Just three years ago, the very idea of a consumer protection agency was dismissed by most bankers and industry representatives as a pipe dream.
But after a brutal legislative fight this year, the Consumer Financial Protection Bureau (CFPB)may prove to be the most important agency to watch in 2011.
With a broad mandate encompassing consumer protection rules from seven different agencies, a powerful director position and a large budget, the CFPB is poised to have a significant impact on the financial services industry.
"It's an idea whose time has come," said Elizabeth Warren, assistant to the president and special adviser to the Treasury secretary, who is tasked with getting the agency up and running. "The need for this agency was clear to millions of people. No one could really argue that the regulators had done a good job or that dividing consumer financial protection among seven different agencies made any real sense. The failures were too obvious. The difference in lobbying dollars and lobbying muscle would have predicted that this agency didn't have a chance, but history ran against the industry."
Despite Warren's assurances the agency will move cautiously, the CFPB makes bankers nervous because of the sheer scope of its authority.
"In many ways, it is the most powerful agency ever created," said Ed Yingling, president and chief executive of the American Bankers Association (ABA)
Warren conceived the idea for a consumer agency in 2007, and the financial crisis helped it gain grassroots support.
"Had [Warren] proposed the idea five years ago or 10 years ago, she wouldn't have gotten anywhere. But the regulatory failures highlighted the huge failures for customers, and it became clear a major restructuring, not just tinkering around the edges, was necessary," said Travis Plunkett, a legislative director for the Consumer Federation of America.
Douglas Landy, a partner in Allen & Overy and formerly a lawyer at the Federal Reserve Bank of New York, agreed.
"Before two or three years ago, no one would have believed you if you had said the consumer finance industry can cause a systemic threat. … It was viewed as individual issues, not a collective problem," Landy said. "The events of the last three years have disproved that. Fundamentally the banks lost the argument that there was no issue that needed to be addressed here."
Although the bureau was originally conceived as a separate agency, lawmakers ultimately housed it inside the Federal Reserve Board. The bureau is also partially funded by the central bank, with a budget that could reach an estimated $500 million.
It was predicted that the Fed would have some oversight of the agency, but the Dodd-Frank Act made the bureau fully independent. "The CFPB represents an unprecedented grant of authority, with a regulator with very few checks on its power," said Jaret Seiberg, financial services policy analyst for MF Global's Washington research group. "That's why it was a lightning rod."
Ed Mierzwinski, the head of the U.S. Public Interest Research Group, said the industry opposed the CFPB because its supervision is unlike any they currently face.
"The bureau is the first agency that has only one job, protecting consumers, and it will have the resources and the authority to look at financial issues from the standpoint of the consumer," Mierzwinski said. "The agencies that have been captured by the industry have served the industry well, and that's why they didn't want this agency."
During the 18-month battle for regulatory reform, the CFPB often became the central sticking point. The banking and business industries claimed it would harm safety and soundness, hamper product innovation and raise costs of credit for even butchers and bakers.
Some consumer advocates said those claims backfired. The industry frequently says potential legislation could dry up credit, while the Chamber of Commerce's arguments that the bureau would punish bakers and butchers appeared far-fetched. "What was surprising to me was a lack of recognition by the Chamber [of Commerce] and ABA was that the game had changed and the crisis had changed it and the arguments should change," Plunkett said.
Brian Gardner, a political analyst at KBW's Keefe, Bruyette & Woods, said the industry didn't make a persuasive argument against the agency.
"I think the industry was a little flat-footed in responding to any of this," Gardner said. "They were in a difficult position to argue against it. The economic and political tides were running against them. … I think in some respects it was the perfect storm to create the bureau."
Yingling defends the industry's strategy, and said there wasn't a way the industry could win the fight against the CFPB.
"The fact is we were in a financial crisis, and the financial crisis in the mortgage arena could be related to consumer issues. And you had a president who strongly supported it and you had an overwhelmingly liberal Congress who were sympathetic to it," Yingling said. "After it was proposed, it was hard to see how you wouldn't end up with some sort of consumer agency."
But outgoing House Financial Services Committee Chairman Barney Frank said it was easy to see through bankers' arguments against the agency.
Banks "are afraid that it would cut into their revenue stream," Frank said. "They make a lot of money from credit cards and overdrafts. In some cases there may have been unwarranted fear that it would over-regulate. I don't think it would. … And they are more comfortable dealing with bank regulators."
Still, some industry representatives say the bureau will just make the situation worse.
"It was completely unnecessary and it will just add burden, cost and confusion," said Andrew Sandler, co-chairman of BuckleySandler. "There were much more effective ways of addressing real problems it was designed to address. It has enormously aggressive powers and it doesn't really replace anything. It's just adding another regulator."
Robert Cook, a partner at Hudson Cook, said the industry fears the unknown.
"It's certainly going to be a huge change, because we are going to have a new regulator touching all the consumer regulatory acts, and we don't know exactly how those changes are going to unfold," Cook said. "We all believe it's going to be a significant change."
He said the industry worries the CFPB will require complex data collection, push for plain-vanilla products and become an antagonistic regulator.
