The Senate is preparing to vote on the confirmation of Richard Cordray as director of the Consumer Financial Protection Bureau (CFPB). This is no routine matter. The bureau is one of the most powerful—and least accountable—regulatory agencies in government. No vote should be cast without consideration of substantial reforms to the CFPB.
Cordray has been running the bureau as a (purported) “recess appointee” since January 4, 2012. That appointment expires at the end of this year. President Obama has nominated him for a new five-year term, and the Senate Banking Committee approved the nomination in March. The matter now moves to the full Senate for a vote.
The issues below should rank high among those addressed before a confirmation vote takes place.
1. Illegitimacy of Cordray’s “Recess” Appointment
Federal appeals courts have twice invalidated Obama’s recess appointments as violating the U.S. Constitution’s Recess Appointments Clause. Although neither case involved the CFPB directly, Cordray was appointed in the very same manner, which likely means that his appointment—and much of the rulemaking under his watch—is invalid.
Solution: Rescind the wrongful appointment and determine which of the regulations and enforcement actions undertaken during the illegitimate term should be invalidated.
2. Absence of Congressional Oversight
With a staff exceeding 1,000 and funding of nearly $600 million, the bureau is living up to its billing as one of the most domineering in government. In less than two years, the CFPB has begun executing a major restructuring of the mortgage market; devising restrictions on credit bureaus, education loans, overdraft policies, payday lenders, credit card plans, and prepaid cards; and amassing unverified complaints with which to assail creditors and bankers. This inordinate control over consumer finance is constraining credit and harming the economy.
Yet Congress has no leverage to rein in the bureau. Under the Dodd–Frank act, the CFPB funding is set at a fixed percentage of the Federal Reserve’s operating budget. This budgetary independence limits congressional oversight of the agency. Moreover, its status within the Fed also precludes presidential oversight. Even the Federal Reserve is statutorily prohibited from “intervening” in CFPB affairs.
Solution: Abolish the CFPB’s current funding mechanism and subject it instead to congressional control.
3. Arbitrary Enforcement
The CFPB is empowered by statute to take action against “unfair, deceptive and abusive practices” in financial products and services. Legal standards for unfair and deceptive exist, but the CFPB is not necessarily bound by prior interpretations. However, the concept of abusive has been previously undefined in regulatory law, and the definition in Dodd–Frank is particularly vague.
Concerns about arbitrary enforcement are not assuaged by Cordray’s testimony to lawmakers that the term abusive in the statute is “a little bit of a puzzle because it is a new term.… We have been looking at it, trying to understand it, and we have determined that that is going to have to be a fact and circumstances issue; it is not something we are likely to be able to define in the abstract. Probably not useful to try to define a term like that in the abstract; we are going to have to see what kind of situations may arise.”
In other words, the bureau is regulating virtually the entire consumer finance sector without defined and fixed standards.
Solution: Rescind the undefined term abusive from the list of practices under CFPB purview and specifically require the CFPB to apply definitions of unfair and deceptive practices in a manner consistent with case law.
4. Risky Rulemaking
Identifying the “risks” to consumers from financial products and services is cited in Title X of Dodd–Frank as a primary function of the CFPB “[i]n order to support its rulemaking and other functions.” The bureau sets regulatory policy based on “likely risks” associated with buying or using a financial product or service, consumers’ “understanding” of such risks, and the extent (if any) to which the risks “may disproportionately affect traditionally underserved consumers.”
The problem: There is no definition of risk in Title X. The CFPB is thus free to define its powers without the checks and balances that typically protect citizens from government overreach.
Examiners are also expected to determine the likelihood that a supervised entity will not comply with federal consumer financial law and forecast whether a firm’s supposed risks will decrease, increase, or remain unchanged. But predictions are speculative, by definition, and have no place in a regulatory context.
Solution: Establish the parameters of risk by which the bureau is allowed to act and require the CFPB to obtain approval for all major rulemakings from the Office of Information and Regulatory Affairs, the department within the Office of Management and Budget that reviews proposed and final rules before they are published in the Federal Register.
5. Misuse of Private Data
Administration officials tout the CFPB as a “data-driven” agency. They emphasize that bureau policies and priorities are based on research and analyses of financial markets. Measuring various aspects of a market may be beneficial, but not all data collection is appropriate or leads to sound policies.
The CFPB is building massive data sets by demanding millions of records from the companies it regulates, including credit cards, credit monitoring, and debt cancellation products from major banks. Officials are also spending more than $10 million to buy data on automobile and payday loans as well as mortgages. Taken together, the government can monitor what Americans buy, when they buy it, and how much they pay. But as Senator Mike Crapo (R–ID) noted: “The agency was founded with a mission to watch out for American consumers, not to watch them.”
Also disconcerting is the CFPB’s use of complaint “data,” which officials identify as the “start and end” of the bureau’s rulemaking and enforcement and which Cordray has called the agency’s “lifeline.”
The CFPB has solicited consumer complaints about credit cards, checking accounts, savings accounts, CDs, student loans, mortgages, money transfers, and credit reporting. Each complaint is catalogued on the agency’s website, including the name of the accused, the nature of the alleged offense, the date of the complaint, and the zip code of the complainant (whose identity is not revealed).
For all the consequential uses to which this information is put, it is not verified. The CFPB is thus crafting regulations and commencing supervision and enforcement actions based largely on consumer allegations that are never checked for accuracy.
Solution: Limit the bureau’s power to demand data that is not directly relevant to a specific supervisory or enforcement action and prohibit public release of unconfirmed complaint data.
Reform Is Top Priority
These systemic and operational defects are not difficult to remedy, and doing so without delay is far more important than a vote on Cordray’s confirmation.
—Diane Katz is Research Fellow in Regulatory Policy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.