Warren, E. Had to Regulate

Have you deconstructed the administrative state today?? piggy bank padlockWell, the GOP has. Or at least, they’re working on it. In early April, DC deciphered posted about the GOP’s years-long battle against one of the agencies that makes up their dreaded administrative state: the Consumer Financial Protection Bureau (CFPB).  Now, I’ve got an update for you . . . But first, for a good description of what the CFPB is, and to get a true understanding of the GOP’s battle against it, please read that April post,  Protection Objection, reprinted at the end of this post. Or for those who want the short version, here’s a brief review:

Getting You Up to Speed

The CFPB was created in response to the 2008 financial crisis.  The agency was dreamed up by Elizabeth Warren back in 2007, when she was still a little known Harvard law professor.  With her guidance, it came to fruition during President Obama’s first term in office.  The idea was to create a “watchdog” agency that would help protect consumers from the types of industry abuses that helped lead to the financial crisis and, in general, to protect customers from mistreatment by the financial industry.

But Republicans opposed the agency from day one.  They weren’t able to prevent its creation, but they’ve been fighting its existence by (among other tactics, which I discussed in the original post) battling its Director, a man named Richard Cordray, since before he was even appointed in 2012.  One prong in their attack has been to attempt to change the structure of the agency from being led by a single director (namely, Cordray) to being led by a multi-member commission (like the FCC or NLRB).

A couple years after Corday’s tenure as Director of the CFPB began, Republicans got some assistance in this fight in the form of a lawsuit, brought by a company called PHH Corp., which had been the subject of a CFPB fine.  The lawsuit (PHH Corp. v CFBP) claims that the single director structure of the CFPB is unconstitutional.   In October 2016, a three judge panel of the DC Circuit Court of Appeals agreed with PHH (by a 2-1 vote) and  ruled that the CFPB was unconstitutional, focusing on the fact that, under the statute creating the CFPB, the Director could only be fired “for cause.”  The court felt that this gave the Director too much unilateral authority.

So instead of dismantling or restructuring the CFPB, as PHH had requested in its suit, the court’s remedy was to say that the director of the CFPB could be fired by the President “at will.” This change would give the President significantly more power over the Director.  And it would, alternatively, give the Director (and the agency) significantly less independence, even though agency had been designed expressly as an independent agency.

The CFPB requested & was granted a rehearing by the full panel of DC judges, and the court’s ruling has been stayed in the meantime. So up until now, Trump has still not been able to fire Cordray.  In a move that would normally seem very unusual, Trump’s DOJ has filed a brief in the appeal, siding with the ruling of the three judge court.  So now the government is on both sides of this case, with the CFPB asking for the rehearing, and the DOJ filing a brief supporting the other side.  And that’s where we left off when we last talked about the CFPB . . .

Now Here’s that Update I Promised

But now, the appeal before the full D.C. court is here!  Oral arguments in the case begin this Wednesday, May 24.  The full D.C. Circuit panel is made up of 11 judges, a majority of whom were appointed by Democrats (only 10 out of the 11 judges will be hearing the case, as Merrick Garland, whose name you just might recognize, will not be participating).  So it seems likely the case could get reversed, giving the CFPB a win.  But you never know – the structure of the CFPB is genuinely unique. If you read the more detailed description of the PHH case, along with the history of the CFPB below (in DC Deciphered’s previous post), you’ll see that was a real sticking point for the 3-judge panel.

However, law professor Leah Litman writes on the Take Care blog that the “novelty” of an agency shouldn’t be an indication of its unconstitutionality.  She finds little sense in that argument made by the court. So we’ll see soon enough which direction the full panel chooses to go. (It’s possible the court will choose to avoid taking on the constitutional question altogether and stick to settling more narrow issues). In any case, if the CFPB does win here, the Trump administration will almost certainly appeal to the Supreme Court, where it faces much better odds, given the makeup of the Court.  However, if the CFPB loses, it is only permitted to appeal to the Supreme Court with approval from the Justice Department (as stated in the Dodd-Frank law which created the agency).  It seems very unlikely such permission would be granted.

And now, here’s DC Deciphered’s original post on the CFPB.  I hope you’ll read it if you missed it the first time around, because it gives background and context that’s really necessary for understanding the larger fight that’s surrounds this case, which is the crusade this has become for Republicans.  If you just want a better understanding of the lawsuit, skip ahead to the section titled “GOP Zeroes in on Director Cordray, Gets Assistance from Court Ruling.”


