Economics

Senator Shelby Is Right on CFPB

On May 2, all the Republicans in the Senate notified President Obama in an open letter that they would not vote to confirm anyone for director of the Consumer Financial Protection Bureau (CFPB) unless the agency was converted into a multi-headed commission, subjected to the appropriations process, and required to consider the safety and soundness of financial institutions when it adopts regulations for banks. This demand evoked considerable commentary among the punditry, and a direct attack on Senator Richard Shelby (the ranking member of the Senate Banking Committee) by Barbara Rehm, an opinion writer for the American Banker. Ironically, the theme of the Rehm article was “Is this any way to run a government?”

This, of course, is the very theme of the Republican objection to the CFPB as it was established by the Dodd-Frank Act. Our constitutional system is based on the idea that the separation of powers is the ultimate protection of the people’s liberties. Indeed, scholars have pointed out that before the adoption of the Bill of Rights the Framers assumed that simply dividing the government between executive and legislative branches was a sufficient safeguard, because neither branch would have the ability by itself to oppress the American people. Under this system, Congress would make the laws and appropriate the funds to run the government, and the executive branch would enforce the laws and spend appropriated funds only as provided and directed by Congress. The president would be elected by the whole nation, but would also be responsible for the conduct of the executive branch.

This structure has been altered gradually over time—regulatory commissions, for example, have been created that enforce the law but are not truly subject to presidential control—but measured against the original constitutional structure the CFPB is in a class by itself. This agency has jurisdiction over a market that extends vertically from the largest international banks to the smallest local check cashing office, and horizontally from banking to financial advice. It is not authorized to regulate an industry so much as it is authorized to control the daily financial transactions of the American people. There is no agency of the government—with the possible exception of the Internal Revenue Service—that has the inherent power to control so much about how the American people go about their daily business.

And yet, the CFPB is set up to be totally insulated from the control by either of the elected branches of government—the  president and Congress. Unlike most regulatory agencies –the SEC, the FCC, or the CFTC—the CFPB is to be headed by a single administrator. But unlike the cabinet departments and governmental units throughout the executive branch, the head of the CFPB is appointed for a terms of five years and can’t be removed from office by the president, except for cause. Significantly, the Comptroller of the Currency—the regulator of national banks—is also appointed for a term of five years, but can be removed by the president for any reason. So the director of the CFPB, once appointed, is virtually immune from presidential control. In addition, the CFPB is exempted from the appropriations process, with which Congress can control the scope of activities of an agency in the executive branch. Unlike any other agency, the CFPB, which is lodged in the Federal Reserve, is to be supported by a percentage of the operating funds of the Fed, and never has to appear before Congress to account for its use of these funds.

There is even more irony in this CFPB-Fed marriage. Although the CFPB is given access to the funds of the Fed—funds the Fed gets without appropriation in order to assure its independence for monetary policy purposes—Dodd-Frank forbids the Fed from having any control over the CFPB. Moreover, the Fed itself is a multiheaded body that guarantees a variety of voices will be heard before a policy is decided, while the CFPB is headed by a single administrator who need listen to no one before deciding on a policy. So we have the peculiar situation in which the CFPB—which should be subject to some control by some elected branch—is even more insulated from any kind of deliberative process than the Fed itself.

And so we can say, picking up on the theme of the Rehm attack, is this any way to run a government? The effort by 44 Republican Senators—led by Senator Shelby—to bring the CFPB back into some semblance of constitutional order should be applauded rather than criticized.

One thought on “Senator Shelby Is Right on CFPB

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