The Consumer Financial Protection Bureau (CFPB) is a key part of the 2010 financial-reform law known as Dodd-Frank. The CFPB has done some good work—but it’s also unnecessary, unconstitutional, and unaccountable both to the president and to Congress. House Republicans are working on a plan to make the CFPB more accountable, but they’ll need a few Democrats to help get it passed. Democrats should welcome these efforts. Politicians shouldn’t need to thwart the basic tenets of good government to give consumers basic protections.
When signing Dodd-Frank into law nearly seven years ago, President Obama said that he had achieved two purposes: ending bailouts and—via the CFPB—empowering consumers to make smarter financial choices. Massachusetts senator Elizabeth Warren came up with the idea for a government agency whose sole purpose would be to protect consumers from unfair, deceptive, or abusive financial-industry practices. The CFPB would serve as a “cop on the beat,” prohibiting or constricting certain activities, such as high-interest payday lending; cutting the fine print in mortgage and credit-card contracts; and giving people better information.
America’s regulatory agencies had failed in the years leading up to the 2008 financial crisis, to be sure. But America really didn’t need another regulatory agency to remedy these failures. Ironically, the CFPB’s highest-profile successes highlight its redundancy. Last fall, the CFPB levied a $100 million fine against Wells Fargo, one of the nation’s biggest banks, “for the widespread illegal practice of secretly opening unauthorized deposit and credit-card accounts.” But Wells Fargo’s egregious sin—allowing for thousands of unsupervised employees to earn bonuses by opening fraudulent accounts in the name of unwitting customers—was already illegal under laws that existed before Dodd-Frank and the existence of the CFPB.
Government agencies ranging from the Federal Trade Commission to the Office of the Comptroller of the Currency have long been able to take civil-enforcement actions and refer candidates to the Justice Department for criminal prosecution. Just last month, the FTC settled a high-profile financial case with the ride-hailing app Uber, extracting $20 million from the company for making “false, misleading, or unsubstantiated representations” about how much drivers would earn using the app, among other charges.
Dodd-Frank could have created a new division of the FTC, staffed by financial-industry experts focusing on consumer finance. Instead, Congress created the CFPB. Most government agencies, like the Department of Transportation, have a secretary who sets policy. The president appoints the secretary, and Congress confirms him or her. When the president leaves, so does the secretary. To work with more independence, some government agencies, like the FTC, have a board that sets policy. The president appoints, and Congress confirms, each board member. But each commissioner’s term—at the FTC, it’s seven years—outlasts a president’s single term, so board members can exercise some discretion apart from the president’s directives and goals. The FTC also prohibits more than three of its five board members from being members of the same party. In both cases, agencies must go to Congress regularly for funding.
Dodd-Frank created an entirely different governance structure for the CFPB. The CFPB has a single director, whom the president appoints and Congress confirms for a five-year term. Normal political checks and balances thus don’t apply. A new president can’t name a new director, and that new director isn’t answerable to fellow commissioners. The fiscal checks and balances don’t apply, either. The CFPB gets its funding directly and automatically from the Federal Reserve. This structure explains why the first and current director of the bureau, Richard Cordray, was unruffled by President Trump’s election. The new president “really shouldn’t change the job at all,” he said.
Late last year, Washington’s U.S. Court of Appeals declared that the CFPB’s set-up violates the tenets of core government principles. “The director of the CFPB possesses more unilateral authority . . . than any single commissioner or board member in any other independent agency in the U.S. government,” the justices concluded in declaring the agency “unconstitutionally structured.”
The decision is under appeal. But even if the CFPB prevails in court, Congress should change this governance structure, for three reasons. First, by creating the CFPB the way they did, the agency’s advocates signaled that they had given up on our normal political system. “Congress took several steps to ensure that the CFPB’s independence would not be compromised by overwhelming political pressure from the financial-services industry, as happened with several key banking regulators before the economic crisis,” said the Consumer Federation of America. But those other banking regulators still exist. Are they still captured by the financial-services industry under our democracy’s normal practices? If so, isn’t that a serious problem? Anyway, this insulation from industry pressures doesn’t work. Last fall, the House voted by a large majority—including Democrats—to keep the CFPB from regulating politically powerful auto lenders. The bill may pass this year.
Second, though financial regulation is technocratic, it is also political. With the change in Washington leadership, Americans may see a big difference in how the federal government protects the environment and approaches education policy. Voters know of these potential changes when they vote. If they don’t like the changes they see, they can vote Trump out of office in a few years, and vote someone with a different perspective in. It’s unclear why Congress must go to extraordinary lengths to protect CFPB from the actions of the new president, yet never went to such lengths similarly to protect the Environmental Protection Agency, the Education Department, the Energy Department, or any other policy-making agency.
Third, Congress has a practical reason to act. Many members from both parties are worried about the power Trump already wields as president. Cordray can outlast the president for a while. But his five-year term is up in 2018. Trump then will be able to appoint a successor for the next five years, possibly seeping well into a new president’s term.
Texas Republican Jeb Hensarling, head of the House Financial Services committee, has floated an idea to transfer the CFPB’s responsibility to the FTC and to other pre-existing regulators. At the least, an FTC-style commission, not a single director, should govern the CFPB. Democrats may want to take a look, and see if they can’t come to a compromise under which consumers enjoy the benefits that the current CFPB provides while being protected from unchecked government controlled by either party. Otherwise, Democrats (and perhaps some Republicans) risk being dismayed down the road when some president they support is stuck with Trump’s lone—and powerful—CFPB director.
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