"In a sense, the concept of such an agency has been fostered from such a mistrust in the industry, so there was concern that it might carry out its mission in a way insensitive to the concerns of the industry," said Ellen Marshall, a partner at Manatt, Phelps & Phillips. "We do not know at this point whether those fears or worries will turn out to be the reality of what the new agency does."
The industry did notch some wins, however. Bankers were successful in removing a provision that would direct the consumer agency to require bankers to offer "plain vanilla" mortgages. Despite the removal of the provision, bankers' concerns have not completely eased.
"At the beginning, they were talking about plain-vanilla products. And while they took that out, everything about this agency is designed to force the industry into plain-vanilla products," Sandler said.
Perhaps the biggest victory came from the Independent Community Bankers of America (ICBA),which won an exemption for banks with less than $10 billion of assets from examinations and enforcement by the new agency. Cam Fine, the ICBA's president and chief executive, said the exemption is the best option for community banks.
"There was no denying some sort of consumer agency was going to be created so our mission was to try to have as little an impact on our community banks from the creation of a consumer entity," Fine said.
Since the bill's enactment, Warren said community banks have been cooperative, and they do not appear to be her target.
"Community bankers have plenty of apprehensions, but they also have been willing to talk openly and help me learn more about their circumstances," she said.
Seiberg said it was unfortunate the industry hung its hopes on defeating the new bureau.
"The industry thought they could get the Senate to moderate the CFPB, and instead the Democrats found a 60-vote coalition, which meant they didn't need to negotiate with Republicans anymore," he said. "So we never got that moderation."
Just as vigorously as bankers fought the CFPB, they opposed an appointment of Warren as its first director. Ultimately, President Obama announced that Warren would serve as an assistant to the president and special adviser to the Treasury secretary to help set up the agency. Many observers are still waiting to see who the president will choose as its permanent director.
"I am flabbergasted that the president hasn't even nominated someone to what he has called the hallmark part of this legislation," said Richard Hunt, president of the Consumer Bankers Association. "The longer the administration takes to name someone, the more we are going to have uncertainty in the marketplace."
Warren, meanwhile, has been reaching out to the industry and bankers individually to allay their concerns and get feedback.
"She hasn't been out there waving a red flag," said Ernest Patrikis, a partner at White & Case. "What I hear is clear, simple language. She isn't throwing out things that scare."
Warren said she isn't trying to go after bankers, so much as ensure consumers have an agency looking out only for them.
"It's important that bankers be represented as the agency tries to think through priorities and regulation, but they can't be the only ones who are important," Warren said. "Consumers need to be a part of the mix as well."
Warren has already signaled her priority is making mortgage and credit card disclosures easier for consumers to understand. The Dodd-Frank Act requires the CFPB to merge by 2012 mortgage disclosures required by the Truth in Lending Act and the Real Estate Settlement Procedures Act.
"I see it as a steady push in the direction of clearer products, products that are easier for consumers to understand," Warren said. "Over time, that makes markets work more efficiently, allows families make better economic decisions for themselves, rewards companies who want to compete in the marketplace and it makes the economy safer overall. I see this agency headed in a direction that will encourage more competition with a lighter hand on regulation."
But even the issue of simpler credit card disclosures has piqued some industry members, who note that credit card disclosures were just overhauled by the Fed. "It's just the fact that just having gone though this to have to do this again, I think this is a big mistake," said Lynne Barr, a partner at Goodwin Procter.
What remains unclear is how far Warren can take the process without a formal CFPB director in place. Mierzwinski said that means the CFPB is likely to take a cautious approach.
"The CFPB is going to be the new kid on the block and it's going to be under a microscope," he said. "It's going to start off small. It is not going to start lighting fireworks the first day. But I think you are going to be surprised how well it's going to work out."
Others see it as more active, particularly in enforcement.
"The big unknown is their role on enforcement," Gardner said. "There has been big criticism, rightly or wrongly, of lax enforcement of consumer protection laws from bank regulators. I think it will be interesting to see how the CFPB enforces the banking laws and how much more aggressive they will be."
But Warren said a lion/lamb debate on the agency's path is the wrong one.
"The banks have the question framed the wrong way," Warren said. "They fear that a strong agency means reduced access to credit, but look at what we're working on. This is about making the price clear, the risk clear and making it easy to compare one product or another. The agency is pushing for customers to be able to understand in advance the terms of their credit agreement. That's not so radical. It's fundamental to contract law and more importantly to economic fairness."
The battle for the CFPB isn't over yet. Republicans have announced they plan to make the bureau a focus of oversight hearings and may introduce legislation to chip away its structure and budget in the next Congress.
Industry sources were doubtful that Republicans would succeed with a split Congress and a Democratic administration. Seiberg said Republicans' best chances would be at altering the CFPB's funding.
"It doesn't matter if you are a Democrat or Republican, lawmakers generally don't want to see agencies funded outside the appropriations process so bringing the CFPB into the appropriations process is a way to bring it under more oversight," he said.
But Frank said the Republicans have "zero" chance of gutting at the CFPB.
"It's very popular," Frank said of the agency. "They can't get after the funding. We will provide funding immune from their efforts."