Research support was provided by The Investigative Fund at The Nation Institute.   On May 24 Elizabeth Warren was back on Capitol Hill testifying before Congress, defending her brainchild, the new Consumer Financial Protection Bureau, a key element of the 2010 Dodd-Frank financial reform legislation. Warren is a major celebrity in Washington, an Oklahoma-born Harvard law professor who’s done more than anyone since Ralph Nader to put consumer protection on the national agenda. The room was packed with reporters, consumer advocates and lobbyists. GOP Representative Patrick McHenry, who chaired the House Committee on Oversight and Government Reform hearing, could barely hide his disgust for the CFPB and Warren, accusing her of lying to Congress and frequently interrupting her answers. “In a few short weeks,” McHenry warned ominously, “the bureau will become a powerful instrument in the hands of progressive regulators.”

In part because it’s one of the strongest aspects of Dodd-Frank, the CFPB has become a favorite target of Republican attacks, right up there with George Soros, ACORN and Planned Parenthood. It’s been called “one of the greatest assaults on economic liberty in my lifetime” (Representative Jeb Hensarling) and “the most powerful agency ever created” (Representative Spencer Bachus). The Wall Street Journal opinion page denounced Warren and the bureau three times in one week in March. And the bureau hasn’t even officially launched!

On May 13 the House Financial Services Committee passed three bills designed to weaken the CFPB, which goes live on July 21. One was sponsored by freshman Representative Sean Duffy, the telegenic former star of The Real World: Boston. When he entered Congress, Duffy admitted he “wasn’t very familiar” with “banking issues, housing issues, insurance issues. These are specific issues that I didn’t deal with in my entire life.” Yet within a few months he found himself denouncing the CFPB as a “rogue agency” with an “authoritarian structure” and introducing legislation to give existing banking regulators greater authority to override the bureau’s new rules. Other bills passed by the committee sought to change the structure of the bureau from a single director to a bipartisan commission, making it harder to act quickly and decisively, and prevent the bureau from assuming power until the Senate confirms a director. In a rather stunning bit of hostage taking, forty-four Senate Republicans recently announced they would not approve any nominee for the CFPB unless the GOP proposals were implemented. (Warren and CFPB officials declined interview requests.)

At one May hearing Duffy claimed his bill would protect small bankers and credit unions in his district. “I come from central and northern Wisconsin,” he said. “This is not Wall Street, I promise you.” Yet the legislation has endeared him to the most powerful financial interests on Capitol Hill and K Street’s lobbying corridor. In recent months groups opposed to the bureau, such as the American Bankers Association (ABA), the American Financial Services Association (AFSA), the Credit Union National Association (CUNA), the Independent Community Bankers of America (ICBA), the Mortgage Bankers Association (MBA) and the National Association of Federal Credit Unions (NAFCU), have donated thousands to Duffy’s re-election campaign. “Why is Sean Duffy sponsoring this legislation?” asks Ed Mierzwinski, director of the consumer program at USPIRG. “How many big banks are in Wausau, Wisconsin? This is all about money.”

The three chief sponsors of the CFPB bills—Duffy, Bachus and Shelley Moore Capito—received a total of $1.4 million from the finance, real estate and insurance sector during the 2010 election. Now they’re returning the favor. The GOP Congressional assault on the CFPB is a clever way for the caucus to appeal to the Tea Party’s antigovernment fervor while attracting prodigious campaign contributions from Wall Street and forcing the Obama administration to play defense on yet another critical piece of legislation. ”This is a preview of coming attractions,” says Congressman Barney Frank, the ranking Democrat on the Finance Committee, “and the audience is the business community and their donors.”

The idea for the bureau emerged from a 2007 essay by Warren in Democracy. “If it’s good enough for microwaves, it’s good enough for mortgages,” she wrote. The horror stories of the financial crisis—ballooning subprime mortgages, payday loans with 400 percent interest rates, inescapable credit card debt—added urgency to her proposal for a new consumer agency modeled on the Consumer Product Safety Commission.

During last year’s financial reform debate, Congressional Republicans, along with some bank-friendly Democrats, launched a furious campaign to defeat the bureau. The US Chamber of Commerce led a $2 million industrywide ad campaign opposing the CFPB, using a butcher as its unlikely public face. “Virtually every business that extends credit to American consumers would be affected—even the local butcher,” one ad claimed. “I don’t know how many of your butchers are offering financial services,” quipped President Obama after meeting victims of lending abuses. The financial services firms that will fall under CFPB purview—big and small banks, payday lenders, mortgage brokers—did all they could to weaken it and create special exemptions for their industries, yet the consumer bureau improbably became “one of the central aspects of financial reform,” according to Obama, and the most tangible victory for consumers. Under pressure from consumer advocates, the administration named Warren a special adviser to Treasury Secretary Tim Geithner, her onetime foe, and the bureau’s interim director. Now Congressional Republicans and their industry backers are mounting a last-ditch effort to constrain the CFPB before its launch. Warren, according to associates, views this as an attempt to “pull the arms and legs off of the agency.”

