Bench Memos

The Consumer Financial Protection Bureau and Separation of Powers

I’ve previously written about the constitutional challenge to the Consumer Financial Protection Bureau, a regulatory agency that tasks a czar-like director with interpreting our consumer-finance laws. The lawsuit and like-minded legislative reforms are based on separation of powers concerns, which many would rather ignore in favor of demagoguery. A recent article by John Gravois in the Washington Monthly, “Too Important to Fail,” does this, making it seem like the CFPB is the only thing standing between Main Street and Gordon Gekko and his Wall Street Raiders. This, of course, is false, for the best protections for consumers are clear regulatory outcomes and restraints on concentrated power.

Part of the constitutional challenge centers on Congress’s delegation of legislative authority to the CFPB. The CFPB can prohibit “abusive practices,” a subjective term that even director Richard Cordray admits is puzzling. Cordray has responded to this puzzle by interpreting “abusive practices” as he goes, essentially telling regulated companies that he’ll know a problem when he sees it. This leaves Cordray, a former partisan politician, with an expansive ability to decide basic policy questions typically reserved for Congress. These questions are endless. What type of practices will be abusive? Should the CFPB prohibit certain forms of credit, even if consumers turn to costlier alternatives? But don’t turn to Congress for help, ask the consumer-finance czar.

What’s surprising about Cordray’s insistence on case-by-case enforcement is that even Elizabeth Warren believes it is “too blunt” to use (and how can you disagree with Elizabeth Warren calling something too liberal?). But, instead of getting clear regulatory outcomes based on stable rules, we’re left with a roving consumer-finance protector. This isn’t just a theoretical problem, it creates practical problems; some businesses might discontinue their consumer financial products rather than risk facing uncertain liability. This has already happened with Big Spring National Bank, a plaintiff in the constitutional lawsuit, which discontinued its mortgage lending rather than risk liability under the broad “abusive practices” umbrella.

Congress has also purposefully limited the president’s ability to fire the CFPB director, removed Congress’s appropriations power over the bureau, and narrowed judicial review over its rule-making. This only amplifies the CFPB’s constitutional problems. For Gravois, this scant oversight is a strength, and reducing the CFPB’s independence would make the CFPB “more accountable to congressional committees and the industries that comfortably influence them.” But, bureaucrats can never have robotic objectivity, or free themselves from the influence of special-interest groups.  And even if industries were non-influential, this would not guarantee sound regulations. Instead, it would just free the regulatory process from one special-interest group’s influence in favor of another.              

Even if concentrating power in the CFPB could mean better policies, a larger issue is at stake: separation of powers. Our Founders made power difficult to wield because they did not trust unchecked power. While the CFPB’s design removes oversight from the purview of the three government branches, separation of powers spreads oversight power over three branches. For, as Madison in Federalist 47 says, “The accumulation of all powers, legislative, executive, and judiciary, in the same hands, whether of one, a few, or many, and whether hereditary, self-appointed, or elective, may justly be pronounced the very definition of tyranny.”

Separation of powers provides recourse to fix another branch of government’s mistake. The CFPB removes that recourse, refusing to recognize that the difficulty in manufacturing cooperation between three branches of government is by design. As Free Enterprise Fund v. PCAOB (2010) explains:

And while a government of “opposite and rival interests” may sometimes inhibit the smooth functioning of administration.. “[t]he Framers recognized that, in the long term, structural protections against abuse of power were critical to preserving liberty.” (citations omitted).


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