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The CFPA: How a crusade to protect consumers lost its steam

By Robert G. Kaiser
Washington Post Staff Writer
Sunday, January 31, 2010; G01

At a time when the country is deeply divided over the proper role of government, what is Capitol Hill's appetite for a new, independent agency with broad power to police the financial industry and protect consumers from the risky lending practices that contributed so much to the financial crash of 2008?

Not as hearty as the Obama administration had hoped last year when it turned a Harvard Law professor's crusade for a Consumer Financial Protection Agency into a major element of its regulatory reform initiative. After months of tinkering, the House last month finally endorsed the creation of a CFPA, but the Senate Banking Committee hasn't found this particular ingredient to its liking.

Particularly worrisome for the White House: The disagreements over the proposed agency go beyond mere partisanship, echoing the enduring national debate over whether government intervention is more a solution or a problem. That debate has sharpened since the Democrats lost a Senate seat in Massachusetts last week, a result that suggested voter frustration with Obama's government-oriented approach.

Yet, in the wake of that defeat, Obama proposed new and stiffer controls on the size of big banks, a new complication that is likely to slow progress on the rest of the regulatory reform package.

The origin of the CFPA proposal may help explain why it has become so controversial. The idea for a new agency with broad powers to police the marketplace for borrowing -- mortgages, credit cards, payday loans and other forms of consumer credit -- came from a 2007 article that Harvard Law professor Elizabeth Warren wrote for Democracy, a liberal policy journal with a circulation of 5,000.

In June, the Obama administration adopted her concept for its package of regulatory reforms. Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) was an early supporter. He called consumer protection "our first priority" and urged approval of "an independent consumer protection agency whose sole focus is the financial well-being of consumers."

But Sen. Richard C. Shelby (R-Ala.), the banking committee's ranking Republican, said he wouldn't support the creation of an independent agency, calling it "a folly and dangerous" and an expression of the paternalism he thinks government should avoid. Yet Shelby, who likes to call himself "something of a populist," also said he favored new consumer protections. "Consumers are not likely to participate in our markets . . . unless they know they are protected against fraud and unfair dealings," he said last summer.

Ultimately, agreement between Dodd and Shelby is the only obvious route to a bipartisan deal. In recent days, according to Senate sources, they have been discussing alternatives to an independent agency as part of an overall compromise.

Dodd, according to the sources, is willing to consider a consumer protection office under a presidential appointee within an existing agency. He also wants consumer protection to have a dedicated source of funding to better insulate it from budget pressures, with regulators empowered to write and enforce new rules on non-bank institutions such as mortgage brokers.

An advocate and her crusade

Compromise wasn't part of Warren's agenda when she floated the CFPA idea in 2007, more than a year before the crash. At the time, she was a crusading outsider with an outside-the-box idea who then found important Democratic allies in the White House and Congress. Since November, she has headed the congressional oversight panel established to monitor the federal bailout of the U.S. banking industry. Senate Majority Leader Harry M. Reid (D-Nev.) named her to that job.

She unabashedly favors a restructuring of the relationship between lenders and borrowers. Why not be as tough on financial products as the government is on dangerous consumer goods? she asked.

"It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house," she wrote in Democracy. "But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street -- and the mortgage won't even carry a disclosure of that fact to the homeowner."

Families "who get tangled up with truly dangerous financial products," she wrote, can face "wiped-out savings, lost homes, higher costs for car insurance, denial of jobs, troubled marriages, bleak retirements, and broken lives."

For years Warren has been researching what she calls "the disappearing middle class." Costly debt is a big reason for middle-class woes, she said in an interview. "Today, the 50 million families who cannot pay off their credit cards pay more in penalty fees and interest than they spend on clothes," she says.

As she envisions it, the CFPA would focus on the lending products, not on the firms that offer them. That alone, she says, would set the agency apart from the existing regulatory structure at the various federal agencies that monitor the banking world.

Friends and allies say Warren would love to be the first director of a CFPA. Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, has endorsed her publicly for the job. Others won't hear of it. "If she were running a consumer agency," Sen. Judd Gregg (R-N.H.) said in a recent interview, "you've got someone running the agency who doesn't believe in a market, in my opinion."

