The Consumer Finance Protection Bureau: Regulatory Overreach?

By Peggy Little on Apr 15, 2013

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Note: This post has been updated by the author to reflect new research on the history of designation and handling of Federal Reserve profits 

 

The Consumer Finance Protection Bureau (“CFPB”), a product of the Dodd-Frank legislation and the Obama Administration, is arguably designed contrary to our system of checks and balances in at least three important aspects – by circumventing Congress’ power of the purse, limits on and powers of the presidential appointments power, and by seeking to curtail the judiciary’s scope of review of its exercise of regulatory power.

Headed by former Ohio Attorney General Richard Cordray, whose appointment was rejected by Congressional filibuster, Cordray was installed by the Obama administration’s “recess” appointment – arguably made when Congress was not in recess and bypassing the Senate’s power to advise and consent to presidential appointments.  The administration, relying on the Department of Justice Office of Legal Counsel, had determined that the Senate was in recess, and the President’s appointment was lawful.  The validity of the recess appointment is one of the issues currently under consideration by the courts.

The CFPB bypasses Congress’s power of the purse to control governmental operations because the Dodd-Frank legislation specifies that its funding will be “determined by the director”, not from congressional appropriations, but from the Federal Reserve.  Its budget is approximately $400 million dollars, over which Congress has no appropriations or other powers.   This ignores the fact that the Federal Reserve’s profits have historically been handled as public funds as a way of avoiding reimposition of a franchise tax by Congress that had required the Federal Reserve from 1913-1933 to remit 100%, later 90%, of its profits to the Treasury– and as such,  have been and should be deposited to the United States Treasury and expended only pursuant to lawful Congressional appropriation.   Its director is appointed for a five year term, but stays indefinitely if no successor is confirmed, and cannot be removed for “policy reasons,” thereby constricting the normal and constitutionally important executive power to freely replace agency directors.   Finally, Dodd-Frank directs courts to give “deference” to CFPB’s interpretation of consumer finance laws, thus constricting judicial review of its conduct.

The government argues that this vital consumer protection agency requires particular independence, given the nature of its duties.   It has through Dodd-Frank, therefore very deliberately sought to insulate it from the political process involved in appropriations and congressional and executive oversight processes.  Only in this way, the government argues, can CFPB’s duties be discharged without undue political influence.

Yet, critics argue that the unmooring of this agency from all three branches of government is an innovation in agency sovereignty not found in other government agencies.  Evidence of what happens when a blank check is issued to an executive’s unchecked appointment of his minister swiftly ensued.    Its budgets are notable for their brevity (one submitted on a single sheet of paper) and vagueness (the 2012 budget estimated $130 million for “other services”).   Reports indicate that approximately 60% of CFPB employees make over $100K per year, and 5% exceed the salary of a Cabinet secretary.      By mid-2012 it had over 900 employees, ten times more than GNMA, and that number is projected to be 1359 employees for fiscal 2013.

Vagueness in funding is mirrored by the language of its powers to “declare” practices to be “unfair, deceptive or abusive.”   Cordray himself has stated that the term “abusive” is “a little bit of a puzzle.”  Financial services and other industries face uncharted regulatory waters and their legal and compliance costs are sure to increase.  This not only affects industry pricing to consumers, but inherently favors big banks better situated to absorb the costs and bear the regulatory risks.  To the extent that the CFPB’s exercise of its enforcement and exception authorities impose unanticipated liabilities beyond those lawfully enacted by Congress, it represents Justice Cardozo’s delightful and prescient  formulation of a roving commission to inquire into evils and then, upon discovering them, do anything it pleases.

Regulatory overreach that converts the executive’s responsibility to take care that the laws be “faithfully executed” into lawmaking powers discretionarily “enacted” or applied by bureaucrats insulated from the structural constitution’s checks and balances have arguably already ensued in the agency’s qualified mortgage rules, counterproductive borrower protections, and asset seizure regulations and prove the wisdom and vital importance of the original design.

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2 Responses to “The Consumer Finance Protection Bureau: Regulatory Overreach?”

  1. Julius Loeser says:

    Peggy’s concerns may be illustrated by the recent CFPB bulletin warning indirect auto lenders of their fair lending liability for the conduct of auto dealers that price their loans.

    Instead of proceeding by proposed rulemaking in order to enable the public to raise, and for the CFPB to consider, concerns about the proposed policy, the CFPB essentially announced a new rule of law that raises a substantial number of concerns.

    Those concerns include the fact that the Dodd-Frank Act explicitly withholds from the CFPB jurisdiction over auto dealer conduct; the fact that data on auto dealer loans and the protected status of borrowers is not regularly available as it is in the case of residential mortgage loans; that, even if such data were available, the size of the sample for any given auto dealer would be too small to permit meaningful regression analysis; that, even were it acceptable to hold a lender vicariously responible for conduct of third-party auto dealers, it may not be appropriate to formulate fair lending conclusions based on a portfolio-wide analysis of a lender that purchases paper from multiple dealers; and that there is so much disagreement over applying disparate impact theory to fair lending cases that the Supreme Court previously accepted certiorari on the issue.

    The CFPB did not receive public comment on these issues, but simply announced a new requirement, thereby reinforcing the concerns of those worried about its being exempt from normal checks and balances.

  2. Noel Cromuel says:

    All I can say is you hit that right on the nose – I agree completely!

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