Elizabeth Warren

Related Stories

• Legislation May Make It Easier for Convicted Felons To Be Employed
• August Job Report Is A Double Edged Sword
• New For-Profit Regulations Call Out Schools on Bad Practices
• Extending the TANF Emergency Fund Will Help Workers, Businesses, and States
• Weekly Audit: Why Do Deficit Hawks Hate Social Security?

Elizabeth Warren is a professor at Harvard Law School. In an era in which consumer protections have fallen by the wayside, Warren has been arguing for the interests of consumers, advocating for the establishment of a Consumer Financial Protection Agency (CFPA), an idea that President Barack Obama is now also folding into new potential regulations. Warren is also the Chair of the TARP Congressional Oversight Panel, which oversees the Treasury’s bank bailout programs. Campus Progress caught up with Warren and talked with her about the proposed CFPA, how student lending can be fixed, and what young people can do for better financial lives.

For our readers that aren't familiar, could you explain the idea behind the Consumer Financial Protection Agency and why you began advocating for it?

The consumer credit market is broken. While the average credit card contract was a single page in 1980, it is now more than 30 pages. Instead of competing for business on straightforward terms, creditors advertise one price and then bury tricks and traps in the fine print. That tricks and traps are called “revenue enhancers” in the industry, and they hide the trust cost of credit and make it impossible for consumers to compare products and shop for better deals. The proliferation of deceptive products has magnified risk at the family level, eliminated real consumer choice, reduced real competition, and driven the market to innovate by creating more tricks and traps rather than by serving customers.

The credit market is broken in large part because of the lack of meaningful rules. Consumer protection authority is currently scattered among seven federal agencies, and all of those agencies have failed to create effective rules for two structural reasons.

The first is that financial institutions can currently choose their own regulators. By changing from a bank charter to a thrift charter, for example, a financial institution can change from one regulator to another. In fact, an institution may decide to evade a federal regulator altogether by housing its operations in the states and forgoing a federal charter. Institutions can shop around for the regulator that provides the most lax oversight, and bank holding companies can shift their business from their regulated subsidiaries to those with no regulation--and no single regulator can stop them. The problem is exacerbated by the funding structure: regulators’ budgets come in large part from the institutions they regulate, and so they are reluctant to lose chartered institutions.

The second structural flaw is a cultural one: consumer protection staff at existing agencies is small, last to be funded, and always playing second fiddle to the primary mission of the agencies. At the Federal Reserve, senior officers and staff focus on monetary policy. At the Office of the Comptroller of the Currency and the Office of Thrift Supervision, agency heads worry about bank profitability and capital adequacy requirements. As the current crisis demonstrates, even when they have the legal tools to protect families, existing agencies have shown little interest in meaningful consumer protection.

The CFPA is designed to fix these structural problems by consolidating the scattered authorities, reducing bureaucracy, and making sure there is an agency in Washington on the side of families. The CFPA would be have the expertise to fix the broken credit market and would be held accountable for doing so.

I have been advocating for the CFPA so strongly because I believe it will that a functional credit market is a key ingredient for rebuilding America’s middle class. And I also think it will help prevent future crises by reducing risk in the system.

What needs to happen for the CFPA to actually be implemented and maintain its teeth in a potentially less friendly future administration?

The House has already passed the CFPA [bill], but the Wall Street lobbyists now have it bottled up in the Senate. The Senate has the power to make the CFPA law, and I’m very hopeful that it will.

To be effective, the agency will need to have real independence. Real independence means independent rulemaking authority and an independent budget that is not solely dependent on appropriations. The CFPA should have its own staff, and its decisions should not require approval elsewhere in the executive branch. History teaches that agency independence is a critical source of success and an important weapon against industry capture.

There has been some controversy over whether risky private student loans made by schools, as opposed to banks, should be exempt from the CFPA. Do you think that would lead to more abuses?

There’s no question that the CFPA needs real and clearly outlined curbs. For example, the agency doesn’t have authority over investment products or most insurance products. I get more concerned though when we start talking about carving out what are clearly consumer credit products, like private student loans. A glaring example of a special interest carve-out in this area is the exemption the House passed for car dealers. It is remarkable that lawmakers would choose to trust used car dealers over banks and other auto loan originators, especially when there is such a well-documented trail of abuses. The key insight of the CFPA is that there’s no reason one kind of auto loan or student loan should have one set of rules while an auto loan or student loan from a different lender should have another set of rules. We don’t regulate child car seats differently based on who manufactures them, and it’s time we start treating like consumer credit products alike as well.

So many people end up taking jobs that barely allow them to afford student loan payments, and often students feel they are powerless against major lending companies (especially when their loans are sold to other companies without their knowledge). Why do young people feel so powerless and what needs to change for that feeling to go away?

Young borrowers feel powerless for the same reason as everyone else: we’ve been burned time and time again by Wall Street and its enormous concentration of power. Wall Street writes the terms and conditions of the loans, and it buries contracts in fine print that even contract law professors can’t understand. To add insult to injury, Wall Street has had all the power in Washington too, capturing regulatory agencies to take the cops off the beat, pouring money into the political system to prevent the hiring of any new cops, and ultimately demanding bailouts when the bad decisions of the banks caught up with them.

We desperately need Washington to start writing rules that benefit families, not the banks. Once that happens, consumers will have a seat at the table again. They will be able to see the terms of their contracts and to do some comparison shopping to find the best deals. They won’t have to worry that every time they sign something that they may get cheated again.

The fight over a consumer agency is playing out in the Senate as we speak. There are armies of lobbyists and millions of dollars of campaign contributions flooding the system. That’s why it is so important that people call their Senators and demand real regulatory reform an end to all the tricks and traps. Lobbyists are least effective when the public is paying attention.

What advice would you give to young people as they begin their independent financial lives?

Stay in control. Work out a budget so that you have a plan to make it from week-to-week and month-to-month. Pay off debt and put aside some savings. I wrote a book with my daughter about how to do this, and the first chapter is available on line. It sets out more of the basics. But the bottom line is simple: Money should not be the focus of your life, but money trouble can turn you upside down. Make it a priority to keep your money life in order.

Kay Steiger is the editor of Campus Progress.