Consumer Financial Protection Bureau Should Acknowledge Its Unconstitutional Structure


This post is the seventh in a 10-part series on reform proposals for the Consumer Financial Protection Bureau. See below for previous posts.

The Consumer Financial Protection Bureau’s structure is unconstitutional. The agency’s leadership should recognize it as such.

First, the bureau does not receive its funding through congressional appropriations, but via a guaranteed fund from the Federal Reserve. This violates Article I, Section 9 of the United States Constitution which states that “No money shall be drawn from the treasury, but in consequence of appropriations made by law.”

Second, its sole director cannot be removed by the president other than for “cause,” such as dereliction of duty or malfeasance. This violates Article II, Section 3 of the Constitution; in particular, that the president “shall take care that the laws be faithfully executed.”

Lastly, the bureau is afforded judicial deference in its interpretation of statutes, at 12 U.S. Code § 5512 (b)(4)(B), similar to that of the Chevron doctrine. This violates Article III of the constitution, which, as the Supreme Court wrote in Marbury v. Madison, places the power to say what the law is solely in the hands of the judicial department.

While a number of high-profile court cases challenging the constitutionality of the bureau have failed to reach the Supreme Court, such as PHH Corp. v. CFPB and State National Bank of Big Spring v. Mnuchin, there are a number of other pending cases challenging the constitutionality of the bureau. It is only a matter of time before one makes it to the Supreme Court.

Despite these facts, newly-appointed Director Kathy Kraninger has so far refused to acknowledge that the bureau’s structure is unconstitutional, defending the structure in cases such as CFPB v. Seila Law.

The bureau should reverse course and instead argue that its unconstitutional structure is in need of remedy. This should be done not only as a matter of law, but also as a matter of policy. It is precisely this unusually powerful and unaccountable structure that has led to so many problems, whether it be reckless spending,  aggressive enforcement actions, or flawed rulemakings. Poor structure leads to poor policy.

One such example where the bureau could acknowledge so is in the Fifth Circuit Court of Appeals case, Collins v. Mnuchin. This case does not directly involve the bureau, but instead an eerily similar agency, the Federal Housing Finance Authority (FHFA).

In Collins, the court was posed the question of whether FHFA’s leadership structure, which is almost identical to the bureau’s, violated the Take Care clause of Article II. The Fifth Circuit found that it did. The case is now being reheard en banc, and is widely expected to be headed to the Supreme Court.

In Collins, the panel opinion found that the FHFA’s structure violates the constitution’s separation-of-powers principles in the following way:

… Congress insulated the FHFA to the point where the Executive Branch cannot control the FHFA or hold it accountable. We reach this conclusion after assessing the combined effect of the:

(1) for-cause removal restriction;

(2) single-Director leadership structure;

(3) lack of a bipartisan leadership composition requirement;

(4) funding stream outside the normal appropriations process; and

(5) Federal Housing Finance Oversight Board’s purely advisory oversight role.

The bureau fits this same criteria almost perfectly. However, the Fifth Circuit was careful to draw a distinction between the two regulators. In particular, the court highlighted that the president can influence the bureau’s activities through the Financial Stability Oversight Council (FSOC), a council of ten regulators that hold broad authorities to identify and monitor excessive risks to the financial system, whereas the FHFA’s Oversight Board is purely advisory.

This distinction, however, is fatally flawed. FSOC is for all practical purposes a toothless check on the bureau. The FSOC is only able to vote to overturn a CFPB regulation or action if it threatens the entire “safety and soundness” of the U.S. financial system—an almost insurmountable task for a consumer protection regulation. Indeed, the Fifth Circuit rightly recognized the limits of FSOC’s influence over the Bureau in footnote 233, citing Judge Henderson’s dissenting opinion in PHH, but neglects to address these limits.

The Trump administration is a clear example of why the president does not control the bureau through FSOC. It is certain that the administration did not agree with a number of rules promulgated during its tenure by an Obama-appointed director, going so far as to sign a Congressional Review Act resolution to block the bureau’s arbitration rule. Nevertheless, regulating arbitration agreements does not come close to endangering the entire financial system, and so it was not eligible to be overturned by FSOC veto. The president simply lacked control of his branch of government.

The Fifth Circuit’s approach in distinguishing the two agencies is wholly unsatisfactory. Congress cannot isolate an independent agency from meaningful executive oversight, or else the president could not fulfill his responsibility to ensure the faithful execution of the nation’s laws. But a toothless FSOC does not render the bureau meaningfully accountable to the president.

If Collins or a similar case reaches the Supreme Court, the bureau should brief the court on the unconstitutionality of its structure, and, in particular, the lack of distinguishing features between FHFA and the bureau. While it may appear awkward for the bureau to openly advocate that their own agency’s structure is unconstitutional, it is a legal and political necessity.

Previous posts on reform proposals for the Consumer Financial Protection Bureau: