As the Senate prepares for what should be a contentious confirmation hearing for President Trump’s nominee to head the powerful Bureau of Consumer Financial Protection (formerly known as the Consumer Financial Protection Bureau), a federal judge in New York just ruled that the BCFP’s unchecked power violates the Constitution.
The BCFP “lacks authority to bring claims” because of the lack of constitutional checks on its director, ruled Loretta Preska, a respected senior judge and former Chief Judge of the U.S. District Court for the Southern District of New York, on June 21.
The Dodd-Frank financial regulatory overhaul, rammed through the Democrat-controlled Congress and signed by President Barack Obama in 2010, purposefully created the BCFP as a massive bureaucracy almost completely unanswerable to the president and Congress once confirmed by the Senate. Former House Financial Services Committee Chair Barney Frank, D-Mass., whose name is emblazoned on the law, admitted to CNN that “we deliberately tried to give it [the BCFP] some protection from the normal political process.”
The BCFP is “protected” from accountability to elected officials in two main ways. First, it receives its funding not through appropriations of Congress but from a fixed share of the Federal Reserve revenues from selling U.S. dollars. This means Congress can’t scrutinize the BCFP through its traditional “power of the purse” oversight that it exercises over other agencies, from the CIA to the IRS.
The second way Dodd-Frank shields the BCFP from accountability is through its leadership structure. Like a department in the president’s cabinet, the BCFP has a single director at the helm, as opposed to the bipartisan board that runs independent agencies such as the Securities and Exchange Commission and the Federal Communications Commission. Yet, unlike a Cabinet department, the BCFP has a leader that can’t be removed by the president except for “inefficiency, neglect of duty or malfeasance in office.”
In October 2016, a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit ruled that this was at odds with the Constitution. The judges declared that the head of an agency must be checked by either the president or a multi-member board.
Although this panel’s decision was overturned earlier this year by the full court, Preska, who is not bound by D.C. Circuit ruling, adopted most of the reasoning the original decision in voiding BCFP penalties against firms that offered cash advances to plaintiffs awaiting lawsuit settlements and awards. The facts of the Preska’s decision are complicated in that she also ruled that New York state authorities could continue pressing their case against these firms.
But now, and especially if Judge Preska or other courts go further and stop the BCFP nationally, her ruling could have vast importance for the thousands of community banks, credit unions, and entrepreneurs that come under the BCFP’s regulatory thumb. Under the tenure of the BCFP’s first director, this lack of constitutional accountability seemed to give the bureau license for unfair, arbitrary actions against the businesses it regulated. These included applying the law retroactively to penalize companies, posting significant rules on the internet without required notice-and-comment from the public, and ignoring the BCFP’s own data in pushing through regulations that could shatter certain businesses.
Fortunately, since Trump appointed Mick Mulvaney as acting director last November, Mulvaney has worked to reverse some of these actions and ensure the BFCP adheres to the letter of the law. As my Competitive Enterprise Institute colleague Daniel Press notes, “while the Bureau has changed little in structure, it has changed greatly in substance” under Mulvaney. There is every indication that Kathy Kraninger, Trump’s nominee for permanent BCFP director who worked on Mulvaney’s team at the BCFP, will continue these reform efforts.
But any director of any government agency or bureau must be subject to the Constitution’s checks and balances. Congress and the courts must protect Americans from the unchecked “protection” of government entities.