What Playing Gotcha Can Getcha

Banks, credit card companies and other financial services firms made an art of snaring customers in loopholes and walloping them with fine print. Now they’re learning that playing “gotcha” can getcha in the end.

The credit card companies, with their love of misleading semantics, ought to have been the first to applaud the linguistic dodge by which President Obama sidestepped the need for a Senate confirmation for Elizabeth Warren, who he has indirectly appointed as the head of the new Consumer Financial Protection Bureau. But they aren’t clapping.

To avoid having to seek Senate approval of Warren’s appointment, Obama named her as an assistant to the president and special advisor to Treasury Secretary Timothy Geithner, rather than give her the title of Director of the Consumer Financial Protection Bureau. However, for all intents and purposes, Warren will be the first head of a largely independent bureau that has a broad mandate to enforce fair practices for financial products.

The Constitution requires that when the president appoints an “Officer of the United States” he must do it “by and with the Advice and Consent of the Senate,” which has given rise to our tradition of confirmation hearings. But the president holds the power to appoint lower officials on his own.

A Wall Street Journal editorial lambasted the unorthodox appointment, pointing out that the Dodd-Frank Wall Street Reform and Consumer Protection Act, which laid the groundwork for the agency’s creation, explicitly stated that a “Director shall be appointed by the President, by and with the advice and consent of the Senate.” The editorial concluded, “We have here another end-run around Constitutional niceties so Team Obama can invest huge authority in an unelected official who is unable to withstand a public vetting.”

As a member of the panel responsible for overseeing the Troubled Assets Relief Program, Warren earned her share of enemies in Congress, leading many to believe that she wouldn’t survive a confirmation vote. Republicans were furious at Warren’s attempt to use her position to urge far-reaching regulatory change. An April 2009 Politico article noted, “In private conversations, even some Democrats complain that Warren’s role as a constant Cassandra could undermine already tenuous public support for the bank, auto industry and other financial rescue programs.”

Warren first suggested the idea of an entity like the Consumer Financial Protection Bureau in the summer of 2007 when, in an article in Democracy: A Journal of Ideas, she recommended the creation of a “Financial Product Safety Commission” modeled after the U.S. Consumer Product Safety Commission. “Financial products should be subject to the same routine safety screening that now governs the sale of every toaster, washing machine, and child’s car seat sold on the American market,” she wrote.

From the beginning, it was clear that Warren had no intention of making friends with credit card issuers and other financial product vendors. In her 2007 article, she portrayed the hawkers of these products as sucking money out of the economy through deceptive fees. After observing that Americans paid $89 billion in fees and interest payments in 2009, she commented, “That is $89 billion out of the pockets of ordinary middle-class families, people with jobs, kids in school, and groceries to buy. That is also $89 billion that didn’t go to new cars, new shoes, or any other goods or services in the American economy.” She claimed lenders had “deliberately built tricks and traps into some credit products so they can ensnare families in a cycle of high-cost debt.”

Despite the fast and loose manner in which Warren got her position, the rest of the country cannot seem to summon the level of outrage shown by The Journal and the financial services businesses. I suppose one person’s threat to constitutional order is another person’s nifty scramble to avoid congressional gridlock and actually get something done. Americans tend to like it when things get done.

Mostly, though, I think the public’s shrug about the manner in which Warren got her new post stems from the simple fact that financial services firms brought this problem on themselves. If they had not engaged in duplicitous practices, this new wave of increased regulation would not be happening. The American public just doesn’t have a lot of sympathy left for them.

These companies routinely engaged in shenanigans that would make the most brazen used-car salesman blush. Credit card companies regularly raised interest rates on existing credit card balances even when cardholders were paying their bills on time. They also issued statements with due dates that fell at different points every month, often seeming to land on weekends, and then charged steep late fees for remittances that were just minutes or hours late.

Many of the companies’ policies were designed to keep those already in financial trouble from climbing out. Credit card companies frequently applied payments to customers’ lowest-interest-rate balances first, so that those in debt couldn’t pay down the balances that were costing them the most. When bank customers had nothing left, the banks still approved tiny debit transactions and then hit the customers with overdraft fees. They also collected extra overdraft fees on checks by paying the largest checks first so that more checks would bounce, with each one incurring a separate fee.

Regardless of whether the law permitted such practices, they were unscrupulous and abusive from the get-go. The people who suffered this treatment are happy to have someone in Washington whose job is to stand up for them, even if she got that job through procedural manipulation.

Those who criticize Warren may be right: The new agency may be about to dive into a runaway regulatory binge. Nobody knows for sure. But if someone deserves the benefit of the doubt, it isn’t the folks who built their business models on penalty fees.

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