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The CFPB will inherit consumer protection responsibilities from seven agencies and assume powers to police “unfair, deceptive, or abusive” financial services products. It will write new rules and enforce existing ones for banks with assets of $10 billion or more and the tens of thousands of companies in the shadow banking industry—payday lenders, student loan companies, mortgage brokers, debt collectors, pawn shops. Smaller banks will be subject to CFPB rules, but other regulators like the FDIC will enforce them. According to Americans for Financial Reform (AFR), a coalition of consumer groups, “The CFPB has authority to write rules affecting mortgage down payments and disclosures, loan modifications, credit card rates and fees, bank overdraft programs, credit score usage, and eligibility for student loans, credit cards, pre-paid cards and more….[and] to impose fines on companies, require restitution (repayment) to aggrieved consumers, rescind consumer contracts and/or file lawsuits against firms that violate its rules.”

The bureau’s mission is mostly about making it easier for consumers to understand the often indecipherable fine print that financial firms throw at them. To do that, Warren wants to strike a balance between government intervention and personal responsibility. “If there had been just a few basic rules and a cop on the beat to enforce them, we could have avoided or minimized the greatest economic catastrophe since the Great Depression,” she wrote to Congress. “In the future, the new consumer bureau will be that cop.” It even has a shield as its logo.

Under an unusual arrangement, the bureau will be housed in the Federal Reserve but have independent authority. Despite claims about its unlimited power, the CFPB is the only banking regulator whose budget will be capped (for now, at 12 percent of the total Fed budget) and whose rules can be overturned (by a two-thirds vote from the Financial Stability Oversight Council, a new group of top federal economic policy-makers). Warren calls the CFPB the “most constrained of all federal agencies.” Nonetheless, its creation was a historic feat. “The last time this country made any significant pro-consumer advances was in the ’70s,” Warren said, referring to Nader’s heyday. “The resulting bureau has the independence and the authority it needs to get the job done,” concludes AFR.

Warren and the CFPB are up against what she estimates to be a $3 trillion consumer financial services industry, which views the bureau as a potentially grave threat to its prosperity. According to the Center for Responsive Politics, 156 groups—the vast majority representing corporate interests—lobbied the government about the CFPB in the second half of 2010 and the first quarter of 2011. The list ranged from JPMorgan Chase to McDonald’s. For some in the business community, the CFPB represents an annoying “nuisance,” says Scott Talbot, chief lobbyist for the Financial Services Roundtable, while for others it’s “holy jihad.”

Representatives from the Chamber, ABA, ICBA, Consumer Bankers Association (CBA), CUNA and NAFCU testified in favor of the House bills, which gives a pretty good sense of where Republicans are getting their legislative direction. “I certainly think they’re talking to the Chamber,” says Mark Calabria, a former Republican aide on the Senate Banking Committee who is director of financial regulation studies at the Cato Institute. “I certainly think they’re talking to the bankers.” Different sectors in the finance community feuded over Dodd-Frank, but now they’re united in efforts to weaken the bureau.

The Chamber has an entire division devoted to fighting Dodd-Frank, the Center for Capital Markets Competitiveness, and a huge budget. In the first quarter of this year, the Chamber spent $17 million on federal lobbying, far more than any other group, with a dozen lobbyists focused on the CFPB alone. In 2009 the Chamber was anything but subtle in its attacks on the bureau. “We’re fundamentally trying to kill this,” said senior director Ryan McKee. It called the CFPB an “unprecedented expansion of government intervention” and a “new tax” on small businesses. But after losing round one, the Chamber and other opponents decided to work behind closed doors. “They’re much more stealth than they were before,” says Mierzwinski of USPIRG. Who needs a public campaign, after all, when you have the House GOP as a new best friend?

Alabama Republican Spencer Bachus, chair of the House Financial Services Committee, aptly described the mindset of the incoming GOP majority in December: “In Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks.” Bachus led the House GOP’s effort to raise Wall Street money in 2010. In a meeting with 100 financial services lobbyists two months before the election, he castigated banks for giving more money to Democrats than to Republicans, according to Politico. The strategy worked—of the $22 million commercial banks gave to political parties and Congressional candidates in the 2010 cycle, 62 percent went to Republicans, compared with 52 percent in the 2008 cycle. Bachus was more reliant on donations from the finance sector during the 2010 cycle than any other member of Congress. In the first quarter of this year, 97 percent of his donations came from out of state, including $18,650 in one day from pawnbrokers across the country.

