will encourage consumer-oriented innovation. Right now, that’s hard, because institutions trying to sell a better kind of credit card or mortgage get lost in the marketing cacophony. When products are transparent and consumers see what works best — which is what the CFPA will help them do — then they will buy more of those products and move away from the ones that don’t work. And that is what innovation should be about.
What should be the CFPA’s role in making Americans more financially literate?
The CFPA’s goal is to ensure that consumers are able to make smart decisions, not to make decisions for them. But when a credit-card agreement is 30 pages long and so hard to understand, making a smart decision is impossible. If card providers instead are required to condense everything into simple language in a two-page document that highlights critical features like the interest rate, the penalty rate, and what kinds of events trigger that penalty, then consumers can make informed decisions.
Ultimately, improving financial literacy is the key to reforming the credit market. I’m convinced that we will end up creating a world in which companies can’t afford to rely on a consumer’s lack of understanding of the products. To be profitable, financial institutions will realize they will do better by offering products that their clients understand.
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