Former CFPB director Richard Cordray testifying before a congressional committee.
Screenshot from a Youtube video produced by CNN Money

No sooner do I write a post  about the dangers of government regulation and the regulatory state than one of the featured rogue agencies proves just how much of a rogue it is. 

The Dangers of the Consumer Financial Protection Bureau

The independent government agency in question  is the Consumer Financial Protection Bureau (CFPB), which I featured in my last post.  Unlike other independent government agencies, the CFPB is headed by a single director, rather than a commission or board of governors. Until last week it was headed by Director Richard Cordray. Although I described the agency in some detail in my last post, I will recap that discussion here.

The first thing you need to understand about the CFPB is that it was constructed to be even more independent from the rest of the government than any other independent government agency. The authorizing legislation for the CFPB, the Dodd-Frank Act, specified the CFPB would be an organization underneath the Board of Governors of the Federal Reserve, itself an independent agency of the federal government. This has an interesting insulating effect because the budget of the Federal Reserve is not part of the federal budget. Instead the Federal Reserve is self-funding because of its role in managing the money supply from open market operations. Concerning the Fed’s budget, we find from Wikipedia that

The vast majority (90%+) of Fed revenues come from open market operations, specifically the interest on the portfolio of Treasury securities as well as “capital gains/losses” that may arise from the buying/selling of the securities and their derivatives as part of Open Market Operations. The balance of revenues come from sales of financial services (check and electronic payment processing) and discount window loans.

In addition, the Dodd-Frank Act requires the CFPB’s budget be funded by the Federal Reserve. In the words of the Act, the Federal Reserve’s Board of Governors “shall transfer to the [CFPB] from the combined earnings of the Federal Reserve System.” [Dodd-Frank, § 1017(a)(1)]. Dodd-Frank also explicitly states CFPB’s funds from the Federal Reserve “shall not be subject to review by the Committees on Appropriations of the House of Representatives and the Senate.” Wow! In one fell swoop the Dodd-Frank Act makes the CFPB independent of Congress’ power of the purse, and eliminates any say Congress might have over the CFPB’s expenditures.

This story just gets better and better in its incredibility.  As Dodd-Frank originally defined the agency, the President could remove the CFPB Director only for cause, i.e. only if he did something illegal or outside the powers of his office. This means if the Director followed policies the President disagreed with, but were otherwise legal, the President could not remove him from office. Similarly, the Congress could not bring the agency to heel by cutting off its funds. So long as the Director’s use of his organization was strictly legal, or appeared to be, no other part of government could touch him. Just from the proceeding information, you should be getting the impression that the CFPB is an independent medieval fiefdom, which it greatly resembles.

And  a very powerful fiefdom it is! From Cornell University’s Legal Information Institute I have found the following CFPB powers. The blue text shows verbatim quotes from the website.

• The Bureau has the authority to administer, enforce, and otherwise implement federal consumer financial laws, which includes the power to make rules, issue orders, and issue guidance. (Dodd-Frank Act § 1021).
• The Bureau is authorized to engage in investigations and request information from covered persons, issue subpoenas or civil investigative demands, conduct hearings and adjudication proceedings, and commence civil actions in federal court seeking any appropriate or equitable relief against any person that violates a federal consumer financial law. (Dodd-Frank §§ 1052–55).
• The CFPB has exclusive authority to enforce federal consumer laws against nondepository covered persons. (Dodd-Frank Act § 1024)
• Further, the Bureau has exclusive federal consumer law supervisory authority and primary enforcement authority over insured depository institutions or insured thrifts with assets totaling over $10 billion. (Dodd-Frank Act § 1025)

On the other hand the CFPB can exempt any product or service from its jurisdiction if it determines that to  be “necessary or appropriate.” [Dodd-Frank, § 1022(b)(3)(A)]. Can you possibly think of a more sweeping opportunity for political corruption and crony-capitalism?

And the CFPB has been doing a great deal to increase the regulatory burden on the financial industry, particularly on banks, and most particularly on small community banks and credit unions. Consider what the video below by PragerU has to say about that.

