A Tale of Two CFPBs; How to Move Forward?

This article previously appeared in FinRegRag, a discussion of financial regulation by the scholars of the Mercatus Center Financial Markets Working Group, and is republished here with permission.

What should the CFPB do, and how should it be structured? A debate is emerging among reformers as to whether a market regulator headed by a commission or a law enforcer headed by a sole director makes the most sense.* With details of CHOICE Act 2.0 (possibly) surfacing the question may be coming to a head.

The Bureau of Consumer Financial Protection (CFPB) is (currently) an independent market regulator for consumer financial products and services. The CFPB enjoys sweeping jurisdiction and broad power to both prospectively regulate conduct via rules and bring enforcement actions. It is headed up by a sole director who is (currently) only removable by the President for cause. There is a technical term for this combination of sweeping power and limited accountability: The Worst.

Ok, that isn’t the real term, the real term is unconstitutional, at least according to a panel decision from the United States Court of Appeals for the D.C. Circuit Court. The court found that to meet constitutional muster either the CFPB’s director would need to be removable at the President’s will or the CFPB would need to become like other independent agencies (e.g. the Securities and Exchange Commission) and be controlled by a multi-member commission.

The CFPB has asked the full D.C. Circuit to review the case, so the constitutionality discussion may not be over. But even if the structure is constitutional, that doesn’t necessarily make it a good idea.

So how should the CFPB be structured? Many people, myself included, have suggested a commission, on the grounds that it would provide greater continuity, moderation, and diversity of thought and experience to the CFPB, which would help it encourage market stability and innovation. Implicit in this argument is that the CFPB’s role and authority will be similar (though hopefully better constrained) than it is now.

Others, including the chairman of the House Financial Services Committee Congressman Jeb Hensarling, believe that the CFPB is better structured as a sole directorship removable at the President’s will. However, Hensarling’s vision of the CFPB’s mission is much different than the current agency.

A publicly circulating memo purporting to detail the contents of the new CHOICE Act includes significant changes to the CFPB. While it keeps the sole director (removable at-will), it changes the CFPB from a market regulator to a law enforcement agency with limited jurisdiction and autonomy. The CFPB’s rulemaking and enforcement powers will be limited to certain enumerated statutes, without the broad power to prohibit “Unfair, deceptive, or abusive acts or practices” it currently enjoys. The CFPB enforcement capabilities would be limited to cease and desist and Civil Investigative Demand/Subpoena powers, which presumably means it would also lose its in-house judges.

In effect, the CFPB would become less like the SEC (which can proactively regulate markets under broad grants of authority from Congress) and more like a civil FBI. The FBI does not create crimes, it only enforces the specific requirements of the criminal laws created by Congress. The lack of autonomy means that the risks posed by a sole director are less acute then a regulator who is able to write its own rules.

This doesn’t mean there are no risks. A sole director will, inherently, have a more limited base of experience to draw from than a commission. A sole director will also have a more direct control than in a commission setting. This lack of checks and balances may result in an agency that is too passive or one that is too aggressive (as the CFPB’s tactics in the PHH case show). While this coupled with broad autonomy can create serious problems, under Hensarling’s proposal the risks would be cabined somewhat by how limited the CFPB’s discretion and authority is.

So which option is better? It depends on what you want the agency to do, and how much autonomy you want it to have. If you want an agency to operate on a short leash and simply enforce existing laws a sole director is ok. A law enforcement agency can use a sole director model because it is and should be subject to close control by the elected branches. The Congress gives the agency strictly limited and defined power, and the President chooses (and can change) the leadership.

Conversely, if you want the agency to exercise independent judgment and autonomy in setting the rules then a commission is the better bet. If the political branches want to delegate structuring the regulatory and enforcement environment (within broad parameters), it is important to have diversity of views and experiences, moderation in action, and continuity over time, all of which are better provided by a commission.

Of course, this just prompts the question, “What do we want the CFPB to do?” That is a policy and political question that will need to be hashed out by Congress and the President with input from the public. However that question ends up being resolved, I hope the structure matches, or else we may end up right back where we started.

* Yes, there are others who want to get rid of the CFPB entirely and return its functions to other regulators, but the post can only be so long.