Tomorrow, Richard Cordray, director of the Consumer Financial Protection Bureau, will face questions from the House Financial Services Committee. Here are some of the questions he should be asked.
Q: The CFPB is currently insulated from the checks and balances required of our government by the Constitution. What is so special about consumer financial protection that makes it immune to meaningful oversight?
Background: The CFPB has no checks or balances to its power, making it unaccountable to Congress, the Administration, the courts, or the people in general:
- Congress exercises no “power of the purse” over the CFPB, because the agency’s budget – administered essentially by one person – comes from the Federal Reserve, amounting to approximately $400 million that Congress cannot touch or regulate.
- The President cannot carry out his constitutional obligation to “take care that the laws be faithfully executed,” because the President cannot remove the CFPB Director except under limited circumstances. It is probable that neither the current President nor his successor will be able to remove Director Cordray until his term ends in 2018. Dodd-Frank goes beyond the "for cause" standard for removal from most independent agencies, and says the president may only remove the director "for inefficiency, neglect of duty, or malfeasance in office."
- Judicial review of the CFPB’s actions is limited, because Dodd-Frank requires the courts to give extra deference to the CFPB’s legal interpretations.
This is why the Competitive Enterprise Institute and others are suing over the constitutionality of Dodd-Frank. Our basic claim is that Dodd-Frank gives an agency of unelected government bureaucrats, like Director Cordray, unrestrained power. We argue this unaccountable power over the daily lives of the American people results in a lack of public accountability, creating a power grab over every U.S. citizen.
Q: Has the Bureau performed any cost-benefit analyses of its proposed regulations? If so, why have you not published them? If not, why not?
Background: As far as we can tell, the CFPB has published no cost-benefit analyses for any of its regulations. If the Bureau has indeed conducted such analyses it has kept them confidential. While cost-benefit analysis has its flaws, it at least represents a level of reflection on whether or not a rule is beneficial to the polity that does not seem to be present at the moment. A rule whose costs outweigh its benefits is clearly damaging, even if it has been mandated by Congress in a law like Dodd-Frank. Therefore, a cost-benefit analysis would provide strong evidence to Congress that that provision should be repealed.
When it comes to rules published by an agency on its own authority, cost-benefit analyses should be the norm before public consideration of the rule. No agency should unduly burden citizens with rules that will lower the general welfare of the Republic. Rules that have a very slim net benefit can be put aside in favor of other rules with a clearer benefit to citizens. Moreover, rules that impose significant costs on large swathes of the population while concentrating benefits elsewhere should also be avoided. A good example of the consequences of the CFPB failing to do such analyses is provided below.
As Wayne Crews said in comments to the OMB in 2014, “Review, however poorly done, at least once reflected an executive branch more appreciative of the reality that the threat of the regulatory state is the same as the alleged menace of market failure: Costs can be externalized or foisted upon others, and resources can be consumed beyond a “socially optimal” level. Externalization of costs is arguably a greater threat with respect to agency behavior than for private actors since bureaus suffer no repercussions when some regulatory intervention proves scientifically, socially or economically irrational. Unlike profitmaking firms, bureaus face no economic incentive to minimize the costs of their “product” (regulations) since others, typically private sector businesses and the consumers who buy their products, are obliged to absorb the impact of their actions. Review can help counter that.”
Finally, this failure to conduct cos-benefit analyses is a clear breach of statutory requirements. The Dodd-Frank Act Section 1022 (b)(2)(A)(i) requires the Bureau in prescribing a rule to consider:
“The potential benefits and costs to consumers and covered persons, including the potential reduction of access by consumers to consumer financial products or services resulting from such rule; and the impact of proposed rules on covered persons, as described in section 1026, and the impact on consumers in rural areas”
By not conducting such analyses, the Bureau is flouting the will of Congress.
Q: Community bankers have told us that they have had to stop offering mortgages to people they know well because they cannot make the individual judgments they once made about creditworthiness because of the Bureau’s mortgage rules. Are you aware of this critique and what do you intend to do about it? Furthermore, the mortgage rules are so complex that you have been credibly accused of regulating by enforcement. Small banks are particularly ill-equipped to handle this means of regulation and so are having to merge in order to be able to afford compliance departments capable of doing so. How do you propose to remedy that situation?
