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Why We Need a New Agency to Protect Consumers

Harvard Law professor Elizabeth Warren

For six years, href="">Elizabeth
Warren has been speaking
her mind
about Uncle Sam's duty to protect the average American
from what she describes as a "broken" consumer financial
system. The Harvard Law professor stumbled on this mission while researching a
book about the American middle class. The stories she encountered proved to her
how difficult it was for even perfectly well-educated people to make wise
decisions about mortgages, car loans, and other credit products.

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 href="">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
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

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

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

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

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