Protection Objection

The Consumer Financial Protection Bureau (CFPB)

Creation of the CFPB

The GOP has been targeting the Consumer Financial Protection Bureau CFPB since before it was even officially created, when the idea was just being hatched. Many of you are already familiar with the CFPB, but for those who aren’t, some brief background:  the CFPB was created in response to the 2008 financial crisis. elizabeth-warren The agency was thought up by Elizabeth Warren back in 2007, when she was still a little known Harvard law professor.  She was instrumental in getting the agency off the ground, and she served as the agency’s interim director until its first official director was appointed.

The idea was to create a “watchdog” agency that would help protect consumers from the types of industry abuses that helped lead to the financial crisis and, in general, to protect customers from mistreatment by the financial industry. The CFPB regulates credit card companies, payday lenders, mortgage lenders, student loan companies, credit reporting agencies, among others.   In addition to writing the regulations governing these companies, the agency is responsible for overseeing the industry and for enforcing the relevant rules.  The CFPB was officially created as part of the Dodd-Frank Act in 2010.  It began its work in July of 2011.

What the CFPB Does

When these companies engage in fraud or abuse against their customers, the CFPB can sue on consumers’ behalf.  Many of these cases end up in settlements for the consumer, without ever having to proceed to the courtroom. The CFPB also investigates patterns of potentially abusive behavior in the industry in order to prevent such behaviors in advance, and it provides information to consumers in order to help them avoid scams, frauds, etc.

The agency has gotten money returned to customers cheated by credit card companies, investigated predatory lending  & protected military families from illegal foreclosures.  CFPB logoAlexis Goldstein, a former Wall Streeter who left in 2010 and became very active in the “Occupy Wall Street” movement has a great Twitter thread full of specific examples of the CFPB’s work.

One recent example of the type of work the CFPB does is its investigation into several credit score companies.  In March, the CFPB fined Experian, the country’s biggest credit reporting company, $3 million for allegedly deceiving customers about the credit scores it was selling them.  Experian told customers that the scores it sold were the same ones lenders used to make credit decisions, but they were actually not the same and therefore were of little value to customers.  In January, the CFPB fined two other credit score companies for the same practice.

Prior to the creation of the CFPB, some of its functions existed in various agencies throughout government, but the CFPB now houses all of these functions in one place, and adds some new functions as well. One feature the CFPB introduced is the consumer complaint database.   When a consumer has a problem with a company that’s regulated by the CFPB, they can file a complaint in the database.  The company is then notified by the CFPB and given 15 days to respond.  If the company doesn’t respond after 15 days, the complaints are published in the database where they are publicly viewable (with personal information removed).

This allows other consumers to be forewarned about potential deception or fraud, and the collection of information allows the CPFB to identify patterns to find cases where larger investigations may be warranted.  The CFPB says it has handled more than 1 million complaints since they began operating.   Overall, throughout all of its different functions, the CFPB has returned nearly $12 billion to over 29 million consumers from various companies for various deceptive practices or other mistreatment.

GOP Opposed the CFPB From the Start

The GOP has been fighting the creation of the CFPB from the very beginning.  Naturally, the financial industry opposed more regulation, and they had lots of allies in the GOP Congress.  Additionally, the banks and the GOP Congress were no fans of Elizabeth Warren who’d begun gaining notoriety for standing up to the industry.  So when it came time to choose someone to lead the agency, Obama thought he might avoid a conflict by not appointing Warren.  Instead, he chose a man named Richard Cordray, a former Attorney General of Ohio.*  But Cordray was a close ally of Warren’s, and Republicans weren’t happy with that choice either.

They made the battle over the agency’s leadership into a battle about the way the agency itself was designed.  The CFPB was designed to be headed by a single director, as opposed to a multi-member commission, the way many agencies are led.  The GOP zeroed in on that as a point of dissension, saying it gave the director too much power, and refused to hold a vote on Cordray’s nomination.  Without a director, the CFPB couldn’t function.

