Consumer Reports asked Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard Law School and a leading proponent of consumer finance reform, to talk about the proposed Consumer Financial Protection Agency. In this first Q&A segment, she explains why the CFPA is so necessary now.
CR: Why do you support a new consumer financial protection agency?
CR: Why do you support a new consumer financial protection agency?EW: The market for consumer financial products is broken.
It is broken because incomprehensible legalese prevents consumers from being able to understand the basic features of financial products and from comparing those products. In 1980, the average credit card contract was one-page long. Today, it is more than 30 pages long. Because the agreements can be changed repeatedly after a customer takes out a credit card, the power of ratings from a trusted group like Consumers Union is completely undercut. While lenders have learned to compete on a few highly visible features—nominal interest rates, free gifts, and warm and fuzzy branding—the real revenue enhancers are the tricks and traps buried in the fine print.
The fact that consumers can’t compare products leads to higher cost and also prevents the industry from innovating around consumer preferences. Instead of developing genuinely useful new features, the industry innovates by developing more tricks and traps.
The broken market helped bring us to the current crisis by allowing enormous amounts of risk to percolate throughout the system and by reducing stability in the banking sector.
CR: Why, in your view, doesn’t the current system work?
EW: The market has remained broken in large part because our regulatory system is fragmented, cumbersome, and complex. While various regulators—including the Federal Reserve and the chief banking supervisors—have long had the legal authority to protect consumers, they have refused to do so.
A Consumer Financial Protection Agency will bring complex and sometimes contradictory consumer regulations under one roof and transform them into a coherent set of smarter rules. The CFPA would put someone in Washington—someone with real power—who cares about consumers and has expertise on consumer finance issues. This will help steer us out of the current crisis and also prevent future crises.
CR: Michael Barr, the Treasury's assistant secretary for financial institution, says the new agency would help create a "level playing field with high standards." What does he mean?
EW: He means that consumers can see the terms and tell which products are better and which are not. In that case, they can make informed decisions. In many ways, the CFPA strives for exactly the same thing that Consumers Union has worked for: well-informed customers.
CR: The American Bankers Association says a new law establishing the CFPA would render moot all consumers laws promulgated by Congress, including the new Credit CARD Act. Your comments?
EW: The CFPA will be able to develop expertise and respond quickly to new and dangerous products that enter the market. Most importantly, it will have the organizational capacity to make disclosure effective and make the market work over time. That capacity will complement the work of Congress—just as it does in other areas of consumer protection. Of course, as with all agencies, Congress will retain the power to overturn the agency’s regulations and to amend its scope if it believes the agency is not effective.