Background: There is clear evidence that the Bureau’s rules on mortgage lending are chilling innovation in the mortgage lending arena. As HousingWire editor Sarah Wheeler has noted,
Example A would be the TILA-RESPA Integrated Disclosure rule. Even with 1,888 pages to interpret and implement, there are still parts that don't make sense and actually cause the consumer to have a wrong understanding of some of their costs (especially in title). Busy with that implementation, companies are also supposed to somehow have the manpower and brain trust to track and understand a pattern of enforcements that may or may not have anything to do with their operations?
The result of too much regulation is an atmosphere of fear and conservatism that doesn't leave any breathing room for innovation.
There is also evidence that the CFPB is regulating through enforcement. Even with (or perhaps because of) rules that reach almost 2000 pages in length, how the Bureau will enforce them only becomes apparent when enforcement orders are issued. Such application of the law stands in stark contrast to the generally accepted concept of the rule of law, which is that individuals should be able to predict how the law will behave based on an examination of the relevant statutes and regulations. It also represents an end around run past the statutory rule-making process. Other financial agencies, such as the SEC and the OCC, have also been accused of regulation by enforcement.
It should therefore come as no surprise that one of the major effects of the Dodd-Frank act that created the CFPB has been the decimation of small and community banks. Many small banks had no in house counsel to advise on the effects of such regulation and have had to merge with other small banks to reach the economies of scale necessary to employ effective compliance teams.
Q: The Bureau’s attempts to regulate the auto lending market appear highly problematic. First, the Dodd-Frank bill specifically excluded auto lenders from CFPB oversight, so your attempt to regulate their finance sources shows that you are ignoring Congressional intent. Secondly, you have admitted that you did not study the effects of your guidance on consumers, so you do not know whether or not it benefits them. Finally, studies of your methodology have found that it correctly identifies well under half of African-American consumers, suggesting that you have no fair lending basis for your rule. Will you therefore support HR 1737, which passed this House comfortably, and will sort out this mess for you?
Background: Section 1029 of Dodd-Frank excludes auto lenders specifically from CFPOB oversight:
The Bureau may not exercise any rulemaking, supervisory, enforcement or any other authority, including any authority to order assessments, over a motor vehicle dealer that is predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both.
Nevertheless, the CFPB found a way to regulate the industry. In an excellent example of regulatory dark matter, the CFPB issued a guidance document to the financial firms that work with auto dealers to provide better rates to their customers. Using the Equal Credit Opportunity Act (ECOA), the CFPB alleged that
An indirect auto lender’s markup and compensation policies may alone be sufficient to trigger liability under the ECOA if the lender regularly participates in a credit decision and its policies result in discrimination. The disparities triggering liability could arise either within a particular dealer’s transactions or across different dealers within the lender’s portfolio. Thus, an indirect auto lender that permits dealer markup and compensates dealers on that basis may be liable for these policies and practices if they result in disparities on a prohibited basis.
The Bureau therefore issued guidance on how these finance firms could avoid being found in breach of the ECOA, indirectly regulating auto dealers by cutting off the possibility of them offering finance that breached the terms of the CFPB guidance.
Unfortunately for the CFPB, an independent study of the methodology by which the CFPB had found the alleged discrimination that required action under the ECOA concluded that it severely overestimated the number of minority consumers supposedly harmed by the practice. This has led to white consumers getting refund checks for supposed racial discrimination against them as African-Americans. Director Cordray has admitted that the Bureau’s methodology contained mistakes.
To clear up this mess, the House has passed H.R. 1737, The Reforming CFPB Indirect Auto Financing Guidance Act, which would nullify the guidance, and provide for a proper rule-making process for indirect auto finance, including a study on the effects on consumers.
There are many more questions that could be asked of the Director, including questions related to 800 page regulations on prepaid debit cards, rules that will cut off small dollar lending and overdraft protection for the poor, and treating amortization as prepayment penalties when the courts have held otherwise, but these questions will suffice to show how out of control this rogue agency is.