Just three years ago, the very idea of a consumer protection agency was dismissed by most bankers and industry representatives as a pipe dream.
But after a brutal legislative fight this year, the Consumer Financial Protection Bureau may prove to be the most important agency to watch in 2011.
With a broad mandate encompassing consumer protection rules from seven different agencies, a powerful director position and a large budget, the CFPB is poised to have a significant impact on the financial services industry.
"It's an idea whose time has come," said Elizabeth Warren, assistant to the president and special adviser to the Treasury secretary, who is tasked with getting the agency up and running. "The need for this agency was clear to millions of people. No one could really argue that the regulators had done a good job or that dividing consumer financial protection among seven different agencies made any real sense. The failures were too obvious. The difference in lobbying dollars and lobbying muscle would have predicted that this agency didn't have a chance, but history ran against the industry."
Despite Warren's assurances the agency will move cautiously, the CFPB makes bankers nervous because of the sheer scope of its authority.
"In many ways, it is the most powerful agency ever created," said Ed Yingling, president and chief executive of the American Bankers Association.
Warren conceived the idea for a consumer agency in 2007, and the financial crisis helped it gain grassroots support.
"Had [Warren] proposed the idea five years ago or 10 years ago, she wouldn't have gotten anywhere. But the regulatory failures highlighted the huge failures for customers, and it became clear a major restructuring, not just tinkering around the edges, was necessary," said Travis Plunkett, a legislative director for the Consumer Federation of America.
Douglas Landy, a partner in Allen & Overy LLP and formerly a lawyer at the Federal Reserve Bank of New York, agreed.
"Before two or three years ago, no one would have believed you if you had said the consumer finance industry can cause a systemic threat. … It was viewed as individual issues, not a collective problem," Landy said. "The events of the last three years have disproved that. Fundamentally the banks lost the argument that there was no issue that needed to be addressed here."
Although the bureau was originally conceived as a separate agency, lawmakers ultimately housed it inside the Federal Reserve Board. The bureau is also partially funded by the central bank, with a budget that could reach an estimated $500 million.
It was predicted that the Fed would have some oversight of the agency, but the Dodd-Frank Act made the bureau fully independent. "The CFPB represents an unprecedented grant of authority, with a regulator with very few checks on its power," said Jaret Seiberg, financial services policy analyst for MF Global's Washington Research Group. "That's why it was a lightning rod."
