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By Pooja Nair, Foley & Lardner LLP
Since she emerged in the national spotlight as the spokesperson and developer of the Consumer Financial Protection Bureau (CFPB), Elizabeth Warren has been perceived as a political force to be reckoned with. After her potential candidacy to be director of the CFPB was soundly rejected by Republicans, Warren entered the political ring and defeated Scott Brown to be the next Senator for Massachusetts. Warren has drawn both intense criticism and glowing admiration. Rob Engstrom of the Chamber of Commerce reportedly stated before the election: “no other candidate in 2012 represents a greater threat to free enterprise than Professor Warren.”1 On the other hand, the Huffington Post is already gleefully speculating about a Warren presidency.2 Both her critics and her supporters agree that Warren is someone to watch in the field of consumer finance and financial reform. Warren was appointed to an open Democratic spot on the Senate Banking Committee.3 Warren's history and interest in consumer finance issues suggests that she will have significant impact in the field. Although much of the information about Warren has been culled from her more recent role in forming the CFPB and through her political advocacy, Warren's prolific academic writings also give us insight into her philosophy and may be telling of her conduct once in the Senate.
Warren has developed a compelling campaign biography, emphasizing her connection with the day-to-day struggles of ordinary Americans. At the Democratic National Convention (and throughout her campaign speeches), Warren offered this summary of her background4:
“I grew up in a family on the ragged edge of the middle class. My daddy sold carpeting and ended up as a maintenance man. After he had a heart attack, my mom worked the phones at Sears so we could hang on to our house. My three brothers all served in the military. One was career. The second worked a good union job in construction. The third started a small business. Me, I was waiting tables at 13 and married at 19. I graduated from public schools and taught elementary school. I have a wonderful husband, two great children, and three beautiful grandchildren. And I'm grateful, down to my toes for every opportunity that America gave me.”
As compelling as this autobiography is for campaign purposes, it completely leaves out a significant part of her life: her decades-long academic career. Since the late 1970s, Warren has been a prominent academic, and a renowned expert in the field of bankruptcy law. Warren graduated from the University of Houston with a Bachelor of Science degree in 1970 and received her J.D. from Rutgers in 1976. From 1977-1987, Warren taught at Rutgers School of Law- Newark, the University of Houston Law Center, and the University of Texas School of Law. From 1987 to 1995, Warren was a tenured professor at the University of Pennsylvania Law School. In 1992, Warren worked at Harvard Law School as a visiting professor and in 1995, she received a permanent appointment to the faculty as the Leo Gottleib Professor of Law. Warren has taught in several areas of financial law, including bankruptcy, contracts, secured lending, payment systems, commercial paper, regulated industries, corporations, partnerships, and banking regulation.5
Warren was first involved with politics as an advisor to a committee investigating bankruptcy reform. However, her vocal views about how to address the issue were largely ignored in the bankruptcy law that actually passed in 2005. In 2009, Warren took a hiatus from academia into the realm of public policy under the Obama administration. Warren was appointed Chair of the Congressional Oversight Panel (COP) as the Troubled Asset Relief Program (TARP) was being administered. In 2010, Warren was appointed by President Obama to serve as Special Advisor to the Secretary of the Treasury on the CFPB. She spearheaded the development of the new agency and established plans for its structure and purpose. However, due to her disagreements with Treasury Secretary Geithner and vocal opposition from the financial sector and Republican Senators, President Obama passed her over for the position of head of the CFPB.
Although Warren has underplayed her impressive academic credentials during her Senate campaign, her academic work is of interest in considering her next steps. Years before Warren was asked to set up the CFPB, she depicted the existing regulations for consumer financial products as deeply flawed and proposed a regulatory agency to provide oversight on these products. Warren's work foreshadowed her vision of the CFPB, and may also be prescient of her vision on the Senate. Warren's academic record also offers significant insight into her general philosophy and her core values, and into how they have developed over time.
