Elizabeth Warren and the Risks of Skiing Out-of-Bounds

You lift the plastic tape that separates the controlled area of groomed snow from a deep, powdery field of virgin powder and you move beneath it. Your skis disappear beneath you and you are floating. The snow, brushing your knees, or even your thighs, is as light as air. You pick up speed as you turn into the natural bowl created by the steep slopes. And then you feel it. Did the mountain just move? On you go…then the sound. You are high above the tree line. There is nothing here to make such a sound. Reflexively, you glance behind, up the mountain….but it is gone, erased by an opaque white cloud. What you see there is the vanguard tip of the last thing that you will ever see, a 100 mph avalanche. To your surprise, escape is not your first concern, and you have not yet even recognized the severity of your lapse of judgment. Instead the only thing that goes through your mind is whether it is going to hurt. Just before everything goes dark, you decide that it will.

Thus, is the story of countless skiers and more than a few rogue operators in the world of consumer finance. Business is good, right up to the moment that it isn’t. And, from the perspective of many in the industry, things are officially “not fine.” By all accounts, the Consumer Finance Protection Bureau will be a legislative and enforcement avalanche. Things aren’t all bad though. One of Time Magazines “100 Most Influential” people is improving her ranking. Last week, Ms. Warren was appointed to a newly created post of “Assistant to the President & Special Adviser to the Secretary of the Treasury on the Consumer Financial Protection Bureau.” In other words, for now, Ms. Warren is running the show. See White House press release.

Ms. Warren is an Oklahoma native whose lengthy resume reads like a precursor to this appointment. The snapshot: She became a lawyer in 1970, and a Harvard law professor in 1992, after teaching at five separate law schools around the country. With over 100 scholarly articles and two best sellers to her name, countless television appearances on everything from Dr. Phil and The Daily Show to hard news, a long-standing interest and voice in the world of finance as it relates to middle class in America, Ms. Warren’s bona fides are unquestionable. Though her real meteoric rise occurred on November 14, 2008, when she was appointed to chair the Emergency Economic Stabilization Act’s Congressional Oversight Panel, a five person panel charged with overseeing implementation of the much maligned, if necessary, financial bailouts. See http://cop.senate.gov/documents/cop-121008-report.pdf and http://cop.senate.gov/documents/testimony-092409-warren.pdf

Ms. Warren is credited with the idea that was given life in the form of the Consumer Finance Protection Bureau, and she has been a consistent advocate for consumers of financial products. Is Ms. Warren an ideologue? Yes. In fact, this morning on the MSNBC morning news show “Morning Joe,” Ms. Warren commented that the CPFB is really about “fixing broken markets.” She claims that individuals have “no idea” what their credit card contracts are. She is looking to make those “two page agreements” that individuals can compare to other cards and choose the least expensive option. Showing her even truer colors, Ms. Warren also commented that “a lot of people fought this agency. . .I mean, fought it tooth and nail.” She sees her role as being one of talking to the American people and convincing them that it is their agency. She added, “[w]e got this agency through when no one believed that we could do it . . . . Now, we really are in an epic battle. . . .” And, if you haven’t had an opportunity to listen to her, you should.

But here’s the thing, and there is just no getting around it: Corporate and consumer activists and thought leaders alike agree that repeating the past few years would be, well, a bad thing. Ms. Warren’s belief that consumer financial services institutions bear a public responsibility; that consumers may not be sufficiently sophisticated to protect themselves or understand the decisions that they make; and that government oversight should be embraced is clear enough. The real question though is whether, under her direction, the CFPB will earn the fearsome reputation some believe inevitable? The answer is, of course, “yes” and “no.” As is so often the case, it depends upon your perspective.

Ms. Warren is tough and smart and she has a sweeping new consumer friendly policy and law to implement, enforce and, yes, even sell. For the first time, she will have the power to actually implement policy rather than just talk or write about it. Here is the rub though, governing is tough duty. In all that has been written about Ms. Warren, both laudatory and critical, absent is any accusation of intellectual dishonesty. There is nothing to suggest that she is opposed to lending, nor to the earning of profits from lending. That said, from where she stands, debt is never free and such an appearance is dangerous and, as a chair of the TARP I, Congressional Oversight Panel she well understands the dangers of huge and irresponsible industry players. Her goal will be good governance through firm regulatory enforcement. Comply and you will probably be fine. Refuse to comply, or push back too hard against investigators when you have no legitimate defense and you will reap what you sow.

For a long time across America there have been financial services players whose business plans, strategies and tactics took them outside established boundries. It has been known to result in the amazing returns with little or no competition for space, but we all now know that it can also result in the unimaginable force, speed and crushing weight of an avalanche, which can, of course, hurt.

Consumer credit debt is down at the moment, but the first sign of optimism will bring new financial products. Americans’ desire for money has been quieted but not vanquished. It will return, and when it does the incentives to ski out-of-bounds will re-appear. Truth be told, no one really skis out-of-bounds without appreciating the risk, but the risk has been given a name and a face in Elizabeth Warren. As such, it will become more real. Subpoenas will follow, enforcement actions will be the talk of the day. Ms. Warren will have only a few short months to make an impression before the economy begins to improve. Smart skiers will lower the plastic tape and remain in-bounds.

-- Chris Jones is a member in Womble Carlyle's business litigation practice group and a leader of the firm's Consumer Finance Investigation and Enforcement Team. He regularly represents a wide variety of clients in both state and federal venues throughout the United States.