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 said in an interview from her new Treasury Department office.
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 such a cause.
Although some might see Warren as a peculiar choice for American Banker's Innovator of the Year, her concept — enacted into law by the Dodd-Frank Act — has the potential to redefine the business of banking.
Bankers are used to regulators looking over their shoulder, but consumer protection has always taken a back seat to other priorities at the financial agencies. 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," said 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 several problems with Dodd-Frank, 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 said 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 said. "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 said. "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 conflicting mortgage disclosure documents, 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," said 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. … I don't know if they can do that or not. If they could, that would sure count as an innovative approach to regulation."
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 those of outfits such as 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 the power to enforce them directly against nonbanks, if necessary.
Warren said ensuring competitive balance is one of the agency's paramount concerns.
"When families have a range of products and providers to choose from, then the market works for them and it's sustainable over time," she said. "The idea that regulations could end up on the face of them protecting individuals but in fact advancing one segment of the industry to the disadvantage of parts of the industry would be a great failure. It would fail the families. … As we build this agency and infuse it with values, it must be directed toward a robust market and a diversified banking industry."
Warren said 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 said. "I sat and thought, how do you fix that? That's when I thought, it takes a single regulator."
The rest is history. Warren said 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.
"When she suggested the bureau, she was one of the first to really elevate the importance from an administrative perspective of" consumer protection, said David Berenbaum, the National Community Reinvestment Coalition's chief program officer. "It was always sort of a stepchild issue for the other regulators.
"A host of organizations — consumer protection, civil rights, labor and others — that were concerned about what was happening in the financial services sector … rallied to her idea. And she embraced becoming the spokesperson."
What is remarkable is just how quickly the idea was enacted. Washington typically moves at a snail's pace, but President Obama made the call for a consumer protection agency a top priority in his regulatory reform proposal. Within three years of Warren's first suggesting the idea, the Dodd-Frank law passed, and the CFPB was born.
"In a rare instance, her vision has become law," said Diane Casey-Landry, senior executive vice president and chief operating officer of the American Bankers Association. "It's not a usual course in Washington or anywhere to have a vision and see it carried through in the process."
Even Warren seems a little surprised that her paper has led to this point.
"It never occurred to me that the consequence of that article would be that I would end up with an office in Treasury," she said. "On the other hand, I can remember writing this article and thinking, the time has come for this."
Many say she succeeded in spreading her message because she has a knack for articulating her views clearly — a talent reflected in multiple Harvard teaching awards.
"In addition to her expertise, her style is very straightforward," said Sen. Jeff Merkley, D-Ore., a member of the Senate Banking Committee. "Both her expertise" and "her style of saying 'Here are the things that need to be fixed so that families can have a stronger financial foundation' put her in a place of being able to be a strong voice for change."
Hal Scott, a Harvard colleague, said Warren had the ability to "communicate her beliefs quite well to the American public" and "the time was right, too."
"She identified a real problem of the relative lack of attention and priority that the banking agencies gave to" consumer protection compliance "prior to the crisis," Scott said.
A native Oklahoman who has held teaching positions at six different law schools, Warren comes across as a decidedly atypical government official. She is engaging but unassuming, and she talks openly about being an outlet for financially distressed families.
"It makes me feel very responsible," she said. "Families talk to me about what's going on in their lives and how they end up in really difficult circumstances."
A regulator can't solve middle-class families' financial problems, but it can help them get through the credit maze, Warren said. "To just try to make this part a little safer, a little easier to understand, a little less risky for them, it matters to so many people," she said.
But unlike other policymakers, Warren does not seem prone to dogma. Her first big project on consumer bankruptcy in 1981 is an example.
"Doing the on-the-ground research completely changed my view of what was going on," she said. "I came to understand that most of the families in financial trouble were trying hard. These were hardworking, play-by-the-rules people for whom life didn't work out quite as they planned."
Her academic colleagues say perceptions of Warren as an anti-business firebrand are off the mark. They say her views have been shaped by a willingness to pore over data, but also by a sensitivity to the economic stress facing real families.
"With each study that she's done and with each year that she's been looking at these issues, she's moved her opinions a lot," said Katherine Porter, a former student of Warren's and now a professor at the University of Iowa College of Law.
"Now she believes from her data and her studies that there are some overspenders, but there's also responsibility in the lending industry for who you're going to underwrite."
To be sure, the CFPB is still an experiment. It has issued no rules and does not even have a permanent director. The advancement of Warren's idea has also opened her to no small criticism, including that the influence she carries should be left to more experienced regulators. Banks and many in Congress found her idea to be an abomination, and the prospect of her leading the agency was polarizing, with the White House opting to give Warren a more informal advisory role rather than go through a messy confirmation battle.
Bankers say they want to work with Warren.
"She has done a very good job of reaching out to the industry to begin to engage in that constructive dialogue," Casey-Landry said.
But she has yet to seal the deal with them. Other open questions include Warren's future role with the agency once it is launched.
But Warren said her focus is on the job at hand.
"I will be disappointed if this agency does not fulfill its promise," she said. "I never expected to be here. So long as I can be helpful, I'll plan to be here. When that isn't so, I'll leave."
