Elizabeth Warren Explains What We Can Expect from the New Consumer Agency
The Harvard law professor, who is coordinating the creation of the Consumer Financial Protection Bureau, sets her sights on simplified forms for credit cards and mortgages.
Elizabeth Warren has been tapped by President Obama as a special adviser to set up the new Consumer Financial Protection Bureau, which was established by the Dodd-Frank financial regulation legislation last summer. Warren, an expert in bankruptcy issues who chaired the congressional panel that monitored the Troubled Asset Relief Program, is coordinating efforts with the seven agencies that currently supervise consumer lending to get the new bureau up and running by July 21.
A controversial figure, Warren hasn't actually been named to head the agency -- widely recognized as her brainchild -- and would probably face a tough confirmation battle. Will she throw her hat in the ring? She is a little coy with her answer: "When the President and I met over the summer and discussed how I could serve, being appointed director was certainly on the table. I'm not one to fuss about fancy titles. I wanted to get to work right away." In her Treasury Department office next to the White House, the Harvard law professor told Kiplinger's editors Janet Bodnar, Jennifer Schonberger, Anne Kates Smith and Mark Solheim what consumers can expect from the bureau.
Kiplinger's: Will anything official come from your agency before July 21?
Warren: I think the best way to understand the situation is this. Congress passed and the President signed the Credit CARD Act early in the spring of 2009, and it eliminated some pretty bad practices that credit-card issuers had been following. The law went into effect in stages, and the industry has adjusted, sometimes in ways that might fairly be read to violate if not the letter of the rule, then certainly the spirit of the CARD Act. So we've been in touch with the Federal Reserve, which currently has authority, and the Fed has decided to add some rules for the enforcement of the CARD Act. We're not waiting until we receive full authority in July. So in that sense I would say that credit-card holders are starting to see the effects of having a consumer agency to speak for them.
What are your goals for the agency? We're doing two things simultaneously: building an agency and starting our first initiatives. The first two initiatives are centered around credit cards and home mortgages. I've already met with CEOs of the major credit-card issuers and other financial-services companies and with consumer groups on the readability of credit disclosures.
You mean those hard-to-read brochures you get with your card? Yes. We're trying to drive toward a short, easy-to-understand credit-card agreement. But we're also talking with the industry about how to approach regulation. The CARD Act identifies bad practices and bans or curtails them. Of course, what usually happens -- and this is exactly what's happened with the CARD Act -- is the industry then shifts slightly and the agency is called upon to write a new round of regulations. Thus grows a regulatory thicket that couldn't be penetrated with a howitzer. Consumers are better protected from the worst practices, but they don't necessarily gain mastery over their financial dealings. Even after the CARD Act, credit-card agreements are almost impossible to read. An alternative approach is agreements that allow people to see the costs and risks easily and to make comparisons in the marketplace. I've proposed that we push toward a simpler, easy-to-read credit agreement, and so far I've received a very warm reception from bank CEOs. In many ways, they're as frustrated by the way this market has evolved as I am. And they say they're ready for change.
How do you change the culture of the way the regulatory system works? Because, as you say, there are always going to be consequences that you don't anticipate. One way to approach regulation is to put down "thou shalt nots," which necessarily creates a lot of regulation. The alternative that I've put on the table is to make credit-card agreements readable in a few minutes by someone with an average reading comprehension in the U.S. Think about it. If the agreements were simpler, if they had straightforward pricing information, what would they look like? You'd see the fees, the interest rate, the penalties and an explanation of any free gifts -- or supposedly free gifts. That's it. Someone could lay down four credit-card offers and make apples-to-apples comparisons. At that point we've got a market that works for consumers, that's no longer driven by one advertised price when we know that the actual prices will be buried in the fine print.
Wouldn't that ultimately affect card issuers' profits? Are they really going to agree to this? We start with a conversation with the industry because it is the right place to start. And we see how many within the industry would embrace a newer, simpler product that makes costs and risks clearer and permits apples-to-apples comparisons. If we get movement, then we do two things: We figure out what kinds of rules we need to bring along the laggards and whether rules are needed to move even further. But I think it is fair to the industry to make the offer, to work with them to create a better product for customers. If they reject the offer, then regulation is still in the toolbox.
You said that your second priority is mortgages. We're starting with a one-page shopping sheet that gives people the key pieces of information they need to understand the costs and the risks, and to make direct comparisons. Something given to them early in the process, at a time when they're shopping, not within hours of a closing or at closing. In return, we want to get rid of some of the forms that are now required by law at closing.
Some of those forms were revised fairly recently. But community bankers tell me that they're still very difficult. There's overlap and complexity, forcing lenders to incur a lot of costs to collect the information and get the forms properly filled out. So it appears that we have hit the worst of all possible worlds: regulations that drive up costs for the industry and produce little good for the consumer.
You think you could do it in one page? It would have all the information a consumer needs: the monthly payment, cash at closing -- including closing costs and the down payment -- and how long it will take to pay off the loan. Variable-rate mortgages take more disclosure, but consumers should be able to make comparisons and find out which mortgage is cheaper and safer.
Will simplifying credit cards and mortgages result in fewer choices? In the case of credit cards, it's the issuer who picks the actual fees, the interest rates, the penalties and free gifts, not the regulator. What the card issuer loses is the ability to hide a term in the fine print that no one ever sees or understands and, as a result, a term that the consumer is not pricing into the product. People say, "Oh, well, you'll cut innovation." I think there will be plenty of innovation. Issuers can innovate on customer service. Innovate on price. Innovate on cool iPhone apps. But innovate in ways that customers can see. Same sort of point on mortgages. There's room to design mortgages and room to price mortgages however the issuer wants to price them. But if the plan is to surprise the borrower, then that's the part this agency is responsible for eliminating.
What feedback are you getting? People in the industry I'm speaking with are saying they are willing to try. Some CEOs I've spoken to recognize that their business is not sustainable when their customers see them as dangerous or as the enemy. They need to be partners with their customers.
How would you use technology, especially social media, to bring consumer voices into the agency? First, we can use technology as a means to make our work transparent and to involve people in the design of the agency. That means, for example, that my brothers in Oklahoma can have virtual seats at the table right next to industry lobbyists. Second, we can tap directly into the experiences of millions of Americans to develop a rapid-response approach to policing credit markets. Finally, we can open up the agency in a way that allows people around the country to come up with better ideas or new approaches.
What's your advice for Kiplinger's readers while they're waiting for this to happen? Anyone who carries credit-card debt from month to month is in financial trouble. This is not a normal state, nor is it sustainable over time. Not paying off that credit card is always a bad sign, so pay it off. That's my best advice.