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The Inside Track

Birth of a New Kind of Regulator

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Elizabeth Warren did not originally set out to save the consumer.

In fact, in a study in 1981 she sought to prove that borrowers, not credit products, were to blame for the glut of bankruptcies. "My first academic endeavor was going to be to expose these shiftless families who were taking advantage of overly generous bankruptcy courts," she says.

Clearly, her opinions have changed. Warren, a Harvard law professor, now embodies the consumer protection movement and three years ago came up with the idea of an agency devoted to this cause.

Bankers are used to regulators looking over their shoulder, but consumer protection has never been a priority. The Federal Reserve Board was more concerned with monetary policy than bank supervision, while the Federal Deposit Insurance Corp. was focused on preventing bank runs.

The Consumer Financial Protection Bureau is something new. For the first time there will be a bank regulator whose sole concern is the ways in which financial services products affect consumers.

"No matter what you think of the bureau as a good idea or a bad idea, it was definitely an innovation," says Robert Cook, a partner at Hudson Cook. "Before Elizabeth Warren started talking about the need for a consumer financial protection bureau, no one that I know of had considered that concept before. ... She was an innovator in looking outside of the box and applying this well-used concept of a consumer protection bureau to the financial services area."

For some bankers, that is a scary concept. While the industry had problems with the Dodd-Frank Act, and many opposed it outright, it was the consumer agency that generated the most heartache during debate. They fear it will abuse its authority and inhibit innovation instead of fostering it. In their worst-case scenarios, the agency will crack down on any new product, forcing institutions to adopt plain-vanilla offerings and stifling competition.

But Warren, tasked by President Obama with setting up the agency, shares those fears and says the bureau is not out to squelch competition. "It would be possible for this agency to follow a model of 10 new regulatory announcements every six months," Warren says. "We have a moment to do much better than that. The moment is about stepping back on regulation and saying, 'What really is the goal here?' If the goal is to make markets work better and more efficiently for families, then how do you execute on that?"

Far from issuing new regulations every day, her focus is on making sure products are understandable and fair. "Can you build a product that most people can read, understand and make comparisons with?" she says. "If that becomes the goal, then it's not a list of a thousand 'thou shalt nots' that are essential. What's essential is to clear out the regulatory underbrush that created thousands of words of disclosure that are not helpful to consumers and brought up costs for the industry."

Even industry representatives acknowledge that if she could succeed in some areas, such as merging the Real Estate Settlement Procedures Act with conflicting mortgage disclosure requirements, it would be a big change for the financial industry.

"For probably 18 years the regulators have been trying to combine the Truth in Lending Act regulations with the RESPA regulations to come up with something that makes sense for the banks and the consumers, and they have failed," says Camden Fine, president of the Independent Community Bankers of America. "If this bureau could create a single, blended document that covers TILA and RESPA, that would be very innovative."

The bureau also could do something bankers have tried for decades to do: level the playing field with nonbanks that face lighter supervision. Bankers have long argued that most of the abusive financial practices are by nonbanks like check cashers and payday lenders. Unlike most other regulations set by the banking agencies, the CFPB's rules will apply to money-services businesses. The agency will also have enforcement power over nonbanks.

Warren says she first conceived of the idea for a consumer agency on a 2007 plane ride while working on a project to help promote safe credit cards. The idea at the time was to create a safety logo that would appear on a new class of "clean" credit cards that had agreed to abide by certain consumer-friendly practices. Warren was frustrated because despite an initial positive response from some credit card companies, none were signing on. While on the plane, she came up with another tack.

"I thought: We have to approach the problem another way. A market in which a large part of the competition is based on revenue-producing devices that consumers cannot see is a broken market," she says. "I sat and thought, how do you fix that? That's when I thought, it takes a single regulator."

Warren says she wrote the first draft of "Unsafe at Any Rate," the 2007 Democracy article proposing a safety commission for credit like ones that already regulated other products, "in one sitting." The 5,000-word piece, which said that bank regulators had made their consumer powers a low priority, galvanized consumer groups.

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