Warren says a CFPA would be a departure from three decades of public policy at the federal level. "The last time this country made any significant pro-consumer advances was in the '70s," she said. Ralph Nader and other consumer advocates pushed for a more modest sort of consumer protection agency in that era, and one proposal came close to winning congressional approval. When a later version lost a key House vote, its proponents felt the moment slipping away. "I knew something dramatic had happened," Nader said in a recent interview.

After her article was published, Warren promoted it to the then-leading Democratic presidential candidates. Former senator John Edwards (D-N.C.) supported her idea. So did Sen. Hillary Rodham Clinton (D-N.Y.). Obama did not signal his support, but then Warren's idea showed up last year in the reform proposals he sent to Capitol Hill.

A flawed first draft?

Michael S. Barr, an old friend of Warren's who is now assistant secretary of the Treasury for financial institutions, oversaw the drafting of the CFPA proposal. Like Warren, Barr was a law professor before joining the administration, teaching at the University of Michigan.

When the administration began working on the bill's specifics, Barr said in an interview, he saw an opening for "a different kind of thinking." Just as economists had concluded that long-dominant theories of market efficiency did not explain all forms of economic behavior, the post-crash environment "frees up space for a better understanding of the role of government," he said.

The initial legislation embraced the expansiveness of Warren's vision. It would have given the CFPA broad powers to intervene in any business that extends credit or provides financial services. One provision -- which suggested that the agency could draft the terms of simpler mortgages, credit card agreements and other forms of credit, and then require firms to offer these "plain vanilla" products -- drew stern criticism from both the House and Senate committees, including from some supporters of a CFPA.

"You all are advocating that you design products for the financial markets," Sen. Bob Corker (R-Tenn.) complained to Barr at a Senate hearing in July. This was an example of the government trying to be "Big Brother," Corker said, by telling citizens what they could and could not do in the marketplace.

"The administration made fairly major errors" with "sloppy drafting that allowed opponents to demagogue it," Sen. Mark Warner, (D-Va.) said.

"You can blame me" for that language in the draft bill, Barr said recently. It disappeared from the version the House approved in December. Nevertheless, the House bill would create a new agency with the authority to ban financial products found to be abusive or too risky.

Frank, who fought to keep the CFPA in the House bill, argued that only an independent body whose primary responsibility is consumer protection can be expected to accomplish that job. The existing regulatory agencies had the power to prevent the abuses that led to the great crash, Frank has said repeatedly, but failed to use it. Dodd has made similar arguments.

Frank said last week he would be willing to look at a Senate alternative, but for now, he favors an independent agency.

State attorneys general, many of whom enforce state consumer laws, have spoken up for an independent federal agency. Roy Cooper, attorney general of North Carolina, said in an interview that his office had received 880 complaints from consumers this year about credit cards and bank accounts, "ten times the amount we received just three years ago." But all of the institutions involved came under the jurisdiction of federal agencies, most often the Comptroller of the Currency (OCC), the principal regulator of federal banks. Cooper's consumer protection division couldn't help.

He favors "a strong federal agency that's independent -- not like the OCC [which is] dependent on fees from member banks . . . -- [but] an agency that can set rules for the entire market and enforce them."

The fault lines of the debate

Business groups -- most vociferously the U.S. Chamber of Commerce and the American Bankers Association -- have campaigned fiercely against what they describe as an unneeded, intrusive new agency that would increase the cost of doing business. ABA President Edward Yingling argues that a new agency would inevitably come into conflict with the "prudential" bank regulators that provide primary oversight of the nation's banks -- the OCC, the Federal Reserve, the Office of Thrift Supervision and the Federal Deposit Insurance Corp. Such conflicts could undermine the "safety and soundness" of the banks, he asserts.

In an interview, he said he could support a bill that mandates better consumer protections, provided it does not create a new agency.

That view exasperates consumer advocates. "For those of us who have watched 10 years of consumer protection failures, the point is you can't put those who so dramatically failed in charge again," said Travis Plunkett, legislative director of the Consumer Federation of America.

Nonetheless, the criticism has taken a toll. In the House, where the Democrats have a 78-vote advantage, opponents mustered considerable support to knock the CFPA out of the bill. An amendment failed by just 223 to 208, with 33 Democrats joining all the Republicans in voting for the elimination.

Warren remains hopeful that her idea, or something like it, can become reality. She said Shelby probably holds the key. Of a possible compromise, she said, "The choice is, with teeth or toothless?"

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