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The ‘administrative state’ needs to follow the rule of law by Congress

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Regulations by federal government agencies, which many now call the administrative state, are quickly supplanting Congress as the principal source of the rules that American citizens and businesses have to obey. In the past 25 years alone, these agencies, which include executive branch agencies like the Justice Department, have issued more than 3,000 rules and regulations each year, totaling more than 101,000 of these commands over this period. Laws enacted by Congress are only a fraction of the rules, of course, because administrative agencies are supposed to fill in the details of legislative statutes, and do so over many years.

Rules issued today could be based on laws enacted decades ago. The Labor Department still issues rules under the Fair Labor Standards Act of 1938. Agencies also advance their interpretations by threatening and filing lawsuits against regulated entities. But there is a danger that in issuing new rules, or interpreting their authority under legislative statutes, agencies will assume they have authority to cover areas that Congress never approved, or they interpret statutory language in ways that Congress never intended. In these cases, the administrative agencies are acting without authority, which raises questions about the rule of law.

{mosads}Under the Obama administration, the Justice Department was no paragon of virtue in this respect. In Operation Choke Point, the Justice Department attempted, through administrative control of the bank regulators and the threat of investigations and potential fines, to deprive payday lenders of financing and other bank services. It is inconceivable that Congress, which has never sought to close down the payday lending industry, would have approved doing so by using the power of bank regulators, yet this is what the Justice Department tried to do. A federal district court in eventually ended this misguided effort.

But this is not the only case where the Justice Department has used its statutory authority in a way that goes far beyond what Congress intended. It has also has sought to broaden the Financial Institutions Recovery Reform and Enforcement Act (FIRREA) so that it would cover actions of financial institutions themselves and not just the individuals or businesses that are dealing with them. The history of this law shows that Congress was attempting with this law to protect financial institutions, particularly savings and loan associations, against various forms of insider abuse. The Senate Banking Committee report on the savings and loan crisis cited “rampant fraud among owners and managers” of these institutions.

Accordingly, FIRREA imposes civil liability on “whoever” engages in fraudulent conduct that affects a “federally insured financial institution,” but the Justice Department interprets this “whoever” language to apply to the financial institution itself. Thus, if the financial institution underwrote or sold subprime mortgage backed securities that caused it or others to suffer a loss during the 2008 crisis, that activity could, under the Justice Department interpretation, fall within the language of FIRREA, and the financial institution itself could then be fined by the Justice Department. In these cases, of course, if the financial institutions had actually engaged in wrongdoing, they would have been liable to reimburse the injured parties, but the Justice Department theory would then impose a massive civil fine in addition to whatever damages the financial institution had already been required to pay to those who had suffered losses from the.

This seems to turn FIRREA upside down. It is a law that was intended to protect financial institutions against losses imposed on them by others. Instead, the Justice Department has turned it into a vehicle for imposing major new costs on the financial institutions themselves. In other words, legislation that Congress enacted in order to prevent banks, savings and loan associations, and other financial institutions from being victimized is now being used by the Justice Department to penalize and weaken the very financial institutions that Congress tried to protect.

This does not make much sense. Nevertheless, three federal district courts have not overturned the Justice Department theory that it was given authority under FIRREA to impose civil fines on financial institutions if they injure themselves by doing such things as selling subprime mortgage backed securities. This shows a willingness by the courts to accept administrative interpretations of their statutory authority. It is a major problem and the main reason that the administrative agencies of the executive branch have begun to replace Congress as the principal source of the rules that regularly bind American citizens and businesses.

The position of the judiciary branch stems largely from the Supreme Court decision in Chevron v. Natural Resources Defense Council in 1984. There, the justices directed the lower courts to defer to agency interpretations of their own statutory authority, if the interpretations were “reasonable.” As a result, the lower courts over the years have become accustomed to accepting as reasonable whatever administrative agencies do, unless Congress has clearly stated a contrary position. This has enabled the federal agencies, by giving expansive interpretations to language in their authorizing statutes to increase the number and rage of their rules.

The Justice Department position on the scope of FIRREA defies common sense. It goes well beyond anything that Congress meant to do when it enacted this statute. But it is still seen as a reasonable position by the judiciary branch. If we are to remain a nation where the rule of law prevails, the actions of administrative agencies must not go beyond what Congress authorized, and the courts should enforce this limit. Otherwise, the rules that American citizens and businesses must obey are being made by unelected officials. Attorney General Jeff Sessions has said that this Justice Department will follow the law. For this reason alone, the Justice Department of all federal agencies should be applying the law as Congress intended, not simply for what it can get the courts to accept.

Peter J. Wallison is a senior fiscal policy fellow at the American Enterprise Institute. He served as general counsel for the Treasury Department during the Reagan administration. His next book, “Judicial Fortitude: The Last Chance to Rein in the Administrative State,” will be published in this fall.

Tags America Business Congress Finance Government Jeff Sessions Regulation

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