In Elizabeth Warren's 2007 article in the journal Democracy, the Harvard University professor decried what she called the "tricks and traps" some financial institutions used to lure consumers into mortgages, credit cards or other financial agreements they couldn't afford. Warren proposed creating a government watchdog group to help guard the public against them.

Yet with President Barack Obama's decision to tap Warren to spearhead the creation of a new Consumer Financial Protection Bureau, critics accuse Obama of practicing his own form of deception. The problem? Obama appointed Warren as an advisor to Treasury Secretary Timothy Geithner, rather than as director of the new group -- a move that exempted Warren from needing Senate approval.

Obama said Warren would help create a regulator that would, among other things, ban what he called "unfair" interest rate hikes and crack down on "abusive" mortgage practices. But activists representing both business and consumer interests are crying foul.

A Test of Transparency

"What the President did was creative," said Sally Greenberg, executive director of the Washington-based National Consumers League, who called Warren the best person for the job. "The idea that there weren't 60 votes (for Congress to approve Warren as director) is probably more true than not. We could go on for weeks and months with nobody in the job."

Other business advocates weren't nearly as charitable in their assessment of Obama's decision.

"The administration has circumvented one of the very few checks on a big new agency that already has been given an unprecedented concentration of regulatory powers," the U.S. Chamber of Commerce said in a statement today. "This maneuver is an affront to the pledge of transparency and consumer protection that's purported to be the focus of this new agency."

At stake is the direction of a group that the administration hopes will protect consumers by discouraging the use of financial instruments like sub-prime mortgages with balloon payments or credit cards with interest-rate jumps. The goal is to create rules that would force financial institutions to market such products in clear terms, without hiding onerous financial terms in the print.

Obama has argued that such agreements helped caused the recession in late 2007 by creating a real-estate bubble and debt crisis. They may also hinder economic recovery. For instance, U.S. foreclosure filings in August increased 4% from the previous month, to almost 339,000 properties, RealtyTrac said in a report yesterday. Such debt issues slow economic recovery, some analysts say. Year-over-year gross domestic product will increase at about 2% over the next five quarters, compared to a 5% to 6% rate typically associated with U.S. economic recoveries, because consumers will likely use any excess cash to pay down debt instead of spending on goods, the UCLA Anderson Forecast said in its third-quarter report this week.

Applications and Access

Watchdog group or not, banks already are already less likely to lend to people with less-than-stellar financial credentials. Bank-loan approval rates will likely fall as applications rise over the next six months, as lending standards won't loosen quickly enough to account for the number of people seeking loans, analytics firm Fair Isaac Corp. (FICO) said in a survey earlier this month.

Just one in seven banking professionals said they expected lending criteria to loosen up, while almost three-quarters said loan applications would either rise or stay the same over the next six months, according to the survey.

Regardless of banks' apparent effort to reign in lending efforts to riskier candidates, today's decision will remain a point of contention, according to Bruce Cain, director of the University of California Washington Center.

"Does it create tensions? Sure, but in the end, the President and his White House advisors hold the cards," said Cain. "And frankly, if the Republicans take the Congress, the whole thing could be thrown open again."


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