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Taming the Beast: Reform Ideas for the Consumer Financial Protection Bureau

This post has been adapted from remarks delivered at CEI’s Capitol Hill policy briefing Financial Regulations in 2018: Outlook and Analysis.

2017 was a controversial year for the Consumer Financial Protection Bureau, a little-known but extremely powerful financial regulator established under the Dodd-Frank Act. From Congress repealing one of its most divisive rules, to claims of enforcement fraud and a slush fund, the Bureau has come under fire for its aggressive regulation and unaccountable nature. This problem was only exacerbated in November, when the longtime Director Richard Cordray departed to run for Governor of Ohio. Left in his wake was a high-profile leadership fight, which a District Court judge only last week resolved, confirming President Trump’s acting Director Mick Mulvaney as the rightful heir to the regulatory throne.

A new Trump Administration Director will undoubtedly dampen the regulatory assault of the Bureau. But that is not enough. Effective reform of the CFPB is going to require more than a changing of the guard, as the Bureau’s problems are deeply structural and engrained in its culture. Taming the beast that is the CFPB is going to require Congress to step up in 2018.

Unaccountable and Unconstitutional

The structure and scope of the CFPB is like nothing ever been seen before in the United States. Indeed, the U.S. Constitution does not provide for the creation of such a powerful and unaccountable body. As my colleague, Iain Murray summarizes in his paper, The Case Against the CFPB:

Dodd-Frank gave the CFPB three mechanisms for avoiding accountability:

  • Its funding comes not from congressional appropriations but from the Federal Reserve, which is to supply whatever the director requests up to a certain amount;
  • It is headed by a single director appointed for a fixed term of five years who may not be fired by the president except for “cause,” such as dereliction of duty or malfeasance; and
  • The courts are required to give extra deference to the CFPB’s decisions in some cases.

These provisions violate expected constitutional checks and balances. Other independent agencies, to be sure, exist with their commissioners insulated from presidential dismissal other than for cause. However, as a U.S. District Court found in the constitutional challenge to the Bureau, PHH v. CFPB, independent agencies have historically consisted of multi-member commissions. Their structure has not left the power of the agency in a single person’s hands. Without meaningful oversight from Congress, the president, or any internal checks, the sole-director structure renders the head of the CFPB the most powerful position in Washington outside of the president.

The unaccountability of the Bureau is made all the worse by the vast power it wields. The Bureau possesses enormous authority over American business, consumers, and the overall economy. As the district court found in the PHH case:

The Director unilaterally enforces 19 federal consumer protection statutes, covering everything from home finance to student loans to credit cards to banking practices. The Director alone decides what rules to issue; how to enforce, when to enforce, and against whom to enforce the law; and what sanctions and penalties to impose on violators of the law. 

Concentrating such enormous power in a single, unaccountable, unchecked Director has had grave consequences for how the Bureau operates. For example, without Congress maintaining its “power of the purse” and checking the Bureau’s funding, the CFPB has been able to run up a $216 million tab for its building renovation, originally estimated at $55 million. This works out to be more than three times the cost of a typical luxury renovation in Washington, and even more expensive than the very symbol of opulence, Trump Tower. Such lavish renovations include plans for a four-story glass staircase, two-story waterfall and a sunken garden. Upon completion, it will feature in the top ten most expensive buildings in Washington, D.C.

The agency’s structure has also lead to some embarrassing blunders. Under Dodd-Frank, the CFPB is statutorily prohibited from regulating auto dealers. Yet it found a way to do so by regulating the finance companies that auto dealers work with to provide better rates to their customers. 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. 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. Worst of all, however, was the way in which the refund checks were dispersed. The CFPB simply guessed on the basis of surnames and home ZIP codes the likely ethnicity of the borrower. This has led to white consumers getting refund checks for supposed racial discrimination against them as African-Americans.

Along with its structure, the culture of the agency has largely influenced the Bureau’s actions. From the beginning, the Bureau was designed to be an aggressive regulatory agency, hiring ideological candidates and weaponizing behavioral economics to allow enlightened regulators to save consumers from themselves. Data from OpenSecrets.org reveals that 593 CFPB bureaucrats donated to the Democratic party, while a mere 1 donated to a Republican. According to the Washington Examiner, overall, CFPB employees have donated $114,859.61 to various Democrats and Democratic committees. “While a partisan tilt towards Democrats within a federal agency is not remarkable, the overwhelming tilt within the CFPB shows the extreme partisan and ideological tilt of the agency,” said a source familiar with the agency.

The consequences of this unchecked authority and aggressive regulatory approach have been disastrous for consumers and the economy. The CFPB’s complicated, one-size-fits-all rules with high compliance costs favor large banks with armies of lawyers while restricting the working poor’s access to financial products. The CFPB largely operates under a system of command and control regulation, which ignores the benefits of competition, innovation, and choice.

Reforming the CFPB

The structural and cultural problems at the CFPB as so profound that the agency as a whole should be abolished. Abolishing the CFPB would not be the end of consumer protection, however. The government has a legitimate role in seeking to curb fraud, deception, and informational problems that distort markets. The government body responsible for bringing such enforcement actions has historically been the Federal Trade Commission. The nineteen consumer protection statutes that the CFPB administers could be transferred to a body such as the FTC, or the Bureau could be remade from scratch.

One key reform is bringing the Bureau under congressional appropriations. This can act as an important check on the agency’s actions, as exemplified by the FTC in the 1970s. According to George Mason University law professor Todd Zywicki, “During the 1970s, the FTC engaged in a period of agency overreach and excessiveness very similar to the behavior exhibited by the CFPB since its founding. As a result, however, Congress cracked down on the FTC, reining in its excesses and threatening to close down the agency. Eventually, the FTC corrected course and moved in a more positive direction.”

One of the greatest disappointments of Dodd-Frank was its squandering consumer financial protection reform efforts. It is now up to Congress to fix it.

Executive agency or Multi-member commission?

If Congress does not have the appetite to abolish the Bureau outright, two other options for reform remain that will solve the constitutional problems of the Bureau. The first option, which is provided for under the Financial CHOICE Act, is to turn the Bureau into a standard executive agency with a director that is removable by the president, and therefore accountable to the electorate. This will dampen the ability of the CFPB to pursue its own narrow-minded goals, as seen under the current structure.

The alternative is to retain the Bureau as an independent agency, but with a multi-member, bipartisan commission that are only removable for cause. The benefit of this approach is its potential to provide greater internal checks and balances, and that dissenting, minor party commissioners can provide a sort of whistle-blowing function for judicial review. But it is far from clear as to whether a multi-member commission would make the Bureau any less partisan than a standard executive agency. Multi-member, bipartisan commissions, such as the National Labor Relations Board, 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.

Whether the CFPB becomes an executive agency or an independent, multi-member commission, one thing is clear: Congress must act to rein in the CFPB in 2018. It is not sufficient to let a Trump appointed Director run the Bureau without reforming its unaccountable, unconstitutional nature.