In the early 1980s when she began her academic career as an assistant professor at the University of Houston College of Law, Warren wrote on public utility rates and regulatory lag. In 1980, Warren wrote “The Regulatory Lag Fallacy,” in which she attacked the idea that regulatory lag provided the primary incentive for utilities to be efficient.6 Regulatory lag occurs in the utility rate-making process because of the way that rates are set: they typically are set in one proceeding and remain fixed until the next rate proceeding. However, even though the rates stay the same, the cost of utilities to the provider change. The “pervasive, persistent notion” about the phenomenon was that regulatory lag acted as an efficiency incentive. Warren questioned this premise and found that rather than promoting efficiency, regulatory lag merely served to “squeeze” the utility, and at times of inflation, could even put the utility in a position of financial insolvency.7 Warren found that regulatory lag could also “ultimately increase customer costs” because utilities had an incentive to propose service improvements at rate hearings in order to get a higher rate approved, but then delay in actually setting up these services.8 Ultimately, Warren argued that the government should focus on developing other types of efficiency incentives for utilities companies rather than relying on regulatory lag to produce significant results. Warren also wrote about tax accounting and automatic cost of service adjustment clauses in regulated industries.9
After an early focus on regulated industries, Warren began writing about consumer bankruptcy in 1983. Since then, Warren has been writing extensively, and often primarily about bankruptcy. Even at the outset of her writings on bankruptcy, Warren characterized bankruptcy as a last-ditch safety net for consumers and an important barometer of economic conditions. Warren's academic work has featured large empirical studies and consumer data, rather than the more theoretical models used by many of her colleagues.
In 1983, Warren wrote “Limiting Access to Bankruptcy Discharge: An Analysis of the Creditors' Data,” in which she attacked a 1981 study developed by the Krannert Graduate School of Management at Purdue University (“the Purdue study”).10 The study had been widely circulated since its publication in 1981, and its central assertion was that “$1.1 billion of debt discharged in 1981 could and should have been repaid, and that 30% of bankruptcy debtors could have paid their debts in full.”11 Warren and her co-authors found that “the impetus to limit the bankruptcy discharge comes from the consumer credit industry” and that this industry had commissioned the Purdue study and arranged to have the results of the study disseminated broadly to influence lawmakers. Newspaper reports from 1981 suggest that the Purdue Study did in fact have a role in fueling a credit industry push for a change in bankruptcy laws.12 As with future studies that Warren analyzed sponsored by the credit industry, Warren attacked it on all fronts. She found that “the design and execution of the Purdue Study incorporated a series of errors”13
In 1986, Warren joined with the Consumer Bankruptcy Project, along with Teresa Sullivan and Jay Westbrook, two colleagues who would become long-term collaborators. The Consumer Bankruptcy Project analyzed the data of consumer bankruptcy to determine what forces were pushing people into bankruptcy. The conclusions of the group's reports often clash with other studies.
Throughout her career, Warren has enjoyed sparring with other academics and politicians on fundamental bankruptcy policy issues. She has embraced a format of point-by-point analysis and direct responses in several articles. In 1987, Warren published “Bankruptcy Policy” as part of her ongoing vigorous debate with Professor Douglas Baird.14 Warren stated that Professor Baird “has developed a coherent, unified view of bankruptcy” that tested all bankruptcy laws by “a single measure: whether they enhance or diminish the creditors' collective benefits.”15 By contrast, Warren stated her view that bankruptcy was essentially “an attempt to reckon with a debtor's multiple defaults and to distribute the consequences among a number of different actors”—a question of how losses should be distributed.16 At the conclusion of her article, Warren noted the difference between her academic theories and Baird's—epitomizing what would become her trademark approach to the academic study of financial policy17:
“Mine is not an entertaining (or, I suspect, popular) position for an academic. I cannot claim that bankruptcy, at its heart, is an intellectual construct or that I can reason to a meaningful conclusion by doing nothing more than thinking hard about logical consequences derived from a handful of untested assumptions. I would like to endorse something that requires only library time and yellow legal pads to uncover ideal solutions to legal problems. The trouble is that I can't do it.
But I don't think Baird can do it either. The certainty of Baird's position is a fiction…”
Warren's statement reflects her view that a discussion about bankruptcy policy cannot fit neatly into the box of theory, but necessarily needs to consider the world beyond academia. Warren goes on to make a more general criticism of academia:
“But if we academics take ourselves seriously, we should put single-issue theories into a somewhat less exalted position in order to minimize the harm we can do. And we should get about the business of asking harder questions, looking for better evidence, and approximating better answers.”
This suggests Warren's dissatisfaction with the ivory tower approach to financial policy and may have led Warren to become increasingly engaged with public policy as a way to integrate the real-world implications of her financial theories.
