Time to Fix the Consumer Financial Protection Bureau

by Iain Murray

The Trump administration’s proposed budget contains an interesting line item that isn’t mentioned in the summary text. It calls for reductions in spending at the Consumer Financial Protection Bureau (CFPB). What makes this different from any of the other spending reductions in the budget is that, currently, the CFPB doesn’t get any funding through the budget process—a situation that would have shocked the Founding Fathers, who invested Congress with the power of the purse. It’s a sign the administration may be serious about fixing the many problems with the CFPB.

Many are convinced that the CFPB is unconstitutional. It is an independent bureau headed by a single director, not a multi-member commission, which is how most independent agencies are structured. That director exercises considerable power, because the president cannot remove him except “for cause,” such as malfeasance. The director does so with a budget requested from the Federal Reserve, not from Congress—and the Fed is required to honor that request up to a certain limit.

The director orders criminal investigations, enforcement actions, and rulemakings, giving him significant executive, legislative, and quasi-judicial powers—all without effective oversight from the president or the Congress.

The full D.C. Circuit Court of Appeals recently disagreed that this strange mix of powers and unaccountability was unconstitutional (reversing an earlier decision by a three-judge panel of the same court). The full court reasoned that the principle of independent agencies, which lie outside the president’s control, was established in the 1930s, that several such agencies have had single directors, and that some institutions, like the Federal Reserve, get their funding outside the congressional appropriations process. Therefore, all Congress did when it created the CFPB was to build on several precedents, which had passed muster with the courts individually.

This is a problem. If this ruling stands, it will give a green light to Congress to continue creating agencies designed to operate without meaningful oversight from the elected branches. In essence, Congress will be able shirk its legislative duties by creating a fourth branch of government to which it can delegate such powers, to be staffed with occasional appointments to it from the executive office—and the judiciary will have no power to stop it.

The power of the CFPB director is such that current Acting Director Mick Mulvaney said: “Authority that I have now as the acting director really should frighten people.” He has been doing his best to restrain that authority, stepping back from what he calls “pushing the envelope” by dropping lawsuits and investigations that may have exceeded the CFPB’s power.

It’s important to note that in the same lawsuit, PHH Corp. v CFPB, where the D.C. Circuit found the Bureau’s structure to be constitutional, it also found that the CFPB abused mortgage servicer PHH’s due process rights.

Acting Director Mulvaney is trying to make sure that doesn’t happen again in the near future. But short-term self-restraint cannot possibly fix the CFPB’s problems over the long term. All it would take is for a new president to appoint a crusading director willing to bring the full power of the CFPB to bear on any financial practice the director dislikes, even if that practice increased consumer welfare on net.

That’s why the president’s budget is so important. It signals to Congress that it should take action to guard its own privileges and bring the CFPB under the appropriations process, where it belongs. Additionally, it should address the problem of the director’s expansive power, which it can do so as part of that budget process (meaning only 51 votes will be needed in the Senate to pass the reform).

If the president and the acting director are serious about fixing the obvious problems with the CFPB, they cannot rely on the judiciary to solve the problems for them. (Still, the Supreme Court really should take a look at PHH or one of the other cases challenging the CFPB’s constitutionality). The responsibility for a permanent fix to the CFPB lies with Congress. It should do so, as the president has suggested, through the budget process this year.

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