During an all-hands meeting of the brand-new Consumer Financial Protection Bureau on Wednesday morning, Elizabeth Warren had an epiphany.
"We really are an agency," Warren told a gathering of 25 writers and editors at the first-ever White House Personal Finance Online Summit.
Indeed, the CFPB has a building, a website, and has already begun a dialogue with the American people. It even Tweets. This is all by Warren's design -- she told us Wednesday that she sees the CFPB as an "agency with a real vision," one meant to serve the "regular folks."
Mounting evidence suggests that the agency couldn't have come online at a better time. The Huffington Post reported this week on a new working paper from the NBER that had grim details. A few of the lowlights:
- "Although many [Americans] haven't mastered basic economic concepts, such as inflation, nearly 40 percent ... gave themselves high scores when asked to rate their own financial literacy."
- "One in five Americans borrowed money in the most expensive ways -- from a pawn shop, a pay day lender or through a tax return advance."
- "20 percent of those with home loans did not know whether they held an interest-only mortgage or a loan that includes this option."
Warren made very clear to us that standing for consumers didn't mean standing against businesses. She described the CFPB's key principles as ensuring that:
- Prices are clear.
- Risks are clear.
- The ability to compare like products is relatively easy.
If the agency can achieve that, then consumers can ask two key questions:
- Can I afford this product?
- Is it the best deal I can get?
The output of all this, Warren says, is a competitive marketplace -- which should be good for both consumers and businesses.
At least, the legitimate businesses
She gave us a useful analogy: Prior to the formation of the FDA, it was common for "drugmakers" to sell snake-oil or rat poison and call it aspirin. Because consumers didn't have access to the information they needed -- "what ingredients go into this product?" -- it was impossible for them to make an informed decision before purchasing said product. That's terrible not only for consumers, but also for the legitimate businesses trying to sell actual aspirin, because their illegitimate competitors could sell fake or risky products for cheaper prices.
The market for financial products today is like the pre-FDA market for aspirin. Some banks offer up-front, honest pricing for mortgages and credit cards. But it's difficult for consumers to differentiate between good, safe loans and deceptive loans that charge lower prices by burying risk in the fine print. Financial contracts are so long, dense, and incomprehensible that consumers are frequently unable to make informed decisions, and markets don't work to match them to good products. As Warren frequently says, the crash of 2008 started one lousy mortgage at a time.
Today, Warren is in charge of standing up the CFPB -- the first-ever FDA for the financial industry. The agency aims to work with consumers and lenders to ensure that financial contracts are understandable, so that markets can work better.
For example, the CFPB recently boiled down the 50-page "mice print" legalese in mortgage disclosure forms into a clearer, two-page layout, so that consumers and lenders can both better understand what they're agreeing to. The agency has collected 14,000 (and counting) comments for how to improve on these agreements further on its "Know Before You Owe" website.
We hope Warren will be allowed to lead the agency she conceived and is now building. The White House has not yet nominated her, and Senate Republicans have vowed to filibuster any nominee unless the agency is dramatically weakened. She's personable, smart, yet tough enough to be the kind of regulator to make real progress. She also reads Fool.com -- a plus in our book!
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