In 1998, Warren argued in “The Bankruptcy Crisis” that the argument for sweeping changes in bankruptcy law to make it harder to file for bankruptcy was not justified. In the article, Warren blasted the credit industry and questioned the validity of data produced by industry experts to suggest that 40% of the debtors could pay some of their debt, and thus they were abusing the bankruptcy system.18 Warren stated that “the system is not in crisis; the evidence points towards a consistent use over time of consumer bankruptcy by the same kinds of families—families in serious financial trouble.”19
In 2002, Warren published “Financial Collapse and Class Status: Who Goes Bankrupt?” in which she analyzed a sample of the 1.5 million families who had filed bankruptcy and found that “families in bankruptcy share many of the same educational, occupational, and home buying experiences as other middle-class Americans. Their deep financial distress suggests a growing reason for concern about these families, who make up the heart of America.”20
Warren has been very involved throughout her career- often on the losing side- in the debates surrounding bankruptcy reform. She spoke out against sweeping bankruptcy reform that would make it harder for consumers to file for bankruptcy. Throughout the debates over bankruptcy reform that raged from the 1990s until 2005, Warren reiterated her belief that bankruptcy was a product of external forces, rather than consumer irresponsibility and fought a bankruptcy system that would give creditors more of an advantage over debtors. In 2001, Warren authored a letter to the Senate Banking Committee opposing the business provisions of the existing Bankruptcy Reform Act. In the letter, Warren stated that the bill would be the “first piece of federal legislation in history that actively discriminates against small businesses and denies them protection available to large businesses.”21 Warren also opposed the consumer portions of the bill. The 2001 bill was eventually tabled, but the debate raged again during the Bush administration. Warren was a vocal opponent of the 2005 version of the bill and she testified in Congress on the issue. Warren testified:
The overarching problem with this bill is that time and the American economy have passed it by. It was drafted never mind by whom eight years ago. Even if it had been a flawless piece of legislation then, and it surely was not, the events of the past eight years have dramatically changed the economic and social environment in which you must consider this bill….
This Congress wants to set a new moral tone. Do it with the bankruptcy bill. Don't press “one-size-fits-all-and-they-are-all-bad” judgments on the very good and the very bad. Spend the time to make the hard decisions. Leave discretion with the bankruptcy judges to evaluate these families. Based on the Harvard medical study and other research, I think you will find that most debtors are filing for bankruptcy not because they had too many Rolex watches and Gameboys, but because they had no choice.
You have a choice. It's a choice that you're making for the American people. Adopt new bankruptcy legislation. Establish a means test that targets abuse. But do not enact a proposal written to address myth and mirage more than reality. Do not enact a proposal written for 1997 when the problems of the American corporate economy in 2007 deserve far more attention and the problems of the American middle class can no longer be ignored.
Overwhelmingly, American families file for bankruptcy because they have been driven there largely by medical and economic catastrophe not because they want to go there. Your legislation should respect that harsh reality and the families who face it.”
The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) also provided a stringent “means test” to apply to consumers in order for them to be determined to be eligible. The purpose of the means test was to reduce bankruptcy fraud and prevent people from filing for bankruptcy if they had the means to pay off any portion of their debt. In her testimony to the Senate Banking Committee, Warren bashed the test methodology created by the bill:
The means test in this bill, Section 102, has been one of its most controversial provisions. Proponents like to say that the means test will put pressure only on the families that can afford to repay. And yet, the bill has 217 sections that run for 239 pages. The means test aside, virtually every consumer provision aims in the same direction. The bill increases the cost of bankruptcy protection for every family, regardless of income or the cause of financial crisis, and it decreases the protection of bankruptcy for every family, regardless of income or the cause of the financial crisis.
There are provisions that will make Chapter 13 impossible for many of the debtors who would file today, provisions that make it easier than ever to abuse the unlimited homestead provisions in some states and yet at the same time hurt people with more modest homesteads in those same states. Other provisions will compromise the privacy of millions of families by putting their entire tax returns in the court files and potentially on the Internet, making them easy prey for identity thieves. Women trying to collect alimony or child support will more often be forced to compete with credit card companies that can have more of their debts declared non-dischargeable. All these provisions apply whether a person earns $20,000 a year or $200,000 a year.
But the means test as written has another, more basic problem: It treats all families alike. It assumes that everyone is in bankruptcy for the same reason too much unnecessary spending. A family driven to bankruptcy by the increased costs of caring for an elderly parent with Alzheimer's disease is treated the same as someone who maxed out his credit cards at a casino. A person who had a heart attack is treated the same as someone who had a spending spree at the shopping mall. A mother who works two jobs and who cannot manage the prescription drugs needed for a child with diabetes is treated the same as someone who charged a bunch of credit cards with only a vague intent to repay. A person cheated by a sub-prime mortgage lender and lied to by a credit counseling agency is treated the same as a person who gamed the system in every possible way.
In 2005, the Bush administration approved the BAPCPA, over Warren's opposition. The passage of the bill marked a significant loss for Warren. Interestingly, in 2005, Senator Barack Obama made a speech strongly in opposition of BAPCPA, stating:22
“…this bill would take us from a system where judges weed out the abusers from the honest to a system where all the honest are presumed to be abusers. Where declaring Chapter 7 bankruptcy is made prohibitively expensive for people who already have suffered financial devastation. With this bill, it doesn't matter if you ran up your debt on a trip to Vegas or a trip to the Emergency Room, you're still treated the same under the law and you still face the possibility that you'll never get the chance to start over.”