Eventually Obama appointed Cordray through a recess appointment, and after that appointment ended, he and the GOP came to an agreement for confirming Cordray to a full five year term (ironically the agreement only came after a threat by Harry Reid to “go nuclear” and end the filibuster).  But Republicans have been complaining about and criticizing Cordray’s leadership of the agency ever since.

Warren, Obama, Cordray
Obama announces nomination of Richard Cordray, July 2011. At left is Elizabeth Warren

GOP Says the CFPB Has Too Much Independence

Adding to the GOP’s complaints about the CFPB is the significant amount of independence (i.e., lack of congressional oversight) the agency has.  That’s actually the whole point of making such an agency “independent” – to insulate it from politics and allow the regulators to do their jobs without political interference or influence (including lobbying by the regulated industries).  But the GOP feels the CFPB has too much independence.  Like most other independent agencies, the CFPB is not funded by Congress.  The agency gets its funding from the Federal Reserve based on a fixed formula set out in the Dodd-Frank law.  (Many of the other independent agencies are self-funding, through fees and other revenue they collect).The GOP members of Congress don’t like this because it takes away their ability to control the agency through the “power of the purse.”

Additionally, many in the GOP feel that the agency’s combined powers of creating the rules, overseeing the industry (to determine whether they’re following said rules), and enforcing the rules puts too much power into an agency headed by a single director.  But the CFPB does not operate in a vaccum, answerable to no one. It is overseen (PDF document) by both an inspector general and by the Government Accountability Office, which conduct regular inspections, investigations and audits.

GOP Zeroes in on Director Cordray, Gets Assistance from Court Ruling

Though the GOP’s original complaint was that the CFPB should be headed by a commission, not a single director, their focus has since shifted to getting this particular director – Cordray – removed (his term doesn’t officially end until July 2018).  The law that created the CFPB states that the director can only be removed “for cause” (defined as “inefficiency, neglect of duty or malfeasance”).  So even with Trump now in the Presidency, they can’t simply get rid of Cordray – Trump is not permitted to  fire him just because he wants to.

However, a company called PHH Corp. that was the subject of a CFPB fine in 2014 filed a lawsuit against the agency claiming that the single director structure of the CFPB is unconstitutional. gavel In October 2016, a three judge panel of the DC Circuit Court of Appeals agreed with PHH (by a 2-1 vote) and ruled that the CFPB was unconstitutional because its Director has “significantly more unilateral power than any single member of any other independent agency” and that power is not checked by the President or by other members on a multi-member commission.  The court decided that the remedy was not to terminate or restructure the agency, but to sever the “for cause” provision from the statute. This would allow the President to fire the Director at will and put the Director under the President’s supervision.

The CFPB requested & was granted a rehearing  by the full panel of DC judges, and the court’s ruling is stayed in the meantime, so Trump still can’t fire Cordray – for now.   In a move that would normally seem highly unusual, Trump’s DOJ has filed a brief in the appeal, siding with the ruling of the three judge court. (Interestingly, Trump’s DOJ is not taking the position of the plaintiff, asking for the agency to be shutdown.  It’s simply asking for the same remedy given by the 3 judge panel, which is to allow the President to fire the director at will).   This DOJ filing is unusual because now the government is on both sides of this case, with the CFPB asking for a rehearing, and the DOJ filing a brief supporting the other side.

The two judges who ruled that the CFPB structure was unconstitutional were both appointed by Republicans.  The full DC Circuit panel tends to be more liberal (and includes the now famous Merrick Garland), so there would seem to be a chance of the ruling getting overturned. But there’s really no predicting the outcome, as the structure of the CFPB genuinely is somewhat unusual.

Though the CFPB is modeled after the Office of the Comptroller of the Currency and follows its structure in nearly every way, there is one significant difference: by statute the Comptroller of the Currency may be fired at will by the President, not only for cause.   All other independent agencies heads may only be fired for cause, so tradition has held that the Comptroller of the Currency is only fired for cause as well. But the fact that the statute technically allows him or her to be fired at will could be a key difference in the legal analysis, as that was the key factor for the 3 judge panel.  Technically no other independent agency that has quite the combination of features that the CFPB has, as far as its vast powers, its funding mechanism and the independence of its director.**

The GOP Does Not Mince Words

In the meantime, Republicans are doing what they can to go after Cordray, and the agency, on their own.   Last week Cordray appeared before the House for a regular semi-annual report to Congress.  At the hearing, Republican Jeb Hensarling, the chair of the House Financial Services Committee said the CFPB “act[s] as legislature, prosecutor, judge and jury all rolled into one”.  Hensarling claimed that the CFPB had caused harm to consumers, and therefore Cordray should be fired. Republican Congressman Sean Duffy had even sharper words for Cordray, telling him, “You have a rotting agency.”

