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Priorities for the New Consumer Financial Protection Bureau

Elizabeth Warren
Consumer Federation of America (CFA) Financial Services Conference
Remarks as Prepared for Delivery
Thursday, Dec. 2, 2010

Thank you, Travis, for that introduction, and thanks to CFA for inviting me to speak with you about the new Consumer Financial Protection Bureau (CFPB).

Two years ago, I spoke to this same group at this same conference to launch a campaign for the CFPB. At that time, not a lot of people had much sense of what a consumer financial agency would be. Of the very few who did, most considered it a pipe dream. Not many organizations were willing to listen. Shoot, there weren’t even many academics, the people who are in the business of producing pipe-dreams, who wanted to listen. It was too ambitious, too far reaching, too impossible.

But not too ambitious for you. You were willing to listen—and to start working to turn an idea into a reality. You helped organize what became an epic David-versus-Goliath fight—an effort to create a new watchdog over consumer financial products and services and a new voice for families in Washington.

Everyone in this room knows what happened next. First, there were CFA and a handful of other early organizers. And then we grew. Eventually, more than 200 large and small organizations supported the agency. They were joined by informal groups of ordinary Americans from around the country, bloggers, letter-to-the-editor writers, people who spoke up at town hall meetings and who signed petitions, and those who wrote their Members of Congress. We fought together—side-by-side with President Obama and Secretary Geithner— to get the new consumer agency passed into law. There wasn’t a lot of money on our side, and the odds were against us. We were up against aggressive lobbying, no-holds-barred from some big Wall Street players and special interest groups with massive budgets. But neither CFA nor any of the other groups buckled.

We stuck together, and, in the end, American families won. They got the financial watchdog they need.

And so today—two years after I first came here to speak about the need for this new agency—I am back. First, I’m back to say thanks. Thank you. And second, I’m back to talk with you about the agency’s first priorities.

This is a new agency, being built from the ground up. Right now, at the beginning, as we breathe life into it, we have the opportunity to set the agency on a path that will enable it to make a real difference for American families for years and decades to come. Read the headlines from the past few years—and the past few days. Financial crisis. Foreclosures. Fraud. We have a chance right now to do better and to create a stronger, fairer marketplace where hard-working Americans can get a fair deal.

The question is how to get there.

Many people who supported this agency—and surely those who did not—assumed that the agency’s first business would be to issue rules—lots of rules. The consumer credit market is infected by a lot of bad practices that are costly to Americans, bad practices that can destabilize both families and ultimately our entire economy. And there certainly is a place for rules and enforcement actions aimed at those abuses.

But there also are limits to what can be achieved if we narrow our focus to issuing a series of thou-shalt-not rules.

Think for a minute about the CARD Act. There is no doubt that credit card customers are better off after this legislation—much better off. Two years ago, there were a lot of credit card practices that hammered families, and many of those practices are now illegal. Right now, across America, families are saving money because the CARD Act makes credit cards safer for consumers and makes it harder for card issuers to hide the real cost of credit.

But the CARD Act also illustrates the limits of the thou-shalt-not approach. As soon as it passed, industry lawyers went to work looking for slightly different ways to accomplish that which the legislation was intended to outlaw.

For example, the CARD Act generally outlawed certain credit card re-pricing practices, such as retroactive interest rate increases on existing balances, or hair-trigger revocations of promotional rates. But before these rules even went into effect, clever lawyers were working to circumvent the law. The approach they devised was ingenious: instead of raising the APR when consumers were a day late (which would be illegal), the rate would just be set very high as an initial matter, with the promise of a waiver or rebate of the interest for customers who paid their bill on time. Then, if the customer paid late, the waiver or rebate would disappear. The effect is precisely the same as the practice that had been banned, but the issuer could claim it was not violating the letter of the law. To its credit, the Federal Reserve has stepped in and has issued a proposed rule to catch this new trick. But notice what happens in the meantime: a complex pricing scheme that can easily trip up customers drains more money out of the pockets of American families until the regulators can get new rules in place. Meanwhile, the regulations grow thicker, raising the risk of unintended consequences, increasing complexity, and driving up legal costs even for the financial institutions that didn’t engage in bad practices.

The problem is that thou-shall-not rules do not fundamentally change the credit markets. Right now, there are a lot of lawyers who are working overtime to figure out how to render the CARD Act rules ineffective. At the same time, consumers look over their credit card terms and still see pages of fine print and wonder what is buried in there. Thanks to the CARD Act, many bad practices have been eliminated, but it is still the case that customers don’t have a fighting chance to read their credit agreements and figure out the real terms of the deal.

