The Clear Case for Restructuring the Consumer Financial Protection Bureau

The House of Representatives will vote as early as Thursday this week on the Financial CHOICE Act, a major part of which is restructuring the Consumer Financial Protection Bureau (CFPB) into the Consumer Law Enforcement Agency (CLEA). It has long been CEI’s contention that the CFPB’s current structure is unconstitutional. The case for reform is clear.

As currently structured, the Bureau is unconstitutional for two reasons. First, as an independent agency its structure departs from long-standing practice in that it is answerable solely to one man – its director, currently Richard Cordray – who cannot be removed from office for anything short of malfeasance. Independent agencies that do not answer to the president have traditionally been structured as multi-member commissions, so as to preserve some form of internal checks and balances. The CFPB does not have this restraint. This is the prime reason why a federal appeals court last year found the Bureau was structured unconstitutionally, calling the director the most powerful federal official apart from the president (the case is currently awaiting en banc review). The U.S. Department of Justice agrees, calling the lack of oversight of such an official by the executive branch, “an unwarranted limitation on the president’s executive power.”

Not only is the CFPB free from executive oversight, it is free from congressional oversight. The prime way in which Congress exercises power over agencies is through the power of the purse – the necessity for agencies to seek funding through the appropriations process. The Bureau is free from such earthly considerations. Under the statute, it requests funding from the Federal Reserve, which provides it automatically. This is why Director Cordray was able to respond contemptuously to an inquiry from a Congresswoman as to why he was spending $215 million on refurbishing the Bureau’s headquarters, “Why does that matter to you?

So the case for bringing the CFPB back under the oversight of the executive and legislative branches is pretty solid. Yet the Financial CHOICE Act not only makes the director answerable to the president and brings the CFPB into the appropriations process, it goes further. The Bureau currently has both supervisory and enforcement powers – it can poke around in banks’ activities as well as enforce the law. The much-lauded supervisory power failed to notice the scandal of upselling at Wells Fargo until the Bureau was alerted by the Los Angeles Times’ investigative journalism. Instead, it spends much of its time investigating legal practices it does not like, such as banking relationships with payments processors that serve industries it disapproves of. The CHOICE Act repeals its supervisory authority, returning it to the banking regulators who have more of an incentive to make sure that the banking system is working properly. The new Agency will retain enforcement powers, enabling it to continue to bring action against bad actors.

The Bureau has also been tempted to overreach by the power granted it in Dodd-Frank to take action against “unfair, deceptive, or abusive acts and practices” (commonly known as UDAAP). Not only has the CFPB interpreted this so broadly as to actively harm middle-class consumers, the power has chilled innovation in banks. They have no way to know what the Bureau might consider UDAAP and the Bureau has refused to outline how it interprets its power – which means that banks have to bring a new product or service to market before knowing if the Bureau might consider it as falling within UDAAP. We’ve been down this road before; in the 1970s and 80s the Federal Trade Commission had similar statutory powers that it used, for instance, to promote the idea that any advertising to children might fall foul of its powers. Congress rightly reined in the FTC. It can do the same to the CFPB by approving the CHOICE Act provision that repeals the Bureau’s UDAAP power.

Finally, the CHOICE Act brings an internal check and balance to the new Agency by establishing an independent Inspector General confirmed by the Senate. The lack of an independent Inspector General in the Bureau has surely contributed to its hubristic abuse of power.

While we at CEI would prefer to see the CFPB shut down entirely, the provisions of the Financial CHOICE Act would go a long way towards righting the wrongs inflicted on American financial consumers by this erroneously-named agency.