New Consumer Bureau Will Run Free of Any Leash

COMMENTARY Government Regulation

New Consumer Bureau Will Run Free of Any Leash

Apr 12, 2011 3 min read

Former Senior Research Fellow in Regulatory Policy

James Gattuso handled regulatory and telecommunications issues for The Heritage Foundation.

Wanted: Individual to lead new federal regulatory agency. Duties to be self-defined by successful applicant. Position comes with guaranteed budget. No supervisor, limited accountability. Direct inquiries to B. Obama, 1600 Pennsylvania Ave., N.W., Washington, D.C., 20500.”

No such ad has been placed -- yet. The Barack Obama administration is on the lookout for someone to lead the new Consumer Financial Protection Bureau, or CFPB, established by last year’s Dodd-Frank financial regulation bill. While the agency’s name still doesn’t come trippingly off the tongue, it will soon become a familiar one as it begins to exercise the broad authority given to it.

For the past several months, preparations for the CFPB’s grand opening on July 21 have been under way at the Treasury Department, under the direction of Elizabeth Warren, a former law professor who long advocated its creation.

In her current role, she reports to Treasury Secretary Timothy Geithner. Come July 21, the keys will be handed to a permanent director -- possibly Warren herself. It’s not at all clear to whom, if anyone, that director will be answerable.

Structurally, the agency is embedded within the Federal Reserve, with a single director to be selected by the president for a five-year term, subject to Senate confirmation. He or she can be removed only for cause, placing them outside the control of the executive branch.

Limited Scrutiny

This level of independence, while inconsistent with a strict interpretation of the Constitution (which, after all vests all executive power in the president) is not unheard of, although such independent agencies usually are subject to close scrutiny by Congress.

Congress’s power over this new agency will also be limited since its most effective tool -- its control over funding -- has been bypassed. The CFPB will receive a guaranteed share of the Fed’s income.

At the same time, the Fed will itself have little control over its ostensible subsidiary, being barred from modifying or overturning decisions made by the new bureau. The agency’s decisions can be reversed only by the newly created Financial Stability Oversight Board -- a council of other financial regulators -- by a two-thirds majority vote.

Sensitive Activities

So the CFPB is a closed circle, effectively insulated from outside influence on all sides, fully accountable to no one.

Warren strongly defends this structure. She correctly points out that many other financial regulatory agencies, such as the Federal Deposit Insurance Corporation, the Comptroller of the Currency, and the Fed itself, are similarly self-funded and headed by officials serving fixed terms. Without such independence, many argue, their work could be disrupted by constant political interference.

That’s an understandable concern, especially when the agency in question is engaged in sensitive activities such as monetary policy and bank supervision.

Other independent agencies don’t enjoy this degree of budgetary insulation: not the Federal Communications Commission or the Federal Trade Commission, not even financial regulators such as the Securities and Exchange Commission or the Commodities Futures Trading Commission. All have independent funding sources though their budgets are approved by Congress.

By contrast, the CFPB will be funded by the Federal Reserve and have its budget audited by the Government Accountability Office.

What Is ‘Abusive’?

The dearth of checks and balances is especially problematic given the broad, vague charge that Dodd-Frank gives the new agency: to protect consumers against “unfair, deceptive or abusive” practices by financial firms. Of these, the term “abusive” is particularly open-ended, having never been previously defined in law.

The CFPB won’t simply apply set rules agreed upon by experts, devoid of policy preferences. The supposed separation of technical expertise from policy is a mirage. From the first day, the agency director will be making political calls, determining not just whether rules have been broken, but what those rules should be and how widely they will apply.

These are choices of principles and values that are inherently political. They should be made by officials, and by institutions, accountable to the political process.

It’s still unclear who will be appointed as the director of the Consumer Financial Protection Bureau. The more important question may be this: To whom -- if anyone -- will the successful applicant report?

James Gattuso is a fellow at The Heritage Foundation.

First appeared in Bloomberg