A Fighting Chance (21 page)

I figured the fix could be pretty simple: Treat mortgages and other financial products like, well,
products
. No one expects a consumer to evaluate the wiring diagram for a toaster. I thought no one should expect a consumer to digest thirty pages of tiny print to evaluate every trick in a credit card agreement. Common sense and basic safety—to my mind, that’s what this was all about.

In the article, I compared the safety of toasters with the safety of financial products. I proposed the creation of a new government agency, one whose sole mission would be to look out for consumers, and to serve as the cop on the beat who would make sure that financial companies follow some commonsense rules. People could still use mortgages and credit cards however they wanted, but the products themselves would be clear. No tricks hidden in the fine print, no traps buried in complex legalese.

It was a pretty simple idea. Getting it done would not be so simple.

Cheated

Over the years, I had heard a lot of stories from people in bankruptcy. The stories so often started with something unexpected and sad. A job that was going great—until the pink slip arrived. A beloved wife—lost to cancer. An aging father—who broke his hip, forcing his daughter to cut back on her hours at work.

And then, more often than not, the story would take a turn that would make me furious—blood-boiling furious. Because then, just when a family was down on its luck, some giant financial company would come along and make things worse.

Sometimes the lenders lied. Sometimes they cheated. Sometimes they baited a trap. And sometimes, even when the target figured it out, the lender just brazened it out.

I remember a guy (I’ll call him Jason to protect his privacy) who lived on the edge of a small southern town with his wife and stepson. As Jason told the story, he had lost his job, but after a few months of searching he had found a new one, working at a warehouse about forty miles from home. Meanwhile, he had racked up some debt. He owed on his credit card, and he had borrowed money from his brother-in-law (which he found mortifying, and he planned to pay him back as soon as possible). But now that he had a new job, Jason figured he was on his way to getting back on his feet.

His pickup was a gas-guzzler and it had broken down a few times, so he decided to trade it in for something a little smaller and more reliable for his long commute. One Saturday, he drove to one of the big car dealers that advertised heavily on the radio. He kicked a few tires, thought long and hard about which car would suit his needs, and finally settled on a two-year-old Ford Taurus. He haggled on the price, arranged for the trade-in, and drove home in his new car, feeling pretty good about his decision. He hadn’t exactly wanted to make the change, but he felt responsible, like he was getting his life back on track.

Several days later, the phone rang. It was the car dealer: there was a problem. When Jason had come to the car lot, the dealer had offered him a 4 percent interest rate, but the man on the phone explained that this was just a
preliminary
offer. The actual rate was higher—more than
five times
higher, according to Jason—than the preliminary rate, so the monthly car payment would be $105 higher than the dealer originally estimated.

Jason panicked. The new job didn’t pay as much as his old one, taxes were chewing up more of his paycheck than he had planned, and he needed to watch every nickel. He didn’t have an extra $105 each month. He told them to call it off. He would return the Taurus and take back his pickup.

No dice. They had already sold his pickup. Jason could either take the car dealer’s terms or he could return the Taurus and walk. Literally.

And it was all perfectly legal. Somewhere in the fine print, the rate on his car loan was marked “preliminary.” No one was obligated to spell out what that meant, and what it meant was: “Preliminary means that after you buy the car we can increase your monthly rate by $105, just because we want to.”

I knew there were millions more people like Jason. He got in trouble with his car loan, but it happened with all kinds of financial products. Big banks across the country had been sneaking in ways to charge sky-high fees for bounced checks. Payday lenders would charge upward of 400 percent effective interest—rates that would make Tony Soprano blush.

And then there were the credit card companies. Their shifting payment dates. Their sudden interest rate hikes. And their torrent of fees—late fees, over-the-limit fees, just-because-it’s-Tuesday fees. The language was convoluted, and the cross-references and defined terms made it unreadable. Let me put it this way: I’d taught contract law for more than twenty years, and I couldn’t understand some of those contracts. How many people who were busy trying to get dinner on the table and check the kids’ homework had a chance to wind through this kind of legalistic wiring diagram? Not many.

So why not put a cop on the beat? Why not create an agency to put a stop to all these shenanigans? We could put some commonsense rules in place and force the industry to use plain English to explain what the products really do. No cheating anywhere—not credit cards, not mortgages, not payday loans or student loans.

The idea was to keep Jason and millions of people like him from getting ripped off.

Don’t Shoot!

My article proposing this new agency was published in 2007, in a journal called
Democracy
. At the time, a consumer financial protection bureau seemed like a pipe dream. George W. Bush was still president, and the Republican leadership was still talking about
de-
regulation, not stronger regulation.

But by the beginning of 2009, the world looked very different. America had a new president and a newly crashed economy. Suddenly a little more financial regulation didn’t sound like such a bad idea.

By early 2009, I was spending nearly all my time teaching or on COP work. But in February of that year, Damon Silvers—my co-panelist at COP and associate general counsel of the AFL-CIO—invited me to a meeting about another topic: financial reform. Everyone knew that Congress would soon start working on a law that would overhaul banking regulation. A number of us also figured that the big banks would quickly begin to marshal their forces, revving up their lobbyists and getting their publicists ready. They had won big-time with the $700 billion nostrings-attached TARP bonanza, and now they were gearing up to fight any reforms that could cut into their future profits.

This meeting would bring together many of the leaders of the nonprofit and advocacy groups dedicated to fighting for working families. Damon—and a lot of other longtime activists—knew that real reform was desperately needed. And they thought that all those who wanted to protect the financial interests of American consumers should start getting ready to fight back.