Hensarling – who has previously called the CFPB “arguably the most powerful and least accountable Washington bureaucracy in American history” – might be the agency’s most outspoken foe.  He wrote an op-ed for the Wall Street Journal in February calling the CFPB “destructive” and “dangerous.”  He accused the agency of “tyranny” and said the people who work there are “zealots.”  In the past, he has accused the CFPB of conducting “shakedowns” of innocent financial institutions and has referred to it as a “rogue agency.”

GOP Introduces Legislation to Change the CFPB

Hensarling has introduced legislation that would allow the president to replace the CFPB director at any time, in case the aforementioned lawsuit doesn’t give them the desired remedy.  The legislation would also go much further, reducing the agency’s enforcement authority & rulemaking authority.  It would also get rid of the CFPB’s popular consumer complaint system and eliminate the CFPB’s consumer education role.   Additionally, Hensarling’s legislation would prevent the CFPB from overseeing companies that are already regulated by other government agencies, such as the SEC.  So if his legislation passes, it would be a vast scaling back of the CFPB’s mission.  However, for now it’s extremely unlikely the GOP would be able to get a bill like this through the Senate, with their very small majority and the legislative filibuster still in place. For now.

Mike Konczal writing for Vox thinks that Republicans will push some of these changes through the Senate via reconciliation (i.e. so it requires only 51 votes).  He believes they will do this by dramatically reducing the agency’s budget (remember, only items affecting the budget can be moved through reconciliation) and thereby its ability to function effectively. In fact, Hensarling has proposed using reconciliation to cut off the CFPB’s funding altogether.  Hensarling would then transfer some of the CFPB’s functions to other agencies. But as this article by NY Times financial writer Gretchen Morgenson points out, none of those other agencies make protecting consumers their priority.

As you can see, the GOP has been waging a years-long, multi-pronged battle against the CFPB and its inaugural director, Richard Cordray.  Their desire to replace Cordray with a director of their choosing who’s controlled by President Trump, is indicative of their desire to curtail the CFPB’s regulatory functions. This desire is further evident in the multiple ways in which Hensarling’s legislation would significantly weaken the ability of the CFPB to oversee the financial industry. The GOP’s opposition to the agency is not just a technical battle about “structure.”  It’s a battle over the idea of regulation in general.  It’s just one more angle in their wide ranging fight to roll back – to “deconstruct” – the administrative state.  It’s unclear at this point how much success they will have on this particular front.  But they’re clearly not going down without a fight.



*A fun fact about Richard Cordray – he was a 5-time Jeopardy champion back in 1987 (5 times was the maximum a contestant was allowed to appear back in those days).  He returned to the show in 2014 for the “Battle of the Decades tournament”, while serving as CFPB Director (he donated his winnings).  He did not come out a champion that time, ending up in second place instead.Jeopardy!

**The Take Care blog thinks that the distinction the DC Circuit judges made between the single director structure and the multi-member commission is nonsensical, as far as a constitutional test goes.  Whether the President has to remove one director for cause or several members for cause, the President would still have the same lack of control over the agency, and the agency would still have the same degree of independence from the President.  However the D.C. Court seems to believe it’s significant that with a multi-member commission, the members provide checks on each other.  And the Take Care has not yet answered the question of how it thinks the full DC Circuit panel will rule on the appeal.

***Additional note added 5/24: There has been speculation that if Cordray is fired from his post at CFPB, he’d be likely to run run for Governor of Ohio to replace John Kasich (who’s term limited out).  Political analysts think he might be one of the few Democrats who’d have a real shot at winning there.  So this might be the one thing that could convince Republicans to keep him in his post.  And one more interesting tidbit about Cordray – he and former FBI Director James Comey were law school classmates at the University of Chicago.

****Photo Credit: Creative Commons Financial Security by Blue Coat Photos is licensed under CC BY-SA 2.0.

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