As you muck around the D.C. swamp, there are plenty of dank crevices its denizens inhabit. Those habitats will need to be cleared away if President Trump ever hopes to drain the swamp. One of the darkest niches is called the Consumer Financial Protection Bureau.
The CFPB imposes horrific costs on America’s financial system and consumers through overregulation, which has led to higher costs for financial services, loss of access to those services for lower-income consumers, and a lack of innovation. But the big reason for radical reform of the CFPB is that it is unconstitutional.
The Bureau’s structure undermines the constitutional principle of checks and balances. Its director is not answerable to the president or to Congress. It is isolated from the regular appropriations process and instead gets its funding from the Federal Reserve, the central bank of the United States. Even the judicial branch, the courts, must give CFPB rulings extra deference that other agencies and citizens do not get. This is exactly the sort of setup the American people adopted the Constitution to avoid.
The problem with the CFPB started when Congress passed the Dodd-Frank Act in 2010 and thereby created the Bureau. It gave the agency’s director too much power and too little accountability, as the District of Columbia Circuit Court of Appeals initially ruled in the case PHH Corp. v CFPB.
Though that case is still pending, Congress should still act to counter the problem of overregulation. Congress should force the CFPB to consider the potentially devastating effects of its regulations on financial institutions and consumers by placing it under the supervision of a board consisting of officials from other federal financial regulatory agencies, including the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve. Those agencies know better than the CFPB what effect its regulations have on the safety and stability of the banking system.
Congress should also make the Bureau a proper regulatory agency and return its supervisory authority to dedicated banking regulators (including state banking supervisors). The CFPB currently has supervisory authority over banks, thrifts, and credit unions with assets over $10 billion, as well as over non-bank financial institutions such as mortgage lenders and servicers, payday lenders, and private student lenders.
In addition, the Bureau’s overly broad power over “unfair, deceptive or abusive acts or practices” should be returned to the Federal Trade Commission (FTC). To date, the CFPB has only defined that power through enforcement proceedings, which has led to a significant chilling of financial innovation. At the very least, the Bureau should be required to define its power through a rulemaking, like other government agencies.
Congress — or a new, accountable CFPB director — should also make the Bureau’s complaints database more reliable or shut it down. The CFPB’s public consumer complaints database collates thousands of complaints leveled against financial institutions, but it is riddled with errors. According to a former CFPB official, more than a quarter of the complaints registered “didn’t pan out” or were incorrect. For instance, a single complaint was counted as 35 different ones. Worse, the Bureau has undertaken an intrusive data collection exercise involving over 500 million credit card accounts, from which account holders cannot opt out.
The Bureau’s research — such as, for example, on payday loans — is often out of step with academic research on the same topics but is nevertheless used as justification for rulemakings. The CFPB should shut down its research unit and rely on independent academic analysis instead.
Ideally, the CFPB should go completely. If Congress wishes to establish a dedicated agency to oversee consumer financial issues, it should start again from scratch, acting in a manner that respects fundamental constitutional principles. But if abolishing the bureau proves politically impossible, at the very least the agency should undergo significant structural reform. Its director should be made accountable to the president, as the D.C. Circuit Court urged in its original judgment.
Just as importantly, in order to make the CFPB director accountable to Congress for the agency’s use of taxpayer money, it should be subject to Congress’ power of the purse by having its funding come through the normal appropriations process.
Draining the swamp will require some hard choices. Abolishing or reforming an unconstitutional agency will be one of the easiest to make.
Originally published on the Washington Examiner.