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Warren Presents Herself to Labor Activists as Fighting for Middle Class

By Joshua Miller, Roll Call Staff
Sept. 5, 2011, 3:52 p.m.

BOSTON — Harvard Law School professor Elizabeth Warren offered a preview of her likely Senate campaign stump speech Monday, presenting herself to hundreds of union officials, activists and local politicians at a Labor Day breakfast as a champion of the middle class.

Elizabeth Warren

“The middle class has been hacked at, chipped at and hammered for a generation,” Warren said to a packed ballroom at the Park Plaza hotel. “We can’t take it much longer.”

Her pitch to the crowd of union faithfuls was that her life had been and would be devoted to continuing to stand up “to powerful interests” in defense of the middle class.

Warren, who was in charge of creating the Consumer Financial Protection Bureau until August, told the crowd here at the Greater Boston Labor Council’s annual breakfast that she is frustrated by a Washington that “wasn’t working for us” and saw the America where children had a chance to do better than their parents slipping away.

The language is remarkably similar to what President Barack Obama used on the campaign trail during his presidential run.

“I’m not giving up without a fight,” Warren said, poised to officially enter the Democratic primary race for the nod to challenge Republican Sen. Scott Brown.

“I’m going to keep fighting for middle-class families, for working people. Whether I fight as an outsider or I fight from the floor of the Senate —” Warren said before her words were halted due to a raucous and lengthy standing ovation.

Finally, the applause died down, and Warren said, “This is a big fight — the biggest fight of our lifetimes — and we will throw everything we’ve got into it.

“We cannot afford to lose. We will not lose!” she said to the audience.

The speech, anchored in her early life, stressed her biography. She told activists that she grew up on the “ragged edge of the middle class.”

“I know the anxiety that comes with living one pink slip or one serious medical problem away from financial collapse,” Warren said. “I know it because I’ve lived it.”

Only making a glancing reference to her tenure at Harvard during the 20 minutes she spoke, Warren appeared to be working to dispel any narrative that her connection to the nation’s oldest and most prestigious university makes her an elitist. Warren is teaching a course on contract law Monday and Tuesday mornings from 10 a.m. to noon.

Discussing infrastructure investment, she also struck a few populist notes, noting the incongruity of General Electric avoiding paying any taxes while middle-class Americans are taxed on “every dollar.”

“Instead of subsidizing the past — those who have already made it — we need to invest in the future,” she said to applause.

The optics of the event made local unions’ likely choice of primary candidates clear. While declared Senate hopefuls Newton Mayor Setti Warren, CityYear co-founder Alan Khazei and activist Bob Massie attempted to work the periphery of the large ballroom, Warren — the keynote speaker of the event — sat on the stage next to Boston Mayor Tom Menino (D).

Menino and Warren chatted amicably on dais in the minutes before the event began, but he appeared to be a long way from endorsing Warren’s candidacy.

Menino told the Boston Globe last week he understands Brown’s appeal to voters. And as for Warren, it sounded like he still had his doubts.

“You know, the media can’t make you,” Menino told the Globe. “You have to be saleable. Do I know she can be saleable? I don’t know that.”

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EXCLUSIVE: JOHNSON RIPS GOP ON CFPB

From prepared remarks to be delivered this afternoon by Senate Banking Committee Chairman Tim Johnson (D-S.D.) at a hearing on the nomination of Richard Cordray to be the first director of the CFPB: “The purpose of today’s hearing should be to consider whether Mr. Cordray is qualified for [the] job. Instead, a vocal minority is playing games with the process and holding Mr. Cordray’s nomination hostage.

“This political gamesmanship is preventing Americans from receiving the consumer protections they deserve and putting community banks and credit unions at a competitive disadvantage to nonbank financial companies … The misleading claim of no CFPB accountability – drummed up by special interests and put forth by a vocal minority – should be exposed for what it is: an attempt to destroy the Bureau’s ability to do its job of protecting American consumers.”

CORDRAY: LAWSUITS NOT THE FOCUS – From Cordray’s prepared remarks: “I know from my own experience that lawsuits can be a very slow, wasteful, and needlessly acrimonious way to resolve a problem. The supervisory tool, in particular, offers the prospect of resolving compliance issues more quickly and effectively without resorting to litigation. … Enforcement, of course, will still have an important role.”

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CFPB NOMINEE FACES SENATE SCRUTINY

Richard Cordray, the former Ohio attorney general nominated by President Obama to head up the Consumer Financial Protection Bureau, will come under scrutiny today in a Senate Banking Committee hearing on his nomination. Republicans are not expected to seriously consider the appointment unless serious structural changes to the bureau opposed by Democrats are enacted, but more than just Cordray’s nomination is in jeopardy. Analysts are saying that with so much economic uncertainty and political partisanship, it is unclear whether Republicans and Democrats will be able to come to terms on other crucial financial nominees like leaders to serve on the board of the Federal Deposit Insurance Corp.

