Bureaucracy Unbound? The Consumer Financial Protection Bureau

The Consumer Financial Protection Bureau has had its full authority since January 4, 2012, after President Obama’s unilateral, non-recess appointment of Democrat CFPB director Richard Cordray. I attended the Federalist Society’s Student Symposium, “Bureaucracy Unbound,” on the administrative state last weekend and two panels, “The Rule of Law and the Administrative State,” and “Congress vs. Agencies: Balancing Checks and Efficiency: Gridlock, Organized Interests, and Regulatory Capture,” were especially insightful in illuminating both the uncertainty created by the CFPB’s lack of structural accountability, and the resulting damage to the rule of law and economic growth.

Regulatory agencies such as the CFPB are tasked by Congress with making rules that follow statutory guidelines. The CFPB, which possesses the wide discretion to make complex decisions about a great variety of consumer protection laws, is more consistent with the post–New Deal regulatory structure. At the conference, Professor David Barron described the post–New Deal regulatory structure as a well thought out response to a now-complex society that requires detailed interventions and discretion. It uses statutory discretion to create regulations that are subject to revision through mechanisms that ensure accountability. The pre–New Deal regime, described by Professor Richard Epstein, followed the opposite path, interpreting clear statutory guidelines that left little room for discretion.

Even if the post–New Deal regulatory regime does bring accountability to the rule-making process, the CFPB lacks any significant checks and balances on its power to interpret our country’s consumer-protection laws. C. Boyden Gray alluded to these arguments, detailed in his white paper on Dodd-Frank’s constitutionality, arguing that the CFPB’s structure cuts itself off from any meaningful review by any branch of government. Congress does not have appropriations power over the CFPB, the president cannot remove the CFPB’s director except under limited circumstances, and courts must defer to the CFPB’s interpretation of consumer financial laws. For an institution with such vast authority over consumer financial laws, ranging from payday loans to student education debt, this is troubling, to say the least.

The CFPB’s agency biases’ also risks enforcing laws that help special interest groups at the cost of consumers, encouraging regulators to eschew their supposed role of enlightened experts in favor of becoming biased observers. Professor Michael McConnell, quoting James Madison in Federalist No. 62, argued that new regulations can be made “for the few, not for the many.” Industries with the most to lose from expensive regulations also have an oversized influence over the creation of those rules. As C. Boyden Gray explains, regulators also often favor the regulated industry, as a way to secure a high-paying private-sector job after their government service. Even if regulators create laws that can harm businesses, they usually end up only hurting startup companies and small businesses, as larger businesses have more of a cushion to absorb regulatory costs.

Finally, the rule-making process for the post–New Deal regulatory regime, particularly the CFPB’s, breeds regulatory uncertainty and stifles much-needed economic growth. According to Professor McConnell, the post–New Deal system, with its broad administrative discretion, creates vast, perplexing, and incomprehensible laws. This, coupled with the regulatory regime’s case-by-case discretion, creates a regulatory process that is destructive for the economy.

The CFPB breeds this insidious economic uncertainty, as it relies upon discretionary case-by-case rulemaking. For example, Richard Cordray, in Congressional testimony last month, explained that he would evaluate if a lending practice was prohibitively “abusive,” an as yet poorly defined statutory term, on a case-by-case basis. Businesses can then at best only predict if their practices would be prohibited by the CFPB. Not only that, but the person who now gets extremely wide berth to define terms like “abusive” was, until very recently, a prominent Democratic politician in Ohio.

This destructive approach to protecting consumers from unscrupulous businesses undermines one of our economy’s most pressing needs, a stable foundation for economic growth, and it must be reformed. As the Federalist No. 62 puts it, “What prudent merchant will hazard his fortunes in any new branch of commerce when he knows not but that his plans may be rendered unlawful before they can be executed?. . . No great improvement or laudable enterprise can go forward which requires the auspices of a steady system of national policy.” 

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