The Fight Over Who Runs The CFPB Is Really Over Federal Accountability

Protesters gather in front of the Consumer Financial Protection Bureau (CFPB) headquarters on November 28, 2017 in Washington, DC. Sen. Elizabeth Warren (D-MA) spoke and demanded that Mick Mulvaney step aside and let acting CFPB director Leandra English do her job. President Trump named Office of Management and Budget (OMB) Director Mick Mulvaney to replace outgoing CFPB Director Richard Cordray. (Photo by Mark Wilson/Getty Images)

The comic-opera overtones of the Trump administration often mask serious constitutional questions with big implications for American business. Take, for instance, the battle for control of the Consumer Financial Protection Bureau.

After more than two years without a Deputy Director, on Nov. 24, CFPB Director Richard Cordray named Leandra English to the post—and then promptly resigned, making English the Acting Director under Cordray’s reading of the statute that established the CFPB.

President Trump disagreed and on Nov. 25 he appointed the head of the Office of Management and Budget, Mick Mulvaney, as Acting Director under a different statute. Mulvaney’s communications director seemed to cement the transition, as well as its farcical nature, by tweeting a photo of empty boxes of donuts that Mulvaney brought to calm the troops on his first day in office.

A federal court will ultimately decide who wins this fight. But the larger question won’t go away: Can Congress really establish “independent” agencies that are accountable only to their own leaders? And given the radical swings in direction at many federal agencies after recent presidential elections, can any of them really be considered independent?

“Judge Brett Kavanaugh, a prominent critic of unfettered federal power, said independent agencies represent a headless fourth branch of the U.S. government, that pose a significant threat to individual liberty and to the constitutional system of separation of powers.”

Already we’ve witnessed once-unthinkable regulatory standoffs and 180-degree policy shifts in Washington, including Federal Communications Chairman Ajit Pai’s proposal to reverse the Obama administration’s adoption of net neutrality standards, themselves a reversal of years of telecommunications law. Or the strange sight of a lawyer for the Justice Dept. arguing against the lawyer for the National Labor Relations Board over Obama-era rules on class-action waivers in employment contracts.

Even by Washington standards, though, the CFPB is an outlier. The brainchild of Sen. Elizabeth Warren, it was designed to be independent of politics, with its funding coming from the Federal Reserve and its director, once confirmed by the Senate, answerable to no one. Unlike nearly every other federal agency, the bureau, created under the Dodd-Frank financial reform act of 2010, operated under the authority of a single director instead of a commission with directors serving staggered terms designed to better reflect Republican and Democratic priorities.

That structure rankled many in the financial-services industry. Cordray, the former attorney general of Ohio, almost immediately pushed his mandate to enforce violations of unfair, deceptive or abusive practices – UDAP in the trade – beyond the limits of what many in the industry considered to be the law.

“Anything that Cordray disliked could be a problem,” said Alan Kaplinsky, a partner with Ballard Spahr in Philadelphia who represents financial firms. “It was whatever he thought would end up carrying the day.”

One side effect was caution about introducing new financial products and services, Kaplinsky said. “I’d tell my clients, “It complies with every state and federal law I know,’” he said. “But I don’t think Cordray will like it.”

Republicans, including Mulvaney, a former GOP member of Congress, have criticized the CFPB in similar terms since its founding. (Mulvaney called the CFPB “a joke” in 2014). And a federal appeals court in Washington held its one-director structure to be unconstitutional in a 2016 decision that has been shelved as the CFPB pursues an appeal.

In that decision, Judge Brett Kavanaugh, a prominent critic of unfettered federal power, said independent agencies represent “a headless fourth branch of the U.S. government,” that “pose a significant threat to individual liberty and to the constitutional system of separation of powers.”

While Kavanaugh acknowledged a 1935 U.S. Supreme Court decision, Humphrey’s Executor vs. U.S., allows Congress to establish agencies whose directors aren’t directly answerable to the President, most of those agencies are multi-member commissions whose directors serve as checks and balances on each other.

“The Director of the CFPB,” acting alone, “possesses enormous power over American business, American consumers, and the overall U.S. economy,” Kavanaugh wrote. Such a structure presents a greater risk of “arbitrary decision-making and abuse of power” than a traditional multi-member board, the judge concluded.

The outcome of the fight over who gets to pick the acting director of the CFPB won’t change its structure, although it could change the bureau’s direction. The full D.C. Circuit is still expected to issue a ruling on the appeal of Kavanaugh’s 2016 decision, and if it upholds the single-director agency Republicans in Congress will have to rewrite the law on how the CFPB is formed.

Financial companies, meanwhile, are faced with near-chaos at an agency that enforces at least 19 different statutes, claims authority over all forms of consumer lending and has extended its reach as far as auto loans and cellphone providers.

Kaplinsky calls the current situation “not good for industry, not good for consumers.” But reform of the CFPB won’t come “until both sides think they have something at risk here.”

“The Republicans think they’re in the driver’s seat, but the Democrats aren’t convinced of that,” he said. “A lot more is going to have to take place until the Democrats and Republicans sit down and agree to work together on this.”

One thing is certain: The next time somebody in Congress advocates for an “independent” agency answerable to no one in elected office, the long battle over the legitimacy of the CFPB will loom large over the conversation.