WASHINGTON — The pieces are quietly falling into place to create a Consumer Financial Protection Bureau, designed to prevent the sorts of renegade lending practices that crippled the housing market and nearly brought down the U.S. financial system.
The idea for the bureau was the brainchild of Harvard University law professor Elizabeth Warren, who was named a special adviser to Treasury Secretary Timothy Geithner last year to help build the new agency from scratch.
The agency was created as part of last year's Dodd-Frank act, the broadest revamp of financial regulation since the Great Depression. The new bureau, which consolidates powers that were spread among several bank and consumer regulators, must be up and running by July.
Warren has shown herself to be a shrewd tactician, bringing aboard big names and neutralizing opposition to the panel from Republicans who'd vowed to defund and defang it.
One example is the appointment Jan. 6 of Holly Petraeus, the wife of Gen. David Petraeus, who's overseeing the U.S.-led war in Afghanistan, to head an office at the bureau that protects soldiers from predatory lending.
The message in hiring her to head the Office of Servicemember Affairs was clear: Oppose the agency and you're resisting efforts to rein in abusive payday lending and other ways that unscrupulous lenders prey on the nation's men and women in uniform.
Similarly, to neutralize concerns by the business community, a high-ranking official from the Federal Reserve's consumer affairs division, Leonard Chanin, was brought in to head rule-writing efforts. That means it's highly unlikely that the new agency will trample on providers of credit with little regard to their concerns.
"We're closing in on six months before the agency must fling its doors open to the public ... and so far they're getting high marks from us in terms of preparation," said Travis Plunkett, who heads lobbying on financial issues for the Consumer Federation of America. "From what I can tell, they've laid the groundwork for bringing on a lot of people over a short period of time."
The agency now has more than 134 employees, still a fraction of the 700 to 1,000 it must have in place when it opens. Employees are working out of cramped office space, awaiting word on where a permanent headquarters might be.
Warren has been traveling the country, meeting with trade groups and consumer advocates to get their views on how the agency might work best. The dialogue and outreach have helped quiet opposition, at least for now.
"She is looking at leveling the playing field by focusing a good bit of attention on unregulated consumer-finance providers," said Michael Calhoun, the president of the Center for Responsible Lending, an advocacy group in Durham, N.C. "I think everyone has been impressed with the quality of people she's been able to attract."
Some of those people include former Ohio Attorney General Richard Cordray, a moderate Democrat, to head up enforcement efforts. The agency also is expected soon to announce the hiring of a Fortune 500 company's general counsel to be its chief lawyer.
"The first thing the agency needs is a vision," Warren said in a wide-ranging interview. "There are a lot of people who voted for this agency, and probably who voted against it, who assumed it would come in and just start issuing regulations. ... That could have been an approach for the agency. But what I've tried to talk with people about is the goal of regulation. The real point, as I see it, is to get the market to work for consumers."
During an aggressive lobbying campaign against the bureau and her, the U.S. Chamber of Commerce alleged that the new entity would cause credit to shrink, especially to smaller borrowers. Warren says that effective regulation that gives consumers information on which they can make informed decisions doesn't necessarily restrict credit.
"If that happens, consumers can make better decisions for themselves and competition kicks in," she said. "I think that the vision of this agency is consistent with many of the basic principles of the Chamber of Commerce. It's about making markets work."
Having lost the battle last year, the influential chamber no longer is trying to kill the agency.
"We're not looking to re-litigate the legislation. The consumer bureau was adopted by Congress; it's being stood up. But we have a number of questions about how this is going to work," said David Hirschmann, the head of the chamber's Center for Capital Markets Competitiveness.
Hirschmann wants more clarity on whom the new agency will regulate. Will it comprise just lenders or include companies that extend credit to customers, say to buy furniture or mattresses? The chamber also wants clarity on what will be left to the Federal Trade Commission, which handled many of the consumer credit complaints in what consumer advocates call ineffective regulation.
"What business hates the most is being told by one regulator to go left and another to go right. What you don't want is an environment in which you leave the house and every cop gets to set what the speed limit is," Hirschmann said.
Many of the problems in the housing market came from playing regulators off each other, a practice sometimes called forum shopping. Big and now-disgraced and defunct mortgage lenders Ameriquest and Countrywide changed their regulatory status in order to move to a regulator that was less likely to question their poor-quality mortgage lending, particularly in California. And unscrupulous mortgage brokers that weren't federally regulated originated many ill-suited mortgages.
That's why Warren and her colleagues are approaching regulation by product rather than by type of lender. These five basic areas involve mortgage lending, revolving debt (credit cards, installment loans), payments, credit reporting and debt collection.
One area that's already getting attention is title loans, in which a borrower is lent money but the lender keeps a car title as collateral and often offers predatory interest rates. This sort of lending happens often on the outskirts of U.S. military bases. Car loans financed at dealerships, which account for about 80 percent of auto financing, will remain under the watch of the FTC.
The FTC's chairman, Jon Leibowitz, acknowledged a certain amount of envy for the new agency.
It "will be an untested entity with enormous power. The bureau will have a substantial budget almost entirely out of the control of Congress, receiving 10 percent of the Federal Reserve's budget outside the appropriation process, which gives every other government agency — including mine — budget envy," he said in a speech Jan. 20 to the U.S. Chamber of Commerce.
Hires to date suggest that Warren is playing a certain amount of defense, given that new Republican leaders on the House Financial Services Committee have promised to try to gut the agency. The new chairman, Alabama Rep. Spencer Bachus, didn't respond to requests for an interview.
Republicans are unhappy that the agency has a single leader whom the Senate must approve, while many other government agencies have leadership boards whose members are confirmed individually. Some even have called recently for new veto powers for other regulators.
"News flash: They already do" have these powers, Plunkett said, noting that a simple majority of bank regulators can veto any bureau rule that they think will affect the safety and soundness of lenders. "It's the only example in federal law with agencies that have power over another."
Hirschmann said the chamber still feared that the agency would change the federal rule-making process in ways that gave lenders less input or certainty. That's a concern on which Warren pushes back.
"The new agency is subject to the same administrative procedure laws as every other rule-making agency, so there will be the same checks and balances in place," Warren said. She added that any change is to give more input to smaller players such as community banks, which have complained "that by the time it gets to the formal comment period, it seems to them the decisions have already been made."
Warren, who many lawmakers think will be made the chief of the agency in a recess appointment by President Barack Obama, says business shouldn't fear her.
"It is important that our work not undermine the strength and the diversity of the industry. The American consumer is best served by a strong and diversified financial services industry," she said. "Our regulation should support that."
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