The federal government is unwrapping its most potent weapon yet in the battle to keep businesses from defrauding consumers: a powerful new agency designed to police nearly every type of transaction in hopes of avoiding another financial crisis.
The Consumer Financial Protection Bureau, opening Thursday, is the first major agency launched in Washington in nearly a decade and the first since the early 1970s that is specifically focused on American consumers.
Its controversial creation — still opposed by most Republicans and much of the financial industry — is the culmination of years of efforts by consumer advocates to get the government to play a greater role in overseeing credit cards, mortgages and other financial products.
"For consumer protection, this is really the biggest and most important change that's occurred for several decades," said Willard Ogburn, longtime executive director of the National Consumer Law Center.
Advocacy group Consumers Union on Wednesday released results of a recent poll showing that 74% of respondents supported the new bureau.
Reza Daniali, for one, hopes the new agency can prevent cases like his. He nearly lost his three-bedroom house in Victorville because of a confusing adjustable-rate mortgage he took out in 2005 that eventually had him paying nearly 12% interest — more than double the average rates for the last year or so.
"I'm partially to blame for not informing myself, but the loan was really awful," said Daniali, 30, a pool service business owner who recently received reduced monthly payments through a federal program. "Somebody needs to be watching these banks because you're powerless over them."
Some consumers are concerned that the agency's staff, now at 400 and expected to triple to 1,225 by the fall of 2012 as it continues to ramp up, will get overwhelmed after years of regulatory neglect.
"They are going to get flooded — 1,200 employees is not going to cover what's going to come at them," said Kim Canning, 44, of Parker, Colo. She has been fighting for nearly two years to save her three-bedroom ranch from foreclosure after banks botched her refinancing.
"It is like I'm in a black hole. Nobody will help. My credit's been destroyed, although I still pay my mortgage," she said. "It's about time at a national-level something like this is coming into place because this is just ridiculous."
The agency, the centerpiece of the financial regulatory overhaul enacted last year, bills itself as a new cop on the beat in the financial marketplace. In a video on its website, http://www.consumerfinance.gov, the agency's initials are framed in a police badge looming over the skyscrapers of big banks.
And just as with a neighborhood watch program, the agency's leaders are hoping that regular Americans will report suspicious activity by banks, mortgage brokers and other lenders.
"Consumer outreach will be the heart and soul of this agency," said Elizabeth Warren, the Obama administration advisor who has been working since September to launch the bureau. She said about a quarter of its budget would go to responding to consumer complaints.
Warren said the agency would use new technologies to analyze consumer complaints and quickly focus on problems. And it is developing a high-tech infrastructure to process consumer complaints and funnel them to financial institutions for action.
The first step starts Thursday as the agency's consumer response center for credit card problems begins operations. The center will integrate phone and online complaints and will expand its reach to other products, including mortgages and student loans.
Warren cautioned that it would take time for the bureau to have an effect.
"The way to make big change in a marketplace is not with a single blow. It's with thousands of small pushes in the same direction," she said. "For us, the same direction is toward making the price clear, making the risk clear and making it easier to compare products."
The agency's first major initiative, already underway, is to merge two complicated mortgage disclosure forms that lenders must give home buyers into a single, easier-to-understand form.
The consumer bureau opens for business after a rocky year of preparations. It is still without a Senate-confirmed director — and therefore, under the law, unable to use all the power that Congress granted it.
Congressional Republicans, along with many financial executives and business groups, say the agency is an unnecessary expansion of government power that threatens to divert more bank resources toward complying with regulations, restricting access to credit by consumers.
"We're trying to be a resource for our community. We want to make credit and financial resources available," said Jeff Ball, chief executive of Friendly Hills Bank in Whittier. "At the end of the day, there's more hoops for us to go through."
Opposition by Senate Republicans has kept Warren from being nominated as the agency's first director and threatens to delay confirmation of President Obama's choice this week for the job, former Ohio Atty. Gen. Richard Cordray.
So unlike major new government agencies before it, such as the Transportation Security Administration in 2002, the consumer bureau's infrastructure and much of its staff were put in place before its first director will come aboard.
That's a recipe for trouble because it prevents an agency from developing consistent priorities and focus, said Paul Light, an expert on government organization at New York University.
"They should be flying the question mark on their flag over the agency," he said. "People who have been opposed to the agency have done just about everything right in undermining it."
The continued battle over the agency shows how much it is needed, said Kurt Eggert, a law professor at Chapman University who has studied predatory lending and other financial abuses.
"There's kind of a war going on to, if not destroy, at least cripple the bureau," Eggert said. "If it weren't that important, I don't think you'd see that kind of battle to stop it."
The bureau takes over power to write and enforce consumer financial protection laws from seven federal agencies that are widely believed to have fallen down on the job in the years leading up to the financial crisis.
In the most glaring example, the Federal Reserve failed to act for 14 years — until 2008 — to limit subprime mortgages. The new consumer bureau would not have waited so long, Eggert said.
"I'm not saying it would have prevented all the subprime problems," said Eggert, who has served on the Fed's Consumer Advisory Council. "But it would have reacted much more quickly and decreased the harm that predatory lending and the subprime market caused."