The Consumer Financial Protection Bureau (CFPB), tasked with supervising and regulating products ranging from student loans and credit cards to home and auto financing, has often been attacked for its aggressive enforcement practices. The CFPB’s formal rulemaking initiatives have also been heavily criticized and some have alleged that the bureau creates law through less formal proceedings such as policy statements and consent orders.
The CFPB has been expected to issue controversial rules that would dramatically change the industry, perhaps putting an end to payday loans and greatly increasing the potential for class action litigation. However, with President Trump’s recent executive order, activity in the Republican-controlled Congress, and forthcoming hearing before a federal court of appeals, the CFPB now finds itself facing attacks under each of the three branches of government.
President Trump’s Feb. 3, executive order instructs the U.S. Treasury secretary to review the effectiveness of the laws, regulations, guidance, and policies of the various banking regulators, including the CFPB. The secretary must report his findings to President Trump by June 3. While the executive order’s language is relatively benign, it should be read in the context of the administration’s criticism of the Dodd-Frank Act, which has called it a disastrous policy that hinders the market, reduces the availability of credit, and cripples the economy’s ability to grow and create jobs.
Although the administration has also specifically called the CFPB an unaccountable, unconstitutional agency that fails to adequately protect consumers, President Trump might find himself with limited options to make the changes he seeks because the Dodd-Frank Act permits the president to remove CFPB Director Richard Cordray only for cause by a finding of “inefficiency, neglect of duty, or malfeasance in office,” a difficult standard to meet.
In October of last year, a federal appeals court took issue with the CFPB’s structure holding that the president’s limited ability to remove the bureau's sole director was unconstitutional. Labeling the director’s position analogous to being “the President of Consumer Finance,” the court noted that as a result of the agency’s structure, except for the president, the director is the single most powerful government official. The court concluded that because the president must have the power to supervise and direct the CFPB’s director, he should be able to remove the director at-will.
However, on Feb. 16, this ruling was vacated and is pending a rehearing before the full D.C. Circuit Court of Appeals. The rehearing is scheduled to take place on May 24. A decision might not be issued before the Treasury secretary reports his findings to the president pursuant to the executive order. For Cordray to be removed by President Trump before any order is issued pursuant to the rehearing or if the court agrees with the CFPB’s arguments, his removal must be for cause instead of at-will and therefore may be challenged by the director.
The administration has signaled its intent to work with Congress to address the CFPB. A recently introduced Senate bill seeks to replace the single director structure with a five member “Board of Directors” who would be appointed by the president and could only be removed for cause. Additionally, House Financial Services Committee Chairman Jeb Hensarling (R-Texas) is expected to introduce a revised version of his Financial CHOICE Act, which includes more comprehensive changes to the CFPB and Dodd-Frank generally.
According to a memorandum circulated by Chairman Hensarling to the committee’s leadership team, the revisions aim to greatly reduce the CFPB’s ability to make rules, remove its supervision authority, and curtail its ability to initiate enforcement actions. Under the revised version of the CHOICE Act, the agency will have a single director that the president may remove at-will. This is the same structure that was ordered by the D.C. Court of Appeals, which is pending rehearing. However, unless the Republicans “go nuclear,” the CHOICE Act could be met with a filibuster in the Senate.
Even if the CFPB's structure remains unchanged, its ability to enact new regulations may have been substantially hindered when the Republicans took control of Congress. Republicans could utilize the Congressional Review Act (CRA) to overturn certain regulations issued by the CFPB. Under the CRA, Congress can disapprove a regulation through a joint resolution of the House and the Senate. The resolution can be passed with only a simple majority and cannot be filibustered in the Senate. The resolution is then sent to the president for signature or veto.
It seems unlikely that a resolution of disapproval, passed by the Republican-controlled Congress, would be vetoed by President Trump. Two of the CFPB’s more controversial proposed rules—the arbitration rule and the payday lending rule—could be subject to a CRA challenge, should they be finalized. A resolution has already been introduced which purports to nullify the CFPB’s prepaid account rule.
Facing attacks under each branch of government, and with Congress’s ability to adopt resolutions challenging any new regulations, the CFPB finds itself facing a somewhat precarious future. The bureau’s rulemaking and enforcement efforts are sure to be hampered over the next few years.
Alan S. Kaplinsky is a partner and head of the Consumer Financial Services Group at Ballard Spahr LLP. His practice focuses on counseling and representing clients in matters involving the Consumer Financial Protection Bureau.
Michael R. Guerrero is an associate in the Consumer Financial Services Group at Ballard Spahr LLP. He advises clients on federal and state compliance issues.
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