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The Bank Lobby Smear Against Elizabeth Warren

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Ezra Klein needs to stop repeating bank lobby smears against Elizabeth Warren. He's sympathetic to the charge that Warren is "too dismissive of the benefits of financial innovation," because, well, I don't know why. It's a baseless allegation being made by Warren's opponents without any evidence whatsoever. It relies on the stock bank lobby response to every effort to strengthen consumer protection rules in the past 30 years. It should be irrelevant to a conversation about reining in predatory lending in an era of rampant abuse.

It's significant that this weak "innovation" argument is the best that Warren's adversaries can muster to protest her potential nomination to head the Consumer Financial Protection Bureau. Yesterday, Klein reiterated the line, which was presented the previous day by his fellow Post-blogger Neil Irwin. It goes like this: Predatory consumer abuses are bad, but if regulators go too far with their regulations, they can end up unnecessarily restricting credit to poor people. Maybe Elizabeth Warren will go too far,  the argument goes, because she's not attuned to how financial innovations can help poor people by giving them access to credit.

Neither Post blogger cites any evidence that Warren has ever backed a destructively overzealous consumer protection rule—they just note that some people say that Elizabeth Warren doesn't like financial innovation enough (and then they don't say who says it).

This is a theoretical objection that the bank lobby trucks out every time anybody tries to curb an obvious abuse. Hypothetically, it can always be the case that a bad rule can unnecessarily restrict consumer credit, but the bank lobby always deploys this argument in response to any regulation to distract people from the specifics of the rule in question. That they're doing that now against Warren suggests they have no case, and they know it. Irwin, in fact, actually acknowledged that the objection was unfounded:

Of course, the same question needs to be asked about the other reported candidates for the job . . . but Warren is the one who is attracting 100,000-plus endorsements through an online petition.

In other words, Irwin is saying that while there's no evidence that Warren is insufficiently attuned to credit access and financial innovation, that could still in fact be the case, just as it could be the case for literally any appointee to the CFPB post. Arguments don't come much weaker than that.

Has Warren ever said we need to roll back the 30-year mortgage or ban credit cards? No. Look at her actual record as a reformer—she was a key figure in getting new credit card regulations through Congress last year—were those "too dismissive of the benefits of financial innovation?" Anybody want to bring back double-cycle billing? Retroactive interest rate increases? Jacking up rates because you returned a library book late? That's what Warren has fought against and won. They were transparent abuses, they made a ton of money for banks, and consequently, banks do not like her. Since they can't come out and say that they want to keep their predatory profits, bankers make up this theoretical nonsense about Warren opposing financial innovation.

But Klein still wants Warren to explain "the test she would apply to decide whether consumer financial instruments were legitimate." This is silly. It implies that the CFPB director's job will mostly be about banning consumer financial products. The new agency probably isn't going to write tons of radical new consumer protection rules, much less go around banning loan types-- it just has a different incentive structure than the Fed and the OCC which will make its enforcement efforts more effective.

There has been a policy consensus on predatory lending standards for decades, and it basically amounts to ability to repay and adequate disclosure. Nobody really disputes these standards in principle, regulators have just decided not to enforce them for a long time. Take a look at the Fed's 2001 guidance on identifying predatory subprime lending. It's great, and with a few minor modifications, can apply to just about any kind of credit you can think of:

Making unaffordable loans based on the assets of the borrower rather than on the borrower's ability to repay an obligation;

Inducing a borrower to refinance a loan repeatedly in order to charge high points and fees each time the loan is refinanced ('loan flipping'); or

Engaging in fraud or deception to conceal the true nature of the loan obligation, or ancillary products, from an unsuspecting or unsophisticated borrower.

Warren's opponents aren't worried that she'll get the standard wrong, they're worried that she'll actually enforce the standard and take away predatory profits.

Banks scored $38 billion in overdraft revenue in 2009, while the industry's total combined profit was just $12.5 billion. The subprime crisis actually happened. The entire country is still drowning in foreclosures, and unrestrained predatory lending helped crash the entire global economy. Predation is a mainstream business for major banks, and has been for decades. We've spent the last 30 years allowing outrageous abuses on a massive scale in the name of financial innovation. Banks are still the most powerful lobby group in Washington. The CFPB won't even have sole authority to write consumer protection rules-- other bank regulators will have veto power. Without a strong, committed reformer like Warren, the CFPB isn't going to make a lot of headway. Worrying about Warren because she might go too far, without any evidence that she will do so, simply does not make sense.

I don't know about Irwin, but so far as I can tell, Klein supports Warren to head the CFPB. He's just saying that an objection voiced by people who oppose her is not outrageous. The trouble is, the objection is, in fact, outrageous.