If future historians are forced to write about how the United States saw its standard of living, its freedom, and its rule of law slip away after the turn of the 21st century, they will have to devote considerable ink to the Obama Administration and its two showcase pieces of legislation. While Obamacare received more attention, the Wall Street Reform and Consumer Protection Act, also known as Dodd-Frank after its Senate and House sponsors, unfolded with less acclaim and less understanding. It unleashed a new regulatory body, the Consumer Financial Protection Bureau, to operate with unprecedented power.
Dodd-Frank became law in 2010 and is supposed to avert the next financial crisis. Yet banks are still too big to fail and Fannie Mae and Freddie Mac remain wards of the state, while the CFPB has been given sweeping authority over consumer credit and other financial products and services that played no significant role in the crisis of 2008.
Presidential adviser Elizabeth Warren, now running for the U.S. Senate from Massachusetts, designed the CFPB to stand in the market between business and its customers. It's in a perfect zone to attract inexperienced idealists and anti-capitalist ideologues, and is likely to be a job-killer for the real economy.
Sweeping and Unchecked Powers
The CFPB ostensibly protects consumers against predatory lending, financial scams, deceptive credit cards, and such, but to do this it extends political control over the lifeblood of capital.
This new regulator is the first to shed restraint from Congress, taking no interference in funding or oversight. Dodd-Frank gives its director unprecedented coercive power, without the checks and balances required by tradition and (we must hope) by the Constitution. In January 2012, the first director, Richard Cordray, was installed by President Obama in a controversial recess appointment made while Congress was still formally in session.
The bureau wields a variety of enforcement tools and sanctions, such as "cease and desist" orders that can be imposed without giving time for targets to appeal. For those who knowingly violate a law or rule, the CFPB can impose penalties of up to $1 million per day, with the ability to demand "reimbursement" for the costs of enforcing the penalty.
The CFPB is reversing decades of cooperation and the presumption of good faith between financial institutions and regulators, turning bank examinations into prosecutions.
The new bureau is taking part in drafting some of the 400 rule-makings required by Dodd-Frank, and in rewriting existing rules that have been successfully enforced by seven other agencies. Exposing so many rules to creative regulators will create confusion and uncertainty, especially since the new rules can flout existing precedent and interpretations by the other federal agencies. The likely result: higher costs, less credit, jobs not created, and a recession without end.
Among the tools that the CFPB can use to intimidate financial institutions into settling CFPB charges is the power to issue civil investigative demands for tens of thousands of pages of documents with no statute of limitation. The Consumer Financial Protection Bureau isn't bound by confidentiality rules, so it can share the information it collects with advocacy groups and tort lawyers.
In July, the bureau took its first scalp, obtaining a $210 million settlement from Capital One, a credit-card issuer alleged to have illicitly marketed certain fee-based services. Capital One chose to fold, rather than fight.
The bureau is now turning its attention to student loans and payday lenders. Given free rein, it could make rising defaults on student loans the next stage of the financial crisis. The student-loan market now exceeds $1 trillion and poses potential systemic risk.
The 2008 collapse and government seizure of Fannie and Freddie, with some six million related foreclosures, should have curbed politicians' appetite for compelling banks to lend to risky borrowers. But the Consumer Financial Protection Bureau has begun coercing banks to lend and underwrite mortgages to unqualified minorities. The CFPB is even extending its new regulatory authority to the consumer credit bureaus by requiring new scoring models for blacks and Hispanics that boost their relative standing.
The bureau is the first regulatory body to use social media to post unverified consumer complaints on its Website. A complaint at the Better Business Bureau is damaging, but the effect of hundreds of complaints posted on "an official Website of the U.S. Government" can be ruinous. Such complaints are raw meat to lawyers trolling for the next class-action lawsuits. The CFPB should not be a conduit for Democratic party funding and payback to lawyers who are big contributors.
Independent and Arbitrary
We can't know what's next, but the record thus far suggests that the CFPB has more solutions in search of problems. The last thing a weak U.S. economy saddled with excessive debt needs is a new bureaucracy intent on occupying everything financial.
In the short run, the Senate can hamstring the agency by summarily rejecting the recess appointment of Director Richard Cordray during the next session of Congress.
But challenging Dodd-Frank's constitutionality -- as is being done in a federal suit filed in June -- is the best defense for the long term. It should be clear to some court that the CFPB lacks the checks and balances required by the separation-of-powers clause.
Most other independent federal agencies are governed by bipartisan commissions and funded by Congress. The CFPB, in contrast, confers power on a single director for a five-year term and dodges the usual congressional oversight. The bureau is funded by, and located inside, the Federal Reserve, yet outside the review of either the Fed or Congress.
It's bad enough that Congress and the administration have set another regulator on the financial industry. But it will be far worse if the Consumer Financial Protection Bureau becomes the model for more unaccountable regulators.