For years, federal banking regulators at the Office of Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS) and the Federal Reserve helped the nation's largest banks wage war on the U.S. middle class. But President Barack Obama wants to change all that with a new regulator that answers exclusively to consumers, not bank balance sheets. AlterNet economics editor Zach Carter discussed the proposal to establish a Consumer Financial Protection Agency (CFPA) with the woman who came up with the idea, Harvard University Law School Professor Elizabeth Warren. After defending the American middle class for decades, Warrant currently chairs the Congressional Oversight Panel for the Troubled Asset Relief Program.
Zach Carter: How did the existing federal bank regulators facilitate today's economic crisis, and how can a CFPA help?
Elizabeth Warren: The big arc of the story is that 30 years ago we had laws that put some basic fairness into the consumer credit market. Over time, the large financial institutions captured the regulators who were supposed to be the cops on the beat to enforce those laws. They also pumped hundreds of millions of dollars into Washington to make sure that no new cops were put on the beat. Without good laws, the industry started selling ever-more-deceptive products, and their friendly regulators looked the other way.
For example, when a dispute arose between a consumer and a bank, the regulator consistently chose the side of the banks. This was particularly true with the OCC.
ZC: The federal regulators even joined the bank lobby to file lawsuits, didn't they?
EW: They filed lawsuits to protect the banks because the banks needed the help of the government against those big, tough customers. Right? So, they kept pushing more and more deceptive products, and they ultimately destabilized not just the American family, but the entire American economy. Once the economy crashed, the industry demanded bailouts from the taxpayer. So now we're writing the final chapter of this story. And the final chapter is about who is in control moving forward. Will the banks continue to select their own regulators and write their own rules? Or will there be someone in Washington who wants to look out for consumers and who will be accountable to them?
ZC: So the regulators go from being cops, or enforcement agencies, to being something very close to lobbyists and advocates for the banking industry, particularly the large banks.
EW: They went from being cops to being the lookout driver. They stand out in front while the banks fleece their customers. And time and again, the regulators believed it was their job to defend and support the banks against customers.
ZC: The bank lobby has made the CFPA their top target since President Obama rolled out the proposal for it back in June. What are the banks so afraid of?
EW: That's right. In fact, I think their language was that they intended to "kill" it. The new agency would put an honest cop back on the beat. That's all. And that's what's so amazing. Think about this. The agency wouldn't have much more power than the Fed or the OCC currently has over credit cards, home mortgages and other consumer loans. The difference is that the consumer agency would be an honest cop. It would be an agency headed by someone who cares about consumers and who would be accountable to the people if consumers were being taken advantage of.
ZC: So what are the crucial provisions that need to be passed?
EW: Independence is at the heart of the proposal. It's not that we need some specific new rule, it's that we need an independent agency to write and enforce the rules that cares about consumers, not just bank profits.
ZC: The CFPA portion of the financial reform bill took some pretty significant blows as it moved through the House Financial Services Committee. They cut a provision that would have required any bank offering complex loans to offer a 'plain-vanilla' loan alongside it, and exempted the 8,000 out of 8,200 banks from CFPA enforcement. How damaging are those revisions?
EW: The small banks were exempted from primary enforcement, but the agency would continue to have secondary enforcement power over them. And they would still be subject to all the same rules. The rule writing authority applies to everyone. The CFPA would also still be the primary enforcer against big banks and the non-bank lenders—the mortgage brokers and the other folks who operate at the state level and not at the national level. But for community banks, the consumer agency would sit shotgun with the safety and soundness regulator, they wouldn't be totally excluded from the process.
Zach Carter is an economics editor for AlterNet. He writes a weekly blog on the economy for The Media Consortium, and his work has been featured in The Nation, Mother Jones, The American Prospect and Salon.