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CONSUMER CHOICE TO STRIKE MODERATE TONE

The Wall Street Journal’s Maya Jackson Randall and Victoria McGrane report on what the nominee to head the Consumer Financial Protection Bureau will say in testimony today: “The new Consumer Financial Protection Bureau will use many tools other than lawsuits to do its job, Richard Cordray, President Barack Obama’s pick to run the agency, plans to tell senators at his confirmation hearing Tuesday. ‘I know from my own experience that lawsuits can be a very slow, wasteful, and needlessly acrimonious way to resolve a problem,’ Mr. Cordray, Ohio’s former attorney general, says in his prepared statement, released Monday. … Mr. Cordray has been considered a leading contender for Ohio’s Democratic gubernatorial nomination in 2014, according to the Columbus Dispatch. Financial executives speculate he would use the director post as a stepping-stone in his political career, seeking to collect a cache of industry scalps to bolster his chances in his next campaign.”

UNMOVED: RICHARD SHELBY

The ranking member of the Banking Committee wants Cordray to know it’s nothing personal: ‘Opposition to or support of Mr. Cordray’s nomination will become relevant as soon as the president agrees to make the structural changes we’ve requested,” his spokesman told the Journal.

Article 5

New ‘Abusive’ Standard Stokes Fear from Bankers

By Kate Davidson

SEP 5, 2011 7:57pm EDT

WASHINGTON — Of the hundreds of thousands of words in the Dodd-Frank Act, none has caused as much consternation as the seven-letter one tucked into Title 10: abusive.

That’s the new standard under which the Consumer Financial Protection Bureau can prohibit certain acts and practices. But what does it mean, and how is it different from practices that are unfair and deceptive, which are already banned? More than a year after the law’s passage, bank lawyers and bureau officials still can’t say for sure.

“I’ve always said it’s like pornography: I’ll know it when I see it,” said Jeffrey Taft, a partner with Mayer Brown LLP. “It’s hard for you to define it. I think it will be virtually impossible for the bureau to really come out with concrete guidelines.”

Bankers and lawyers can point to a string of court cases and regulations that help define “unfair and deceptive” acts. But they argue Congress threw the door wide open by adding “abusive” into the mix, fueling suspicion that the CFPB can use the term to ban any product or practice it wants.

For the past year, lawyers have dug through old regulations, reviewed decades-old case law and parsed speeches from bureau officials for clues about how the bureau might shape the new standard.

The law itself provides some guidelines.

Under Dodd-Frank, the bureau cannot declare an act or practice abusive unless it: “materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or takes unreasonable advantage of a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.”

Since Congress specifically defined the term, CFPB officials recognize that the authority must be carefully applied, according to a person familiar with the bureau’s thinking. Acts or practices have to meet that legal standard in order to be considered abusive, and claims have to be backed up by provable facts.

For right now, the CFPB cannot even apply the new standard. Without a Senate-confirmed director in place, the CFPB is free to enforce laws already on the books, including cracking down on unfair and deceptive acts, but cannot implement new authorities, such as restricting abusive practices.

Still, even when they have the new power, CFPB officials have publicly signaled they do not intend to use it to ban a slew of products. Elizabeth Warren, who helped launch the bureau this year, told a House panel in July that she didn’t know of a single product that should be banned at this time.

“We have made all of our priorities clear, and we have no intention of banning a product,” Warren testified before the House Oversight committee.

But that gives little comfort to the legion of bank lawyers trying to advise their clients on how to comply with the new law — particularly, how to evaluate whether new products might some day be considered abusive.

Suzanne Garwood, a lawyer with Venable LLP, said her firm is looking to the Federal Trade Commission for guidance.

Peggy Twohig, the bureau’s assistant director for nonbank supervision, previously served as the associate director of the FTC’s division of financial practices, and officials have said that the agency’s enforcement processes will be based largely on the FTC’s model.

“Our perspective is that since the CFPB has a lot of its DNA coming from the FTC, that we’ve looked to basically what the FTC has done to see what they consider to be abusive,” Garwood said.

One of the most telling examples is the FTC’s telemarketing sales rule, which was also related to the federal Do-Not-Call law. The agency was targeting a pattern of behavior that was so egregious in ignoring people’s right to privacy — based on the types of calls and the time calls were made — that it was abusive, Garwood said.

“The behavior that people sort of know is bad but they do it anyway,” she said. “I think that the bureau will take this theory that the FTC had been sort of percolating for years and turn that into a more concrete standard.”

That would ultimately boil down to something that materially interferes with the ability of a consumer to understand the terms of the product — “materially” being the key word, Garwood said.

There is a fear among bankers, however, that the bureau will say that certain products are inherently abusive, she added.