For additional comments on how badly the CFPB has affected the financial industry and thereby hurt the economy, consider the testimony of Rep. Jeb Hensarling (R-TX), Chairman of the House Financial Services Committee, on MSNBC’s Morning Joe, June 6, 2017, shown in the video below. You should take note that the Financial CHOICE Act they are discussing is a bill passed by the House that would reform some of the worst aspects of the Dodd-Frank Act. The proposed law would strip the CFPB of powers to write rules and supervise companies. Unfortunately, since the bill is not a reconciliation bill, and since the Democratic Party considers the Dodd-Frank Act to be sacred and holy writ, the bill’s prospects in the Senate would appear hopeless unless the World’s Greatest Deliberative Body abandons the filibuster against ordinary legislation. With the GOP having at best only 52 votes in the Senate, assuming all the Republican senators hang together, and with 60 votes being necessary to invoke cloture, the bill’s Senate prospects appear very dim indeed.

One other point to remember while watching the video below is that the big banks were not really the fundamental cause of the Great Recession. One of Hensarling’s questioners asks if he does not believe that we really need something like Dodd-Frank to regulate big banks and prevent similar future financial crises. Hensarling replies that in fact prior to the financial crisis of 2007-2008 there had not been a great degree of bank deregulation, that the bank deregulation explanation for the financial crisis was a myth. Instead, he says, the explanation was bad government regulation that provided incentives for people to get junk mortgages they could not afford. In fact the explanation is much more damning of government than that. Ever since the Clinton administration, requirements were built into law that required banks to make the junk mortgages that caused the crisis. You can find the explanation in somewhat greater detail in my post Causes of the 2007-2008 U.S. Financial Crisis.

Because it was government policies and not greedy bankers and investors that created the Great Recession, the founding premise undergirding the Dodd-Frank Act (and therefore the CFPB) is a lie. Nothing good can come from basing your policies on a lie.

Director Richard Cordray’s Resignation and Its Fallout

The origins of the current excitement  over the CFPB dates back to a federal court case decided a little over a year ago. The gathering of such an immense amount of concentrated economic power in an essentially unsupervised, unaccountable agency was apparently too much even for the generally progressive U.S. Court of Appeals for the District of Columbia. The court case was PHH Corporation, et. al. v. Consumer Financial Protection Bureau, in which PHH was contesting a $109 million penalty assessed by the CFPB.  A three judge panel of the DC circuit ruled that because of its immense, unanswerable power, the CFPB was unconstitutionally structured. Unfortunately, the Court is allowing the CFPB to continue, rather than totally shutting it down, but has ruled that the Director must serve at the pleasure of the President. Before the court case, the CFPB director could only be removed for cause.

Given that court decision from before Trump’s election, and given that Director Cordray’s abuses justify his firing even for cause, many thought Trump would have fired him in the first months of his administration. Among other sins, Cordray violated due process rights of the firms he regulated, and approved excessive spending on CFPB office renovations. In the first group of mortal sins was a retroactive prosecution of the financial services companies PHH and Ocwen for actions years earlier, when the firms were under the jurisdiction of other agencies.

For whatever reason Trump hesitated to remove Cordray, that reason had disappeared by last Friday when Cordray tendered his resignation letter to Trump. Apparently Cordray was offered a chance to quit rather than be fired. Below is a Fox News video detailing the circumstances of Cordray’s resignation.

What Cordray did just before that however was to appoint his assistant Leandra English to be the bureau’s deputy director. The Dodd-Frank Act requires the deputy director to be the acting director “in the absence or unavailability of the Director.” There appears to be a scheme among Democrats to use the language of Dodd-Frank to justify English as the acting director for the remainder of Cordray’s appointed term, until July 2018. The Wall Street Journal quotes Barney Frank as commenting, “If you look at the CFPB language it is very specific and it was designed to protect an agency that we knew would be under a lot of pressure. Everything was structured for its independence.”

Acting in reaction to the prospect of Leandra English becoming acting director, Donald Trump quickly appointed long-time critic of the CFPB, Mick Mulvaney, as CFPB director. In a counter-reaction to that appointment, English continues to claim she is the rightful acting director, and has asked a judge to issue a temporary restraining order to keep Mulvaney out. Sen. Elizabeth Warren, who originated the idea to create the CFPB, supports English’s claim.

However, as the Wall Street Journal also points out, the Vacancies Act can supersede any office-specific succession scheme. Under the Vacancies Act, the President can fill any vacancy with his own appointment, subject to the advice and consent of the Senate. A memo from the Justice Department Office of Legal Counsel (OLC) notes there are 40 other office-specific statutes providing alternatives to the Vacancies Act. Nevertheless, according to the memo even when it is not the “exclusive means for filling a vacancy, the [Vacancies Act] remains an available option” for a President to fill any vacancy. From these considerations it would seem that just as a matter of law, Trump will end up on top in this controversy. It will be fascinating to see how it all plays out, in the media as well as in the courts and among the politicians.

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