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Agency has teeth, panelist says

“Families should be able to make clear-eyed decisions about their credit,’’ said Elizabeth Warren, a bankruptcy expert. “Families should be able to make clear-eyed decisions about their credit,’’ said Elizabeth Warren, a bankruptcy expert.
Globe Staff / July 13, 2010

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One of the nation’s leading experts on bankruptcy, Elizabeth Warren is on leave from her professorship at Harvard Law School to serve as chairwoman at the Congressional Oversight Panel. Congress created the panel during the economic crisis of 2008 to review financial markets and the regulatory system and to track how the money for the bank bailouts was spent. Warren has been the leading advocate of the creation of the Consumer Financial Protection Agency, one of the cornerstones of the financial regulations bill awaiting final Senate approval, which could come this week. The agency seeks to protect consumers against abusive, convoluted, and opaque practices of lenders.

Warren is a leading candidate to be the first director of the agency, a position she has declined to discuss, but she agreed to talk to the Globe about details of the agency and other elements of the financial bill.

When the conference committee met to reconcile the House and Senate versions of the financial regulations bill, pressure from lobbyists for car dealers and banks, among others, threatened to undercut plans to create the consumer agency, and you said any further weakening would render the agency a waste of time. Now that the bill is completed, and exemptions were made for some in the industry, including car dealers on car loans, what’s your verdict? A waste of time? An ironclad protector for borrowers? Something in between?

The new agency has teeth and a lot of independence, with enough rule-writing and enforcement authority to begin to fix a broken consumer credit market. It isn’t perfect, and the auto dealer exception is outrageous. But I kept waiting for an incoming missile that would mean the bank lobbyists had made good on their vow to kill the agency — and that never happened.

There were certain principles many supporters hoped the bill would provide to the agency, including independence from outside interference, the ability to shield its budget from congressional and corporate interference, and provisions giving it enough muscle to enforce its regulations. On which issues does the resulting bill hold up well? Where does it fall a little short?

The new law guarantees the agency meaningful autonomy. It has a protected funding stream, an independent director appointed by the President, and strong rule-writing authority. The agency also has the power to enforce rules against the big banks and, for the first time, against the non-bank originators of mortgages and other credit products that have done so much harm. I had hoped that Congress would restore the rights of states to provide greater oversight and accountability with their own rules, especially because they can serve such an important early warning role, but that was a bridge too far.

The overall bill provides a framework for regulations, not a detailed blueprint, and many contend that its strength, the connective tissue for the law, will only be determined when regulators actually write the specific rules. When this process begins, to which areas will you be paying particular attention concerning the consumer agency, to make sure the safeguards are as strong as intended?

I want to see the agency push the consumer credit market toward easy-to-read credit agreements with no more tricks and traps. Families are tired of fine print. They should be able to make clear-eyed decisions about their credit and to see the real costs and risks upfront. Note that this isn’t a partisan issue. According to a recent AARP survey, 96 percent of Americans support clear, transparent credit contracts they can understand.

Give us an example or two of how the consumer agency will tangibly change how we get our mortgages, pay our credit cards, or get a loan for our cars?

The agency will set its own agenda, but I would like to see a world with two-page mortgage disclosures, two-page credit card agreements, and two-page overdraft contracts. The consumer agency has the power to cut the legalese and make that a reality. It can put an end to a world where consumers discover what’s on page 16 of the fine print only after it bites them with a big fee or hiked interest rate. Families expect to be held to what they bargain for, but they are tired of getting caught by all the tricks and traps.

In response to the Depression, Congress and President Roosevelt enacted a series of economic changes, not just a single bill. Is “one and done’’ sufficient to confront the systemic problems that led to the crisis of 2008? If not, what should be next for legislation or innovation to further safeguard our markets?

The current package represents the strongest set of Wall Street reforms in three generations. It will go a long way toward preventing the kinds of abusive practices that brought our economy to its knees. But there is much more that we can do to modernize our regulatory system, increase transparency, and level the playing fields. Many of the rules put in place in this bill will need to be tightened. In addition, Fannie and Freddie pose huge problems that we can’t avoid much longer. The accounting shenanigans that gave us off-book liabilities and inflated valuations are an affront to good market functioning. Executive compensation structures continue to encourage excessive risk taking.

Corporate governance structures are still loaded to favor powerful management cabals. I could go on, but the point should be clear: There is more work to be done. And to increase the degree of difficulty, Wall Street’s army of lobbyists will fiercely resist the implementation of the new law and any efforts to move new legislation. It will be hard, but this is a fight we must be willing to have.

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