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The Myth of Independence at the Consumer Financial Protection Bureau

Last week, the U.S. Court of Appeals for the D.C. Circuit handed down a much-anticipated ruling on the constitutionality of the Consumer Financial Protection Bureau, a federal government regulator established under the Dodd-Frank Act of 2010. The case, PHH v. CFPB, deemed the Bureau constitutional by a 7-3 vote, largely along ideological lines.

At issue was the question of whether the Bureau’s extreme independence from the President, where a single director can only be removed for “inefficiency, neglect of duty, or malfeasance,” and Congress, which does not control the Bureau’s funding, conformed with the Constitution’s separation of powers. It is my view that the Bureau plainly does not. But that is not my concern here.

My concern is the very nature of the CFPB’s “independence.” The Bureau’s proponents view its extreme insulation from Congress, the president, and the electorate as an essential characteristic. Why? To prevent “regulatory capture.”

Regulatory capture is where an agency advances the concerns of special interest groups instead of the public interest. Insulating the CFPB from political winds, we are told, prevents the agency from being capture by special interests. Indeed, the majority opinion in the PHH case noted that the Bureau had been structured “to avoid agency capture that Congress believed had beset the agencies that previously administered the CFPB’s statutes”.

Preventing capture is a noble intention. But the idea that the CFPB’s extreme insulation has made it independent of political influence is patently false. In fact, the Bureau has already been captured by special interests—such as consumer and progressive groups—to represent one brand of politics and one vision of consumer protection, and it has been brazenly resisted any attempts to reflect a diversity of opinion. This does not constitute the kind of independence that CFPB proponents urge us to protect.

The ideological bias of the Bureau was clear from the start. Under its first director, the CFPB hired all but exclusively from one political party, deliberately weeding out applicants with differing opinions. Ronald Rubin, a former enforcement attorney at the CFPB, has documented the discriminatory hiring practices, including screening techniques that could easily identify Republicans in order to reject them. “In retrospect, the Office of Enforcement’s hiring process, which was typical for the bureau, violated more laws than a bar-exam hypothetical.”

The anecdotal accounts of ideological bias are largely confirmed by public information of political donations. Data from OpenSecrets.org reveals that nearly 600 CFPB bureaucrats have donated to the Democratic party, while a mere 1 donated to a Republican. Overall, CFPB employees have donated around $115,000 to various Democrats and Democratic committees.

The special interest bias has been reflected in the Bureau’s rulemakings and enforcement actions. Documents obtained under the Freedom of Information Act show that Pew Charitable Trusts and Center for Responsible Lending, an anti-payday loan group, strongly influenced the recently finalized payday loan rule. In a public comment to the Bureau, one lender wrote that:

During the multi-year development of the Proposed Rules, [the Director] allowed the Center for Responsible Lending and other consumer advocacy groups extensive access to Bureau staff.   The special interest groups engaged in frequent email exchanges and private meetings with staff, outlined key features of the Proposed Rules… at the Bureau’s request, coordinated their research efforts with the Bureau’s, and solicited potential candidates for job openings. Representatives of the payday lending industry were not allowed any equivalent access or influence, while consumer advocacy groups were given key positions within the Bureau.

You don’t get more “captured” than privately contacting a special interest group to help write portions of a regulation for you and then employing people from those very same organizations.

The Center for Responsible Lending played a large role in another controversial CFPB action regarding discriminatory auto lending practices. Claiming violation under the Equal Credit Opportunity Act (ECOA), the CFPB assessed Ally Financial an $80 million fine, claiming the company routinely charged higher interest rates to racial minorities on auto loans. This was later found to be largely exaggerated, with the Bureau admitting that their methods for proving discrimination were seriously flawed, with little chance of holding up in court. As recognized by the Bureau’s “Auto Finance Discrimination Working Group,” it was CRL’s interest in automobile finance discrimination that provided the impetus for the investigation.  

Another example is the Bureau’s rule governing arbitration agreements in credit contracts. The rule bans providers of unsecured personal credit from including mandatory arbitration clauses, which waive class action lawsuits. Yet the CFPB’s own study found that arbitration is historically better at compensating victims, with faster and larger awards than class-action lawsuits. If consumers would not benefit from the rule, then who would? The class-action lawyers, who receive millions of dollars for such cases. It turns out that the trial lawyer groups are a major donor to the Democratic party, with ties to CFPB staff.

The CFPB is independent in the sense that it is insulated from accountability to the President and Congress. But it is not independent from special interests and regulatory capture. It has merely preferred one kind of special interest and worked to entrench one vision of consumer protection. This is not the kind of impartial, independent agency that the CFPB’s proponents tout. As Judge Henderson wrote in her blistering dissent in the PHH case, “An agency cannot be considered impartial if in a partisan fashion it uniformly crusades for one segment of the populace against the other.”

The idea that there is only one way to protect consumers, which would require a narrow-minded and ideologically driven agency, is plainly false. Todd Zywicki, a law professor at George Mason University, discusses the difference between “market-reinforcing” and “market-replacing” regulation:

Market-replacing regulations are characterized by a decision by regulators or legislatures to replace the terms to which the parties would voluntarily bargain with terms dictated by the regulator, and to prohibit consumers from entering into certain contracts even if those consumers believe that purchasing that product furthers their own goals. A market-reinforcing regulatory strategy, by contrast, seeks to promote competition and choice so that consumers can find those products that they think are best for themselves and their families.

The CFPB has firmly committed itself to the “market-replacing” camp of consumer protection, involving paternalistic prohibitions of certain products and overreaching enforcement of the law. But this isn’t the only kind of consumer protection, and it is a mistake to assume that the CFPB must be independent of a diversity of thought on how best to improve consumers financial well-being.  

Ultimately, the myth of CFPB independence invalidates the Bureau’s protection from the President and Congress. The extreme insulation is predicated on protecting the Bureau from regulatory capture. But the CFPB has already been captured by special interest groups, who have pursued their own version of consumer protection against the public interest.

Even disregarding the constitutional problems, the Bureau should be reformed to create a more accountable and less aggressive agency. This could be done either by requiring the Bureau to have a sense of impartiality, with a diversity of opinion under a multimember commission structure, or through ending the “independence” charade and making the director answerable to the president. The CFPB’s independence is a myth. Its structure should be reformed to reflect that.