The meeting was held at the AFL-CIO headquarters in Washington. It was supposed to start at nine, but I was running late, so I started jogging through the lobby. The floor was hard and shiny, but I couldn’t keep my eyes off the building’s magnificent two-story mural: its monumental figures of working men and women were interlaced with small gold tiles that glinted in the morning sun. As I ran, the heel on my shoe slid sideways and I lost my balance. As I started falling, I vaguely wondered whether I’d be more likely to break a leg or knock out my front teeth—I figured it would depend on how I landed. But somehow, arms and legs flailing, I found my feet again just before crashing to the floor.

The meeting took place in the big conference room on the eighth floor. I’d never been there, but Damon had told me about it. The room had a balcony that looked out on the White House. During the Bush years, the AFL-CIO had been sternly cautioned that no one should step on the balcony or the sharpshooters might fire at them. So far, no one in the Obama White House had issued the same warning.

Every seat was taken, maybe seventy-five or so in total. I didn’t know most of the people in attendance, but I think there were representatives from civil rights organizations, consumer groups, labor unions, and religious groups that viewed economic security as part of their core mission. It was a hodgepodge of leaders from organizations populated by people I thought of as “the good guys”—those who spend their lives fighting for the well-being of regular folks.

When I stepped into the meeting, everyone was already seated and quiet. The room was dominated by a huge conference table, and sunlight coming from a long bank of windows running beside the table briefly blinded me. I had the sense of stepping onto a brightly lit stage before I was ready.

Damon had organized the meeting, and he sat at the head of the table. On his right was his boss, John Sweeney, the legendary seventy-four-year-old president of the AFL-CIO. On Damon’s left was an empty chair, which Damon motioned me into.

I’d never met Mr. Sweeney before, and I was surprised by how old he looked. His voice was thready and hoarse, barely above a whisper, and his body was bent. But like a good host, he welcomed us all, and when he spoke, no one moved. Here was a man who had organized millions of workers. Thirteen years earlier, he had risen to the presidency in the first contested election in the union’s history. His message to the group that morning was short and clear: This financial crisis is historic, and our country’s response should be historic. We should make the changes we need to make to protect the American worker. Then Damon turned to me. “Tell them.”

So this was it. There would be a lot of topics on the agenda today, from regulation of derivatives to international capital standards, and I had one brief chance to make my case.

I started talking about the idea of a consumer agency. It was a simple concept, but that shouldn’t fool anyone; it was pretty bold just the same. I wanted our government to create an entirely new agency, one whose purpose would be to rein in the financial institutions that were taking advantage of families across the country. The agency would serve as an aggressive watchdog, with the power to oversee and regulate all consumer lending—credit cards, mortgages, student loans, payday lending, car loans. Its sole mission would be to look out for the interests of families.

Big banks had perfected the art of circumventing new laws designed to protect people. I pointed out that more than a dozen federal laws already addressed issues involving consumer credit, but the responsibility for enforcing these laws was spread out among seven different federal agencies—seven! Moreover, each of those agencies had some other first job, like making sure the banking system was stable or administering housing policy. Not a single one of those agencies had as its primary job protecting consumers from dangerous credit products. Not one.

And there was another ugly problem: Guess who picked the regulators who had oversight responsibility for the individual banks? Often it was
the banks themselves
. Two federal banking regulators competed for business, and the more banks they signed up, the bigger their budgets became. The results shouldn’t have surprised anyone: regulators often tried to outdo each other to be the friendliest, which shifted their role from watchdog to lapdog.

As if that weren’t bad enough, there was one more problem: The mishmash of agencies left giant holes in the regulatory fabric. In fact, a growing number of lenders were left out altogether. No federal agency was responsible for overseeing payday lenders, title lenders, or an increasing number of mortgage lenders. Those guys could do pretty much whatever they wanted. Worse, many of them were financed by the big banks.

So credit regulation was a tangled mess, and enforcement of the rules was spotty at best. We needed an agency—one agency—that would be responsible for writing new rules, for updating the rules as lenders changed their practices, and for enforcing the rules. With a new agency, every mortgage and credit card would be regulated the same—no more shopping around for lax regulators or figuring out how to avoid oversight altogether. The system would be a lot more efficient and a whole lot more effective.

I didn’t say so at the time, but I also thought that this agency could help us navigate a practical political problem. If the groups in this room lined up behind a hundred different ideas about how to provide financial protection for consumers, we’d get negotiated down to a dozen or so. And then those dozen would be like fence posts on the prairie—the giant banks could see them from a mile off and run right around them. But if we all rallied around a truly comprehensive idea—a long-term structural solution that would keep momentum behind reform over time—that might give us a fighting chance to create an effective counterweight to the big banks.

For many of the people in the room that day, the idea for the Consumer Financial Protection Bureau (as the agency would eventually be known) was new, and it would require a huge leap of faith. How could all these organizations, each with its own agenda and history, get behind a relatively unknown and untested idea, one that at the time had very little active political support?

People would find plenty of other reasons to be skeptical about the consumer agency. The banks would almost certainly hate it, and they would instruct their lobbyists to fight to the death to stop it. Even though the agency would streamline government and make it more efficient, the very idea of a new government agency would probably enrage the small-government advocates on the political right. Many in the media would try to rip the idea apart, and Fox News would have a field day.

And even if we won, what if the agency got a lousy director who failed to take on tough problems or was bad at spotting emerging threats? After all, other government agencies had been started with high hopes, only to sink in a bureaucratic tangle. We might fight an epic battle, somehow manage to get the agency launched, and then see it amount to little.

Still, I believed in this dream; American families desperately needed a consumer agency like this one. I knew that if the groups represented by the people in this room didn’t get behind the proposal, there was zero chance of getting it through Congress. I also knew that if our first conversation focused on all that was wrong or risky or unfamiliar, the idea would die that very morning. So this was the moment.