In addition to introducing the aforementioned legislation, Congressional Republicans tried unsuccessfully to cut the CFPB’s budget earlier this year and succeeded in mandating two audits of the bureau per year. “It’s a death-of-a-thousand-cuts strategy,” says Mierzwinski. “They’re throwing spaghetti at the wall to see if anything will stick,” adds Lisa Donner of AFR. The hope is to intimidate the Obama administration and/or lay the groundwork for a Dodd-Frank repeal if Obama loses in 2012. “If the House Republicans had their way, they would just repeal the CFPB!” said Hazen Marshall, a former Republican staff director for the Senate Budget Committee, earlier this year.

Before Dodd-Frank, the banks had rarely lost a fight on Capitol Hill. They don’t want to lose another one, which is why they’re trying to defang every aspect of the law. The twenty-six largest financial firms spent more money on lobbying in this quarter than during the peak of the reform fight last year. The ABA alone dropped $2.2 million on lobbying and has eleven lobbyists working on the CFPB, led by Wayne Abernathy, a former aide to Senate Banking chair Phil Gramm, who co-sponsored repeal of the Glass-Steagall Act, which helped spawn the economic crisis. The ICBA has spent $1 million on lobbying in 2011. The banking sector clashed over Dodd-Frank, with the ICBA supporting parts of the bill after winning an exemption from CFPB enforcement, while the ABA remained bitterly opposed. Yet both have backed the House GOP bills. The ABA claims Dodd-Frank will drive 1,000 small banks out of business.

To blunt the potential impact of CFPB, the biggest banks have leaned on their existing regulator, the industry-friendly Office of the Comptroller of the Currency, for support. “For years, the OCC has had the power and the responsibility to protect both banks and consumers, and it has consistently thrown the consumer under the bus,” Warren told The Nation in 2009. The OCC used its authority more than twenty times at the height of the bubble to pre-empt states and cities that tried to go after predatory subprime lending. As part of the CFPB’s creation, the banks managed to get an amendment that limited the ability of state regulators to sue national banks at the state level. The OCC recently announced a settlement with the country’s largest banks, which have admitted to massive foreclosure fraud, that is viewed as far more lenient than a deal being pursued by state attorneys general. (Republicans have accused Warren of masterminding the state AG deal, which Geoff Greenwood, spokesman for Iowa Attorney General Tom Miller, calls “simply not true.”) The CFPB was established to mitigate this kind of cushy arrangement, which allowed banks to prosper while consumers suffered.

The banks have also found a strange bedfellow in the 
$42 billion payday lending industry, even though banks support the CFPB’s efforts to regulate that industry at the federal level for the first time. “The payday lenders would be the top foe of the CFPB,” says Mike Calhoun, president of the Center for Responsible Lending. “They recognize that CFPB has the power to put them out of business or make them fundamentally change their business model.” During the Dodd-Frank debate, payday lobbyists defeated amendments that would have capped payday interest rates and limited the number of loans one person can take out. “We have lobbyists, and they made their point,” industry spokesman Steven Schlein told The Huffington Post.

The industry continues to flex its lobby muscle to evade regulation. In 2002 the Community Financial Services Association, a trade group for payday lenders, hired top lobbyist Tim Rupli, a former aide to Tom DeLay “known for his ability to kill legislation and his prodigious fundraising power,” according to The Hill (he’s also on the payroll of ICBA). Another association for the payday industry, the Financial Service Centers of America, recently moved its headquarters from New Jersey to Washington and retained the services of ex-Senator Don Nickles, former GOP chair of the Budget Committee, as part of what FiSCA chair Joe Coleman calls its “greatly expanded lobbying teams.” He says the industry “must focus like a laser beam” on the CFPB. Everyone from Tea Party darling Dick Armey to civil rights groups like the National Urban League has worked with the industry. Former Democratic Representative Larry LaRocco, whose firm Brownstein Hyatt Farber Schreck represents the payday titan ACE Cash Express, is launching a website to monitor the bureau. “It’s going to be a huge bureau with many tentacles,” LaRocco predicts. “It’s going to be like an octopus shaking hands with itself.”

