The chief purpose of the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed 2010, was to avert the next financial crisis. So why does the new regulatory agency created by the act — the Consumer Financial Protection Bureau (CFPB) — enjoy sweeping authority over so many consumer credit and other financial products and services that played no significant role in the crisis?
Most media coverage on the new agency focuses on its stated mission to “promote fairness and transparency for mortgages, credit cards and other consumer financial products and services.” On closer examination, the CFPB is quite different from other regulators.
And now that the new agency is up and running, we are learning that the CFPB has a Trojan horse-like side to the way it operates — extending authoritarian rule by the executive branch and enabling activists and lawyers to game the financial services industry.
In one of the most brazen evasions of the advise and consent role of Senate confirmation, President Obama forced the recess appointment of “friend of the plaintiff’s bar” and former Ohio Attorney General Richard Cordray as CFPB director on Jan. 4, 2012, at a time when the Senate was demonstrably in session according to the Constitution and Senate protocol.
The CFPB wields a broad range of enforcement tools and sanctions, including the ability to issue cease and desist orders that are effective immediately upon notice. For those who knowingly violate a law or rule, the agency can impose penalties of up to $1 million per day — without court orders.
In effect, the agency’s power to shut down businesses at will is not just an unintentional consequence of a new agency trying to find its way. The CFPB has turned prudential bank supervision on its head, creating an adversarial relationship and reversing decades of traditional cooperation and the presumption of good faith.
The agency has taken the unprecedented step of including enforcement attorneys as part of the groups of examiners who go out on audits — what some have called regulatory “swat teams.”
The CFPB states it will use its authority over existing consumer financial laws and issue yet more regulations — a portion of the 400 rule-makings required by Dodd-Frank. The CFPB’s mandate allows five years to review and rewrite all the rules that are part of Wall Street reform, many of which were already successfully enforced by seven other agencies.
This protracted process means heightened confusion and uncertainty, especially since the new laws can flout existing precedent and interpretations by these other federal agencies. The result? More sand in the gears of banks and financial institutions already hesitant to extend credit.
Recently the CFPB has turned its attention to student loans and payday lenders, advocating for the rights of the borrower “victims.” Given free rein, the CFPB could become a handmaiden in socializing the cost of rising defaults on student loans, much as Fannie and Freddie did in the mortgage market. The student loan market now exceeds $1 trillion and poses potential systemic risk.
The bureau is the first regulatory body to use social media to post consumer complaints on its website, and does so without verifying those complaints’ legitimacy. If you think a “Better Business Bureau” complaint is bad, consider the effect of thousands of complaints posted on a site that says, “An official website of the United States Government.” It is a short step from posting complaints disparaging financial institutions to engaging in regulatory blackmail.
The fact that such complaints are raw meat to the plaintiff’s bar trolling for the next class action lawsuits suggests the CFPB also facilitates payback to the Democratic Party from that well-heeled constituency.
Any way you cut it, Dodd-Frank and its offspring mean that consumer costs will go up because all financial institutions have to get more “lawyered up” and divert personnel and resources to compliance and legal defense, and away from banking and lending services.
We can’t know what’s next, but the record thus far suggests that the CFPB has solutions in search of problems, and new means to find them. The last thing a sluggish economy saddled with excessive debt needs is a new costly regulatory bureaucracy intent on “occupying everything” with no limits. So what can be done?
Challenging Dodd-Frank’s constitutionality — as is being done in a suit filed in June in U.S. District Court in Washington, D.C. — may be the best long-term course. Clearly, the CFPB lacks the checks and balances required by the separation of powers clause.
Other federal agencies are governed either by commissioners whose terms coincide with the administration under which they serve or by multiple bipartisan commissioners or board members. The CFPB, in contrast, confers unprecedented power on a single director for a five-year term while dodging requirements for congressional oversight. The bureau is an independent unit funded by and located inside the Federal Reserve, and yet outside the review of either the Fed or Congress.
In the short run, however, the Senate can strip power from the agency by summarily rejecting the recess appointment of director Cordray during the next session of Congress. This is yet another issue that makes the upcoming Senate elections so crucial to the future of our economy and constitution. November cannot come soon enough.
Powell and Richards are senior fellows at Discovery Institute in Seattle.