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CFPB v. Community Financial Services of America

posted by Adam Levitin

With oral argument in CFSA v. CFPB scheduled for tomorrow, it's no surprise that some unfounded claims about the CFPB are getting thrown around by the usual anti-regulation suspects, like the WSJ editorial page and George Will. Given that there's more attention than usual being paid to the Bureau, I figure it's the least I can do to flag what's wrong about these claims. Specifically, I want to address the claim that the Bureau is some uniquely ultra-power federal agency and that its funding has "dual insulation" from Congressional control. 

Most Powerful Agency, Ever?

Is the CFPB really the most powerful government agency ever? Puhlease. Federal agencies aren't Pokemon cards with a CP level that can be compared, but even so, it's just ridiculous to claim that the CFPB is the most powerful federal agency around. Its ambit is noticeably narrower than that of the Federal Reserve Board, for example. (There's a reason that Jerome Powell, the Fed Chair, is a household name, while Rohit Chopra, the CFPB Director, is not.) 

Let's get the headline number up. There are 33 million businesses in the United States. The CFPB has some form of regulatory authority over only around 40,000 of them. That 40,000 consists of ~23,000 payday lenders, ~4,800 credit unions, ~4,600 banks ~4,500 debt collection agencies, ~500 nonbank auto lenders, and 410 consumer reporting agencies, and some sundry other entities.  In other words, only 0.1% of all businesses in the United States are under any CFPB jurisdiction (and even that is quite limited, as we will see). That fact alone should be the end to the "most powerful agency, ever," nonsense. 

Over those businesses that are subject to CFPB jurisdiction, however, the Bureau's authority is still quite limited. It does not have the power to license them, meaning that the CFPB does not get to decide who gets to be in business. The Bureau does not have the power to issue an asset freeze order. It cannot order a business to do or not do anything. It cannot issue formal rules without going through regular notice-and-comment rulemaking. It cannot terminate a business or place it into receivership. Those are all things other agencies can do. And if the Bureau wants to get an injunction or a judgment, it has to going to court and operate through the normal legal process.

So what can the Bureau do? The CFPB's authority extends only to persons engaged in offering or providing consumer financial products or services (or providing certain material services or assistance to them). That means it only covers consumer lending, payments, and some ancillary areas like debt collection and credit reporting. Selling paper supplies or running a lawn care company? There's no CFPB jurisdiction over you! 

Even for covered persons, the CFPB's powers are limited. It has rulemaking authority, but only to the extent that a covered person's activities are covered by either (1) a specific federal law, like the Electronic Fund Transfer Act or the Fair Debt Collection Practices Act or (2) the prohibition on "unfair, deceptive, and abusive acts and practices." The latter is not some open-ended category. Instead, it operates within the frame of detailed statutory limitations (for unfair and abusive) or well-established case law (for deception). 

The Bureau also has enforcement authority, but it's narrower than its rulemaking authority, excluding all but around 100 banks and credit unions. And it has supervision authority over an even narrower group of institutions: really big banks, payday lenders, student lenders, mortgage lenders, and a subset of entities that play a large role in their markets. 

Oh, and the Bureau is subject to some unique safeguards. CFPB rules have to go through a special small business review (only EPA and OSHA have the same requirements), and the CFPB is the sole federal agency whose rulemakings are subject to a veto by other regulators. 

If you're still not convinced, compare the CFPB to the Federal Reserve Board. The FRB wears three hats: regulator, monetary authority, and payment system operator. As a regulator, the FRB regulates all bank holding companies and all Federal Reserve System member banks. Given that any bank of consequence has a bank holding company, the FRB is the only banking regulator with authority reaching across big banks and all their affiliates. The FRB's authority over these institutions is immense:  it not only has rulemaking, supervision, and enforcement authority, but it controls entry into being a bank holding company and acquisition of banks, it determines what the regulated institutions' capital structures have to look like (how much debt and equity they can have), who can be an officer or director, and what activities they can engage in. It can issue cease and desist orders, prompt corrective action orders, and temporary asset freezes. It can even place a bank into receivership. The fact that the FRB rarely litigates against its regulatory charges is actually the best evidence of its power: no one wants to fight the FRB because the FRB has so many ways of making life miserable for difficult bank.

Beyond serving as a bank regulator, the FRB also serves as the monetary authority for the United States, providing paper currency and regulating interest rates through its open market activity (purchases and sales of Treasury debt) and bank regulatory requirements. That affects everyone. And, often overlooked, the FRB operates the payment systems that keep the US economy running:  it operates the wire transfer service, one of the two ACH clearinghouses, and the major check clearinghouse. And yes, it has lots of regulations to make this all happen. Compared to the Federal Reserve Board, the CFPB has a much more constrained regulatory ambit and set of powers.

Double Insulation

The legal argument against the CFPB is that its funding is supposedly "doubly insulated" from Congressional control, which allegedly offends the Appropriations clause. This argument is a conservative-movement creation that attempts to take the argument that prevailed in Free Enterprise Fund v. Public Company Accounting Oversight Board in the context of double insulation of the power to remove federal officers and apply to the funding of federal agencies. The problem? It doesn't fit the facts, as I've explained at length before

The double-insulation argument is premised on the idea that the CFPB gets its funding from the Federal Reserve Board, which is in turn funded independently of Congressional appropriations through assessments on the twelve regional (private) Federal Reserve Banks. Thus, according to the argument, Congress does not control the funding of the CFPB directly.

But it's factually incorrect. The CFPB is funded exactly the same way as the Federal Reserve Board. Both are funded with assessments on the the twelve regional (private) Federal Reserve Banks. The only difference is that the CFPB's assessment is collected for it by the Federal Reserve Board. The Federal Reserve Board has no discretion in the matter. It is involved only because it maintains the bank accounts for the CFPB and the regional Reserve Banks, so its just administratively easier than a direct assessment. This is clear from the Federal Reserve System’s audited financials, where it shows the assessments for the Board itself and for the CFPB as parallel items: 

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In other words, CFSA is reduced to arguing that there is some sort of constitutional significance to the routing of money through particular bank accounts when there is no discretion over the ultimate destination of the funds. That's laughable. The Federal Reserve Board's role in the CFPB's funding is purely ministerial, meaning that there is no double insulation. Instead, the CFPB's funding is independent of the appropriations process, just like that of many other federal regulators, including the Federal Reserve Board. There is no plausible basis for suggesting that the CFPB's funding is unconstitutional, while claiming the Fed's is.  (And even if the dual insulation were true, Congress could change the funding tomorrow, so there really is no insulation whatsoever.) 

What Does "Political Accountability" Mean? 

Let's be honest about what the argument against the CFPB means. It does not mean "liberty" or "accountability." It means dysfunction. This past week we saw the US government come to the verge of a shutdown ... because one man, Kevin McCarthy, wanted to keep his job. To call the circus that exists in the Capitol building "political accountability," is to denude that term of any real meaning. Subjecting every government agency to an annual appropriations process builds hostage-taking—not political accountability—into the system. It's silly to think that's what the Framer's wanted, and it's certainly no way to run a railroad. 


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