In response to these lobbying efforts, the CFPB is keeping its post-July plans close to the vest and focusing on low-hanging fruit, such as clearer mortgage disclosure forms, that can draw consensus among consumer advocates and industry groups. Everyone agrees the real fights are yet to come, once the CFPB goes live and begins tackling difficult issues like policing scams in the credit and mortgage markets, and cracking down on overdraft lending fees and shady prepaid credit cards. “There’s bound to be a fight about every single rule-making, supervision and enforcement action,” says Donner of AFR. That’s when the CFPB’s clout within the Obama administration will really be tested. “The dirty little secret in our community is that once in a while we succeed in passing laws, but keeping up with the trench warfare of implementation is enormously expensive, and we almost never have the resources to do it right,” says Travis Plunkett, legislative director of the Consumer Federation of America. One consumer advocate described the current stage as the honeymoon period between the CFPB and industry. If this is the honeymoon, Lord knows what the marriage will look like.

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Since becoming the CFPB’s interim director in September, Warren has begun a well-publicized “charm offensive,” meeting regularly with leaders of the biggest Wall Street banks and the Chamber. She’s met with community bankers from all fifty states and won praise from JPMorgan Chase CEO Jamie Dimon and local bankers alike. The president of the ABA, former Oklahoma Governor Frank Keating, even said in May he’d support her nomination to lead the bureau, before quickly walking back the endorsement under pressure from fellow bankers and Congressional Republicans. “We’ve embraced the CFPB because we want to make sure they get it right on behalf of the banking industry and the consumer,” says CBA president Richard Hunt. “It’s reality. Deal with it.” Warren’s open-door policy has helped win over skeptics. “Right now she’s trying to get out and just lower everyone’s anxiety,” says AFSA lobbyist Bill Himpler. At the very least, she’s forced some companies that are privately lobbying to weaken the CFPB to say nice things about it. “I reject the allegation that we’re trying to cripple the bureau,” says Talbot, who in ‘09 said his goal would be to “kill” it. “Our goal is to make it as effective as possible.” American Banker named Warren its Innovator of the Year in 2010.

Warren has been something of an outcast even within the Obama administration, dating back to her time as chair of the TARP Congressional Oversight Panel, when her withering questioning of Geithner achieved cult status among econ junkies on YouTube. “I’m a thorn in this administration’s side as much as in the last administration’s,” she said in 2010. Her populist politics scared the likes of Geithner, Larry Summers and Rahm Emanuel, and she was only reluctantly appointed interim director after an intense public campaign on her behalf. The administration has reportedly offered the CFPB post to former Delaware Senator Ted Kaufman, former Michigan Governor Jennifer Granholm and three state AGs, all of whom have turned it down. After all, Warren is uniquely suited to lead the agency she created.

For months the administration tried to find a director who could please Warren and Richard Shelby, ranking Republican on the Senate Banking Committee. But now that Shelby has threatened to block any nominee without changes to the bureau, the Obama team may be more inclined to install Warren via a recess appointment, which would last until the end of 2012, even if she complicates its outreach to the business community. “I was troubled the administration was going so slowly, but now Republicans have solved that problem with their announcement that they wouldn’t confirm anybody,” says Barney Frank, who calls Warren the front-runner. Sixty-five House Democrats have circulated a letter urging Obama to recess-appoint Warren, while a pro-Warren petition by the Progressive Change Campaign Committee generated 175,000 signatures in two days. (Harry Reid has urged her instead to run for the Senate in Massachusetts against Scott Brown.)

Shelby has said that a Warren recess appointment would be “dangerous to the American economy,” and the White House seems reluctant to pick another fight with him. The cantankerous Alabama senator, who last year put a hold on seventy administration nominees while fighting for a defense contract in his home state, recently scuttled well-regarded nominees for the Federal Housing Finance Agency and the Fed Board of Governors (the latter, Peter Diamond, boasts a Nobel Prize in economics). ABA lobbyist Wayne Abernathy predicts that some industry groups might challenge the legality of a Warren recess appointment. More broadly, five of the ten top federal financial regulator posts are empty or occupied by temporary caretakers, which suits opponents of reform just fine. If Obama doesn’t step in soon, the entire Dodd-Frank legislation may unravel from inertia.

Warren has seen this play before. In 1994 Congress established the National Bankruptcy Review Commission. Warren was its chief adviser. Banks hated the idea and urged Congress to ignore its findings. In 2005 Congress and the Bush administration enacted a bankruptcy bill, favored by the credit card companies, that made it harder for people to file for bankruptcy. Warren is determined not to let something like that happen again. “If it’s going to be weak,” she said of the new consumer bureau, “we’d just as soon not have it at all.”