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.
"When she suggested the bureau, she was one of the first to really elevate the importance from an administrative perspective of" consumer protection, says David Berenbaum, the National Community Reinvestment Coalition's chief program officer. "It was always sort of a stepchild issue for the other regulators."
What is remarkable is just how quickly the idea was enacted. 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 Act passed, and the CFPB was born.
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," says Sen. Jeff Merkley, D-Ore., a member of the Senate Banking Committee. "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."
A native Oklahoman who has held teaching positions at six 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 says. "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 says. "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 says.
The CFPB is still an experiment. It has issued no rules nor does it 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 an abomination, and the prospect of her leading the agency was polarizing, with the White House opting to give Warren an 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," says Diane Casey-Landry, senior executive vice president and chief operating officer of the American Bankers Association.
But Warren has yet to seal the deal with them. Other open questions include her future role with the agency once it is launched.
Warren, for her part, says her focus is on the job at hand. "I will be disappointed if this agency does not fulfill its promise," she says. "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."
This story is excerpted from American Banker's annual "Best in Banking" issue. Go to