There was a time when the basic terms governing a credit card were understandable for the average consumer. But the landscape has changed. Today, too many creditors devise complex terms embodied in impenetrable credit agreements that undermine comparison shopping. Too many creditors have decided that there are profits to be made from keeping customers confused or uncertain about costs and risks.

That is why the consumer credit market needs to be repaired. When it is impossible for a customer to know the full price of a credit card, and when the risks of a particular kind of mortgage can be hidden, then the market isn’t working as it should. When is the last time you signed a contract—for, say, a credit card or a car loan—and thought, “I understand every word of this agreement. I’m sure there aren’t any surprises hidden in here.” Not lately. It is almost as if we have changed the law. The customer is caught, but the lender can cross its fingers behind its back and say, “We promised one price, but we really didn’t mean it.”

This agency can issue thou-shalt-not rules—and some companies can try to work around them, and the agency can issue more and more rules. That approach will eliminate some of the worst practices. But the market still will not work as it should. I’m here to argue that we need fundamental change, not just narrow rules that ban the latest abuses. We need tough, no-nonsense changes that will last and that will address the real, underlying issues.

In my visits with CEOs over the past two months, I’ve learned more about the impact of complex pricing. One CEO told me that his company used to compete based on the actual cost of credit cards. The company reduced the price of its card and explained the lower price up front—no surprise fees or interest rate re-pricing were hidden in the fine print. His competition was considerably more expensive, so that should have been a winning strategy. But the competition advertised their cards as much cheaper—counting on the fact that they would make their profits on the back end with various fees, charges, and interest rate increases. In a market in which competitors can obscure the price of credit, the CEO explained that when he made the cost of credit clear up front, his card seemed more expensive and he could not launch a profitable business.

A different CEO explained to me that, in his view, the consumer credit market suffers from a major disconnect. As he explained it, the sellers of credit (banks like his) and the buyers of credit (American families) too often make deals with two very different understandings of the basic economics of the deal. That should come as no surprise in a world where only the banks know what is in the fine print. This doesn’t work. If the two parties to a contract don’t actually have the same transaction in mind, then the fundamental premise of an efficient market—we both understand the deal and engage in deals that we think are good for us—is missing.

This agency has a moment, right now at the beginning, to envision fundamental change. It has a chance to define clear goals for the agency and a chance to set a direction that is good for families, good for those in the industry who want to compete for customers’ business, and good for the economy generally. For families who learned about the real risks of a mortgage only after they had been ruined financially, for families tipped upside down by tricks in credit cards and overdraft traps and payday loans that seemed so safe on the front end, for families who learned the cost of sending money to a foreign country only after the money arrived and all the surprise fees had been deducted, this agency has a real chance to say, “There is now someone in Washington on your side, pushing hard to make every agreement clear.”

Some will hear this and think, “This is just the same old disclosure regime that we tried for decades—and that failed.” Once upon a time, the word “disclosure” meant making people aware of what they were agreeing to. But over time, “disclosure” became a code word for obfuscation. Credit agreements and even summaries like the well-intentioned Schumer box got longer and longer, and the wording got more and more complicated. Today, there is much more disclosure, but there is much less understanding.

It is this simple: No customer should be asked to take out a loan without knowing the costs or the risks of the deal. And every customer should be able to compare different financial products straight up. Regulations should be about making sure that customers have the information they need to make the decisions that are right for them.

I believe in what the American people can do. When people can see what they are getting—when the price is clear up front and not hidden in the back, when the risks are clearly explained, and when it is easy to compare a mortgage with three other mortgages or a credit card with three other credit cards, then competition kicks in and markets can work. When families aren’t choking on fine print and legalese, then they don’t have to worry about what surprises are hidden in the deal.

There are other reasons to focus on easier-to-understand consumer products, on enabling customers to evaluate products straight up.

Take a moment and remember: American families have the agency they need, but they may have to fight for its survival. Goliath may have lost, but unlike in the Bible, this is not a one-round fight. To survive, this agency will need clear goals that make sense to the American people.

We can take a lesson from other consumer safety agencies that organize around core principles. The Food and Drug Administration ensures that drugs are safe and accurately labeled. The National Highway Traffic Safety Administration oversees crash tests on new automobiles to improve passenger safety. The Federal Aviation Administration focuses on how to maintain planes to prevent crashes. The Consumer Product Safety Commission makes sure that baby cribs don’t strangle infants and toasters don’t explode.

