Since the passage of the Dodd-Frank Act in 2010, the Consumer Financial Protection Bureau (CFPB) has been a thorn in the side of many Republicans. Now that the GOP holds the majority of power in Washington, change appears inevitable, though it is not clear when President Trump and the Congress will actually be able to rein the agency in.
The House, in an effort led by longtime CFPB foe Rep. Jeb Hensarling (R-Texas), is likely to pass a bill in 2017 that will restructure and reform the CFPB. But the prospects of his Financial CHOICE Act are less certain in the Senate, where it may require 60 votes to pass. The GOP, of course, only has a narrow 52-vote majority.
The Trump administration, however, may pursue more immediate avenues of changing the CFPB’s direction while legislation works its way through the Congress. Specifically, the Trump administration could seek to remove and replace CFPB Director Richard Cordray.
A new director would wield immense authority in setting the agency’s agenda and could narrow its mission overnight. A new director could also begin to implement some of the ideas contained within the Financial CHOICE Act while that legislation is pending in Congress.
But Director Cordray’s five-year term doesn’t end until July 2018 and the Dodd-Frank Act, in an attempt to make the CFPB truly independent, ties the hands of any president who may want to remove the director for reasons other than cause.
But does the Dodd-Frank Act make the CFPB too independent?
In October, the D.C. Circuit excited CFPB critics when it ruled that for the agency to be constitutional, the president must be able to remove the director at will. In other words, the president should have the power to remove the director for political, personal, or any other reason.
The ruling came in a lawsuit brought by a mortgage servicing company that challenged a $109 million fine imposed by the CFPB. It will take many months, and perhaps even more than a year, for the case to wind its way through review by the entire D.C. Circuit and potentially the U.S. Supreme Court.
If President Trump seeks to remove the director before this litigation is resolved, he would have to decide that Director Cordray had been inefficient, negligent of his duty, or engaged in misconduct. At this time, it is not clear how the White House would justify such a decision. While it is ultimately President Trump’s call, Director Cordray could challenge his dismissal in court, which would likely result in a bruising and lengthy litigation.
Until his term expires or he is removed, Director Cordray is likely to continue his ambitious regulatory agenda. He likely will want to issue three main rules to build on the Obama administration’s legacy in consumer protection. Those rules would address arbitration clauses in consumer credit contracts, payday loans, and debt collection, with the debt collection rules being the first federal rules ever for that industry.
How much of this rulemaking Director Cordray can complete depends on how long he remains in office. If he stays until the end of his term in July 2018, he would be able to issue final rules for arbitration, payday loans, and (probably) debt collection. If he is removed from office or leaves sooner, the outcome of some of these rules would certainly be in doubt.
While Director Cordray can issue these final rules, the CFPB would have to submit each of them to the Congress under the Congressional Review Act. The Congressional Review Act was passed as part of the Contract with America in 1996, and it allows the Congress to invalidate final rules with a majority vote. It is important to note that Congress would break new ground if it used the Congressional Review Act to invalidate any of these rules. It has only been used once to invalidate a fairly minor OSHA rule on workplace ergonomics in 2001.
So, the fate of the CFPB, its director, and its rulemaking agenda will be resolved through the interaction of all three branches of government in the coming days and weeks. Unfortunately, it looks like we are in for a slow and painful transition at the agency.
It would seem that the transition would be less wrenching and divisive if the CFPB were a five-member commission, like Rep. Hensarling proposes in his Financial CHOICE Act. No more than three of the five commissioners would be from the same political party, and while the majority would dictate the agency’s agenda, the presence of two minority party commissioners would bring greater transparency and a moderating influence.
When Democrats won at the ballot box, Republicans were frustrated at their lack of influence over an Obama-appointed, single leader of the CFPB. Now that Republicans have won, there will be a Trump-appointed single leader no later than July 2018. While Democrats are now supportive of Director Cordray, with each passing day they come closer to a Trump-appointed director. Perhaps it would be in the long-term interest of consumer protection to restructure the CFPB as a bipartisan, multimember commission that is less controversial and more transparent, deliberative, and centered.
Thomas B. Pahl served as a managing counsel at the Consumer Financial Protection Bureau during the Obama administration. He spent more than 20 years working on financial services and consumer protection issues at the Federal Trade Commission and is now a partner in Arnall Golden Gregory’s privacy and consumer regulatory practice in Washington.
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