“I’m not sure that the CFPB is going to go there, because I don’t think they want to cut off credit, but I think that there might be a concern that they could be overreaching.”

In looking at old case law regarding consumer cases at the state and local level, Taft said he has come across another, similar word: unconscionable.

Certain practices — not necessarily consumer credit cases — were found to be unconscionable by courts in the mid-70s. A number of states adopted similar laws in the 60s and 70s establishing a uniform credit code, which made mention of certain unconscionable practices in which a seller knowingly took advantage of the consumer’s inability to protect his interests “by reason of physical or mental infirmity, ignorance, illiteracy, inability to understand the language of the agreement,” or similar factors.

While that criteria would be unlikely to appear in regulations or laws today, Taft said, “It’s the same kind of logic.”

“They’re looking to protect a certain group of consumers who might not be able to fend for themselves in today’s marketplace,” he said.

Other observers said the provision seems to open the door for a so-called suitability requirement.

In other words, when banks are designing or selling a product, banks would first have to determine whether a product is suitable to a consumer, whether they understand it and whether the bank ought to provide it to them.

“It definitely creates a much higher threshold in terms of duty of care, at least on the face of the statute, than is imposed on banks and other financial institutions with respect to financial products,” said Kevin Petrasic, a partner with Paul, Hastings, Janofsky & Walker LLP.

L. Richard Fischer, a partner with the Morrison & Foerster law firm, said he has advised clients to look carefully at public comments by CFPB officials. Warren, for instance, has indicated that products should be appropriate for the individual consumer, and has talked about the responsibility that financial institutions, or sellers of financial products, have to consumers.

Consumers “go to a mortgage broker and reasonably expect that every broker puts the customer’s interests first,” Warren said at the Independent Community Bankers of America convention in San Diego in March.

Developing consumer-specific products and services could preclude the national marketing of those products, making them more expensive to deliver, Fischer said.

It could also raise the potential for violations of fair lending laws if banks are limiting certain categories of consumers to particular products, observers said.

“It creates a knife edge,” said Jo Ann Barefoot, the co-chairman of Treliant Risk Advisors. “What happens if you decide that you think that certain loans are unsuitable for proportionately more minority borrowers, or more women or more elderly, then you could be charged with not being liberal enough in your lending.”

Barefoot said the abusive standard seems to be a backdoor way of inserting a suitability requirement, which was initially proposed, but removed from the bill’s final language.

Although the statute doesn’t make reference to the way that banks target consumers in its “abusive” guidelines, Barefoot does when speaking with clients.

“One of the things that people need to think about is what is the target customer for the product, and if the product is less desirable than your mainstream product,” such as secured credit cards, debt cancellation products or reverse mortgages. “If it’s a vulnerable population, then the smart risk management thing for the industry is to give more care to being sure people understand it, rather than less or even equal.”

Despite the guidelines in Dodd-Frank, observers said the bureau still has considerable leeway in crafting the rule.

Michael Benoit, a partner with Hudson Cook LLP in Washington, said one of the biggest problems with the provision is that Congress did a poor job of distinguishing “abusive” from “unfair” and “deceptive.”

Banks are familiar with the latter terms, and know how to avoid offering products or services that fall into that realm. The word “abusive,” however, had cropped up in only a handful of previous regulation, and was defined for the first time in Dodd-Frank.

The guidance raises more questions than answers, Benoit said.

What would be material interference? What would take unreasonable advantage of consumers? What do you have to do to ensure that a consumer is not relying on you to act in their best interests? Where do you draw the line between taking reasonable advantage of a consumer, and taking unreasonable advantage?

Although the bureau has indicated it plans to address these questions primarily through supervision and enforcement action, rather than through rulewriting, Benoit said the industry would rather see rules.

“You may not like them at the end of the day, but they create some certainty,” he said. “You know how to design your business practices, as opposed to, ‘This may be ok, it may not be ok, and we may end up spending millions of dollars in litigation over something that has been fairly standard in the industry for 100 years.’”

Banks can also look for guidance from recent enforcement actions involving unfair or deceptive acts, many of which appear to be influenced by the new abusive standard, Barefoot said.

“When you talk with regulators, they seem to be subjectively applying this general … abusive standard, as well,” she said.

JPMorgan Chase Bank, Meta Financial Group, Woodforest National Bank, and Monterey County Bank are among a handful of banks that have been forced to pay monetary penalties this year for violations related to unfair or deceptive practices.

Many lawyers said they advise their clients to use the good, old-fashioned smell test: if a product doesn’t seem right, or if you wouldn’t want your child or elderly parent to use it, you need to take a closer look at it.

“One could argue that … financial institutions with strong or successful marketing plans always look out for the best interests of consumers, because those are the products that are going to be the most successful over time, those that are good for consumers,” Fischer said. “If you develop those types of products, price them appropriately, you’re going to do very well.”