Obama cited Warren's study for the proposition that most people who declare bankruptcy do so as a result of bad luck or medical problems rather than because they are trying to abuse the system. Ultimately, Senator Obama and Professor Warren were unsuccessful in halting the tide towards bankruptcy reform.
In Fall 2005, just before the regulations were scheduled to go into effect, Warren wrote a short article for the Federal Reserve Bank of Boston, entitled “Natural Disasters and Bankruptcy: A Perspective.”23 In this article, Warren drew on the experience of Hurricane Katrina and data from other hurricanes and argued that the changes made by BAPCPA would negatively affect communities hit by natural disasters. She also argued that changes by the government to waive some requirements for victims of Katrina would not be sufficient because the full scope of the consequences of a hurricane or natural disaster would not be apparent until up to three years after the event. Warren also commented on the fact that judges would have much less discretion under the BAPCPA regime to excuse victims of natural disaster from following the rigid paperwork requirements of BAPCPA, even if paperwork and receipts were missing because of a natural disaster.
After BAPCPA went into effect, Warren continued to speak out over what she perceived to be the continued flaws of the bill and participated in extensive analysis of what the actual effects of the bill were on debtors. In 2008, Warren and several co-authors analyzed the effects of BAPCPA after three years of operation as part of a Consumer Bankruptcy Project study entitled “Did Bankruptcy Reform Fail? An Empirical Study of Consumer Debtors.” The conclusion of the study was that the number of families seeking bankruptcy relief declined after BAPCPA went into effect, but that this was because the barriers in the law prevented families who needed bankruptcy relief from meeting the criteria to file. The study found that the means test, which Warren had specifically criticized in her Senate testimony, had the effect of “blocking out hundreds of thousands of struggling families indiscriminately, regardless of their individual income circumstances.”24 Additionally, the paper analyzed data from several past Consumer Bankruptcy Project surveys and found that the 2008 amendments did nothing to prevent the ongoing trend of families filing for bankruptcy being in “ever-increasing financial distress” before they filed.25 The paper characterizes creditors as the real winners under BAPCPA and states that the law put them in a deeply advantaged position where “they have a stronger hand to press the debtors—all debtors, regardless of income—to struggle outside the bankruptcy system,” even if this means paying extremely high interest rates.26 In 2007, there were 800,000 fewer bankruptcy filers than in 2004. While advocates of BAPCPA hailed this as a clear victory for reform, Warren and her colleagues found instead that BAPCPA allowed only those with extremely high debt loads to file for bankruptcy while others with debt loads that would have qualified for bankruptcy under the previous system were now excluded. According to this analysis, BAPCPA “does not appear to be sorting can-pays from can't pays; it appears to be sorting can't-pays with high debt loads from similar income range can't-pays with even higher debt loads.”27
The “Did Bankruptcy Reform Fail?” report was the subject of a scathing attack by Professor Rafael I. Pardo.28 In his article, Pardo attacked the assumptions of Warren and her co-authors, particularly the assumptions related to the means test. Pardo stated that the report had “failed to answer” the question of whether BAPCPA was successful because it relied on faulty assumptions and failed to understand how the means test worked. Warren and her co-authors responded in the same issue of the journal with “Interpreting Data: A Reply to Professor Pardo.” They strongly defended their analysis and assumptions, and stated that these assumptions were based on BAPCPA as framed by its proponents. In a footnote, they stated “we also do not doubt that the sophisticated consumer lenders who lobbied for BAPCPA's passage had unstated private motives to push for the means test.”29
Warren's scholarship approaches bankruptcy as a way to gauge the economic progress of what she characterizes as vulnerable groups, including women, the elderly, and minorities. Warren's scholarship has focused on reasons why bankruptcy disproportionately affects certain groups and who benefits from maintaining the current system. In 2009, Warren wrote “The Increasing Vulnerability of Older Americans: Evidence from the Bankruptcy Court,” in which she and her co-authors analyzed bankruptcy filing data from 2007 against earlier data and found that “the average age for filing bankruptcy has increased, and the rate of bankruptcy filings among those ages sixty-five and older has more than doubled since 1991.”30 Warren has also characterized bankruptcy as a critical issue affecting families, particularly women and children. These pieces include “Bankruptcy and the Family,” “Bankrupt Children,” and “What is a Women's Issue? Bankruptcy, Commercial Law and Other Gender-Neutral Topics.” In “What is a Women's Issue?,” Warren singled out Senator Joe Biden for his aggressive support of bankruptcy reform. She found a hypocritical contrast between Biden's long-standing support for the Violence Against Women's Act and his strong ties with the credit industry.31
