On Monday, the Consumer Financial Protection Bureau released its first semi-annual report to Congress under its new Acting Director, Mick Mulvaney. A routine procedure that typically outlines the work of the Bureau over the past year as well as any upcoming initiatives, Mulvaney used his first report to highlight the unique problems with the Bureau’s structure—problems that only Congress can fix.
There has never been such a powerful and unaccountable regulator in United States history as the CFPB. It was explicitly designed to be independent of congressional oversight through its funding and its structure, with an all-powerful director who is checked neither by the president's removal power nor a bipartisan board. Mulvaney recognized as much in the report:
As has been evident since the enactment of the Dodd-Frank Act, the Bureau is far too powerful, and with precious little oversight of its activities. Per the statute, in the normal course the Bureau’s Director simultaneously serves in three roles: as a one-man legislature empowered to write rules to bind parties in new ways; as an executive officer subject to limited control by the President; and as an appellate judge presiding over the Bureau’s in-house court-like adjudications…
By structuring the Bureau the way it has, Congress established an agency primed to ignore due process and abandon the rule of law in favor of bureaucratic fiat and administrative absolutism.
That kind of authority is not to be taken lightly. The Bureau’s director alone has rulemaking, supervision, and enforcement authority over nearly every consumer financial product in the economy. That means, as Mulvaney put it, the Bureau’s director has the kind of authority that can “all too easily be used to harm consumers, destroy businesses, or arbitrarily remake American financial markets.” Dubious enforcement actions that arbitrarily forced major companies to rewrite their compensation policies and rulemakings that have the potential to eliminate access to credit for large swaths of the country are testament to that statement.
Appropriately, Acting Director Mulvaney recognizes that this is a problem only Congress can fix. He therefore requested four statutory changes to the CFPB:
- Fund the Bureau through congressional appropriations;
- Require legislative approval of major Bureau rules;
- Ensure that the director answers to the president in the exercise of executive authority; and
- Create an independent inspector general for the Bureau.
Each reform is an important step to bringing desperately needed congressional oversight and accountability to the CFPB, as well as reconciling its complications with the Constitution.
The first provision solves the funding issue. Currently, Congress has little to no control over the Bureau due to its mandated funding from the Federal Reserve, itself an independent agency. When agencies in the past have run awry, Congress has been able to restrain them through reining in their funding. This is not the case with the Bureau. Directors, therefore, are free to flout congressional concerns with no consequence.
The second provision extends Congress’ power over Bureau rules, which currently receive little scrutiny. CFPB supporters tout that the Bureau is already checked by another government body—the Financial Stability Oversight Council, a board of financial regulators—which can overturn the Bureau’s rules with a two-thirds vote if the rule would seriously threaten the safety and soundness of the United States banking system or put the stability of the financial system at risk. In effect, however, this measure has absolutely no teeth. The CFPB would have to do something extraordinary to endanger the stability of the world’s largest financial market through regulating consumer financial products. While eliminating short term, small dollar loans may be a disastrous policy, for example, it does not create systemic risk. Congressional review of major rules is a sound measure that should be taken up across all regulatory agencies.
Third, making the director accountable to the president would solve the chief constitutional issue. Article II of the Constitution reads “executive Power shall be vested in a President of the United States of America” and that “he shall take Care that the Laws be faithfully executed.” Heads of executive agencies under the president are therefore appointed by and are accountable to the president, who has the authority to dismiss them. A caveat to this foundational rule are independent agencies, first created as part of President Franklin D. Roosevelt’s New Deal policies of the 1930s. Independent agencies have an extra layer of insulation from presidential control, with the president only being able to dismiss the heads of these agencies for “inefficiency, neglect of duty, or malfeasance in office.” However, to temper such insulation, it has long been convention to require that independent agencies are headed by a bipartisan commission, typically of five members. The CFPB does not abide by this, instead having a sole director as the head of an agency situated inside another independent agency (the Federal Reserve), with none of the typical constitutional checks and balances.
The debate over how to reform the agency, then, has been whether to structure the Bureau as a typical independent agency with a 5-person bipartisan commission, or as an executive agency, with the head of the Bureau fully accountable to the president. Mulvaney prefers the latter—and this is the right approach. To start with, independent agencies do not fit well within the U.S. constitutional system, as described above. But more fundamentally, independent agencies aren’t all they are cracked up to be. The supposed benefit of independent agencies is that 5 commissioners are more deliberative and therefore less partisan than one director. But commissions such as the National Labor Relations Board remain incredibly partisan and continue to swing widely with a change of administration. One study, for example, found that the Obama-era NLRB overturned a cumulative 4,500 years of legal precedent—91 decisions—without a single Republican vote. An agency as divisive as the CFPB will unlikely be any more deliberative, but just as insulated from presidential control.
Lastly, the creation of an independent inspector general for the Bureau is a commonsense move. The offices are typically tasked with promoting accountability and transparency, such as identifying fraud, waste, abuse, and criminal activity in an agency by conducting audits, investigations, and evaluations. For an agency with such little accountability and oversight, and renowned for waste and abuse, an independent inspector general would be welcome.
Acting Director Mulvaney has done an excellent job at reforming the Bureau to better fit within its statutory mandate. But the problems at the CFPB are so fundamental that even the most powerful bureaucrat in Washington cannot solve them. It is now the responsibility of Congress to step up and reform the Bureau, with bipartisan steps already being taken to do so.