In an effort to get the word out to students about the newly-formed Consumer Financial Protection Bureau, Elizabeth Warren, assistant to President Barack Obama and special advisor to the secretary of the treasury on the CFPB, discussed how the bureau will effect students in a conference call with student journalists last night.
The CFPB was created as part of the Consumer Protection Act of 2010, which Obama signed into law on July 21. The bureau aims to improve the clarity of financial contracts and protect consumers from hidden charges. Supporters of the new bureau say it will provide consumers with much needed protections that weren’t available to them during the 2008 financial crisis. But critics argue that the CFPB will lead to too much regulation that may end up costing consumers.
Finances like mortgages, private student loans and credit cards often include fine print and unnecessary fees that hurt consumers and benefit banks, according to Warren. The CFPB’s job is to help consumers by getting rid of this fine print, she said.
“We believe it ought to be a level playing field,” Warren said. “Not a playing field that is choked with fine print, but a playing field where everyone can see … what the terms are up front and that there’s some basic fairness.”
Warren also discussed the CFPB’s plans to improve student loans for higher education by supervising private lenders.
“Right now in the world of student loans, you’re pretty much on your own,” Warren said. “What this new agency will be able to do is to review the procedures used by private lenders of private student loans … and work to rebalance the power between the borrower and the lender.”
The CFPB intends to not only regulate laws that are already in place, but also to impose new laws to better protect consumers.
“The time for hiding tricks and traps is over,” Warren said.
Paolo Pasquariello, an associate professor of finance at the Ross School of Business, said he disagrees with Warrant’s approach. According to Pasquariello, the federal government’s regulation of banks tends to result in more expenses for the banks, which are then passed on to consumers. These costs include those that come with the banks’ hiring lawyers or accountants to follow the new regulations, he said. Pasquariello’s critique of the CFPB is a common refrain among critics of the new bureau.
“In economics, an externality is when you do something, which has a positive impact, but there is also a side effect,” Pasquariello said. “And we need to be aware of this side effect. The side effect is that banking as a business has become more expensive.”
Pasquariello said an example of this side effect is that many banks previously allowed consumers to open checking accounts free of charge, but because of the expense of complying with new regulations the banks now require fees for this.
Instead of the government providing more financial regulation, Pasquariello said economic reform should be based more on financial education.
“Rather than needing an agency that protects us, we need an effort to educate people when they make financial decisions,” Pasquariello said. “(The reform) was mostly driven by the idea that financial institutions are bad and they’re trying to screw people up, and people are good and need to be protected. I think a lot of people are lazy and ill-prepared and I think we need to think about what to do about that.”
Either people need to become more financially literate, he said, or the government needs to make decisions for people in order to protect them. For example, Pasquariello said in the case of retirement, people in some countries can either invest their money in stocks or bonds themselves or allow the state to invest their money for them.
“If you don’t do it on your own, the state will do it for you,” Pasquariello said of these countries. “And that’s what most people end up doing. They just don’t know much about it or they’re too lazy, so they state decides for them, and maybe that’s where we have to go.”
During the conference call, Warren also said financial education should play a large role in economic reform.
“We have two problems simultaneously,” Warren said. “One is that Americans need more financial education, more information about how to survive in a complex financial world. But, at the same time, financial products need to be more readable.”