Biden must be delighted with his starring role in the [National Organization for Women's] Annual Report and with the halo effect that suggests that he is one public official politically active women can trust. Of course, not all of Senator Biden's legislative agenda is reflected in the Annual Report. Missing, for example, is a picture of Senator Biden standing shoulder to shoulder with the CEOs of the credit industry, cosponsoring legislation to increase restrictions on consumer and small business bankruptcy. His energetic work on behalf of the credit card companies has earned him the affection of the banking industry and protected him from any well-funded challengers for his Senate seat. This important part of Senator Biden's legislative work also appears to be missing from his Web site and publicity releases. Like his support for the Violence Against Women Act, Senator Biden's efforts on behalf of the credit industry to increase restrictions on bankruptcy bear particular relevance to NOW Legal Defense and Education Fund's annual report. The annual report focuses on economic and social issues that will affect women and establishes the organization's legislative agenda. The group that will be most affected by the changes in the bankruptcy legislation Senator Biden so forcefully supports will be women, particularly women heads of household who are supporting children. Indeed, women are now the largest demographic group in bankruptcy, outnumbering men by about 150,000 per year.
Of course, Warren's comments on Biden are especially interesting given their current positions. Warren's harsh criticism of Biden continues into the article, and she uses Biden as a symbol of the dangers of a single-issue mentality, which separates social issues from commercial issues. Warren finds women's groups too willing to separate social issues from other issues and discussed the need for advocates concerned about women's issues to also have a grounding in financial institutions:
It is not possible to remain ignorant of business and commercial law and become an effective advocate for social issues. Anyone attempting significant social change without a thorough grounding in business and commercial law is handicapped. To accomplish real change in many areas, advocates will need to understand the causation, implementation, and collection issues that deeply implicate business practices and commercial laws. If few students interested in women's issues train themselves in commercial areas, the effects of the commercial laws will not be diminished, but there will be few effective advocates around to influence those policy outcomes.32
“giving creditors so much power that businesses that could have been reorganized will end up liquidating makes no business sense for anyone. Congress was enthusiastic about dismantling some key Chapter 11 protections in boom times. When those amendments are tested in hard times, they seem much less attractive.”
Every day, middle-class families carry higher risks that a job loss or a medical problem will push them over the edge. Although plenty of families make it, a growing number who worked just as hard and followed the rules just as carefully find themselves in a financial nightmare. The security of middle-class life has disappeared. The new reality is millions of families whose grip on the good life can be shaken loose in an instant.
“The next time the economy contracts we will see the disastrous effect of allowing 125 percent debt-consolidation mortgages and allowing lenders to charge rates of interest that were illegal just 20 years ago. Bankruptcies will explode and we will all pay the price for this folly.”
In 2007, Warren wrote a short article, “Unsafe at Any Rate,” in which she compared the rigorous regulatory system in place for consumer goods against the lack of regulation for consumer financial products. Warren stated:
“Just as the Consumer Product Safety Commission (CPSC) protects buyers of goods and supports a competitive market, we need the same for consumers of financial products—a new regulatory regime, and even a new regulatory body, to protect consumers who use credit cards, home mortgages, car loans, and a host of other products.”
Warren finally got a chance to put her vision into practice when the Dodd-Frank Act created a consumer finance agency. Warren was appointed by President Obama to serve as Special Advisor to the Secretary of the Treasury on the CFPB. According to Warren's March 16, 2011 testimony to Congress:
By law, the CFPB is obligated: 1) to ensure that consumers have timely and understandable information to make responsible decisions about financial transactions; 2) to protect consumers from unfair, deceptive, and abusive acts or practices, and from discrimination; 3) to reduce outdated, unnecessary, or overly burdensome regulations; 4) to promote fair competition by enforcing the federal consumer financial laws consistently; and 5) to advance markets for consumer financial products and services that operate transparently and efficiently to facilitate access and innovation.
“A consumer finance market place: where customers can see prices and risks up front and where they can easily make product comparison; in which no one can build a business model around unfair, deceptive, or abusive practices; that works for American consumers, responsible providers, and the economy as a whole.”
“The American economy has benefited from agile companies that can quickly shed or add workers, often on a contract basis without fringe benefits such as health insurance. But this agility for companies brought vulnerability for workers, through interrupted employment and medical bills not covered by insurance.”
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