The work of those agencies enjoys widespread support because it limits risks that consumers cannot detect on their own at the time of purchase. Thanks to federal agencies, no one competes in the pharmaceutical industry by substituting cheaper baking soda for aspirin. Thanks to federal agencies, no one competes in the auto industry by leaving out the brakes or making the seat belts out of flimsy fabric. And thanks to federal agencies, no one competes in the appliance industry by leaving the safety switches and insulation out of toasters.

Those agencies have made the markets they regulate more efficient. Safety rules outlaw deceptive or dangerous innovations, making room for good innovation. Those agencies have also generated widespread support for their core missions from the American public. When was the last time you heard a friend or colleague—Republican, Democrat, libertarian, or vegetarian—complain that the Federal Aviation Administration should do less to prevent plane crashes? Or that the Consumer Product Safety Commission should do less to protect infants from unsafe cribs?

If the new consumer agency does its work right, not many Americans will complain that it should do less to encourage short contracts or less legalese. If you don’t believe me, just look at how strongly the public supports making credit agreements clearer. According to an AARP survey taken earlier this year, 96 percent of Americans over 50 want to see short, easy-to-understand credit products. And 91 percent of those polled said they felt strongly about it. The conservative think tank the American Enterprise Institute has advanced its own version of a short mortgage disclosure form. In hearings about the new consumer agency, both Democrats and Republicans have enthusiastically agreed on getting rid of the fine print.

The crash of 2008 made it clear that the consumer agency should have been law years ago. It should have been in place before an out-of-control lending industry developed and marketed mortgages that many knew would explode. It should have been in place before millions of families refinanced homes, often with only a thin understanding of the transaction, and ended up with mortgages that doomed them. It should have been in place before millions more took on mortgages they could pay for only a year or two and then ended up in foreclosure. It should have been in place before it became standard business practice for loan originators to receive bounties for putting families in higher-cost loans than they qualified for. It should have been law before dangerous mortgages and securitizations injected so much risk into the system that they ultimately brought our whole economy to its knees.

There were many causes behind the economic crisis of 2008, but one simple fact is inescapable: If mortgages had been clearer, the crisis would not have unfolded the way it did. The housing boom would not have been fueled by crazy mortgages, and the securitization market could never have aggregated so much risk. The complex securitizations of risky loans that helped trigger the near-collapse of our economy were built one lousy mortgage at a time. The crisis of 2008 was a preventable disaster.

If we stick with a clear mission for this agency, and if we back up that mission with meaningful rules and vigilant enforcement, we can help ward off such disasters in the future. If we make sure that competition is on terms that people can see, then we can make certain that competitive markets work for families. And if the playing field is leveled—if prices are clearer and comparisons are easier—then we can help families across America be a little more secure and a little more hopeful about their economic futures.

Last week, you may have read about the new agency’s disclosure of all the meetings I had in my first several weeks as Assistant to the President and Special Advisor to the Secretary of the Treasury. I have been busy talking and meeting with consumer advocates and a wide variety of stakeholders in the financial services industry—CEOs of all stripes, big banks, community banks, Ohio bankers, Oklahoma bankers, California bankers, credit unions, and the list goes on. Earlier this week, I went to Florida to meet with Attorneys General from across the country because they are on the front line of so many issues involving family finances, including the foreclosure problems that present so many challenges for homeowners and financial institutions.

At the CFPB implementation team, we are hard at work doing what we can to gather information and to stand up this new agency. But the work ahead of us is daunting, and that’s why it is as important as ever—every bit as important as it was two years ago—to have CFA on our side, pushing for a strong watchdog for families and helping this country continue its economic recovery.

This is a time for congratulations, but it is not a time for complacency. Without your leadership, there would be no agency so committed to helping the American family. But without your continued leadership, the new agency will always be vulnerable—to those who would deny it authority, to those who would deny it funds, and to those who would deny it an effective place in government.

We knew this before the crisis of 2008, and we know it today. Consumer protection is not seasonal. The harsh challenges facing the American family did not begin with the meltdown on Wall Street and they surely did not end with the establishment of the CFPB. The challenge of consumer protection is permanent. We now have a new tool in this new agency that the President and Congress worked so hard to create. But like any new tool, it helps no one if it sits on the work bench unused and untried. So your job, like mine, has only just begun.

I admire the work you have done on behalf of hard-working, play-by-the-rules families. I know how hard people in this room have worked to make our economic system fairer for everyone. I have seen how much of yourselves you have invested in turning the new consumer agency into law. Now our work enters a new phase. We must build this agency to last. We must infuse it with basic principles that American families embrace, with ideas that will sustain workable markets over generations. We have a great deal of work ahead of us, but we can do this.

Thank you for having me here today, and thank you for all your work.