A Brief Essay on the Constitutionality of the Consumer Financial Protection Bureau

• Publication year: 2012

47 Creighton L. Rev. 99. A BRIEF ESSAY ON THE CONSTITUTIONALITY OF THE CONSUMER FINANCIAL PROTECTION BUREAU

A BRIEF ESSAY ON THE CONSTITUTIONALITY OF THE CONSUMER FINANCIAL PROTECTION BUREAU

ERIC PEARSON(fn)*

I. INTRODUCTION

In 2008, the domestic economy of the United States experienced a severe downturn, prompted by a liquidity crisis triggered by a prolifer-ation of non-performing mortgages.(fn1) This so-called "economic meltdown" devastated the finances of the nation.(fn2) Thousands of homeowners found themselves evicted from their residences. Unem-ployment floated into double-digits.(fn3) Stock market valuations de-clined dramatically.(fn4)

After initial rounds of finger-pointing,(fn5) the federal government responded to the crisis with alacrity. The President and Congress first moved to restore liquidity in the markets by enacting the Toxic Assets Relief Program.(fn6) Thereafter, they launched a massive governmental spending program in hopes of stimulating economic recovery or at least reducing the duration and severity of the recession.(fn7)

Having addressed the immediate dilemma, albeit largely unsuc-cessfully,(fn8) the federal government next turned to the larger question of how to avoid future economic collapses. It concluded that risks of a repeat market failure would decline if the government would establish an exceedingly more elaborate and comprehensive supervision and regulation of financial markets.(fn9) The regulatory package that ulti-mately emerged installed tighter controls on credit, loan origination and securitization, derivatives sales and more. It also modified inter-national regulatory standards and revived the capacity of states to join in the regulatory enterprise. Consuming hundreds of pages in the Public Laws of the nation and comprising sixteen titles, the new stat-ute enacted for these grand purposes was the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank").(fn10)

As part of its effort to reorganize and consolidate federal regula-tory oversight, Dodd-Frank modified modifies the federal regulatory superstructure. Whereas, pre-Dodd-Frank, regulation of the financial sector was splintered among as many as six agencies,(fn11) themselves administering at least sixteen consumer protection laws,(fn12) post-Dodd-Frank, there would be a single agency with predominant authority. Among the duties assigned to this new agency would be the responsi-bility to affirmatively and vigorously protect consumers of financial products. The initial call for such a consumer-focused federal agency came from Elizabeth Warren, then a professor at Harvard Law School, and at this writing a United States Senator from the State of Massa-chusetts. In a 2007 article, she bemoaned the dearth of protection available for individuals when they deal with banks and other finan-cial entities.(fn13) As she provocatively put it, consumers buying small household appliances enjoyed more sophisticated protection from fraudulent and abusive sellers than did consumers of real property and securities.(fn14) The juxtaposition was palpable: why should a con-sumer of a financial product -a product that may be critical to that individual's long term fiscal solvency -not receive as much legal pro-tection as enjoyed by a Walmart shopper? Ms. Warren traced the problem to the "current regulatory jumble."(fn15)

Ms. Warren's thesis found wide favor in the Department of the Treasury, which in 2009 joined the call for precisely such an agency. The Department argued for an independent bureau with "broad juris-diction to protect consumers . . ."(fn16) to be run by a Director and a Board.(fn17) It proposed to invest such an agency with "stable robust funding" the source of which, the Department speculated, might be from fees on transactions and firms in the financial sector.(fn18) Trea-sury suggested as well that the new agency be provided "sole auth-ority" to interpret a wide range of statutes(fn19) and power to promul-gate rules to implement those statutes.(fn20) The new agency would also enjoy a full compendium of "supervisory, examination and enforcement" authorities.(fn21) In line with these proposals, DoddFrank established the Consumer Financial Protection Bureau ("CFPB"). (fn22)

It also created a "Financial Stability Oversight Council" ("FSOC") in line with other recommendations of the Department of the Trea-sury ("Treasury").(fn23)

In configuring the CFPB, Congress drew liberally from Treasury's recommendations but departed from those recommendations in cer-tain significant particulars. First, the CFPB would be an executive rather than an independent agency,(fn24) which means the agency would be led by a single person rather than by a board or panel.(fn25) That person, moreover, would be removable by the President for good cause only.(fn26) Second, Dodd-Frank "one-upped" the Treasury Department's proposal for stable agency funding by providing for the CFPB to be entirely self-funding. As currently configured, the agency allocates funds to itself essentially in amounts it chooses.(fn27) Henceforth, the new agency would not be "at the mercy of a political dogfight for its funding."(fn28) Third, while affording the new agency a broad authority to interpret the financial statutes it administers, the legislation once again exceeds the Treasury's recommendations by expressly mandat-ing federal courts to review CFPB's exercises of its interpretive au-thority more deferentially than they might otherwise do.(fn29)

These add-on design features were intended to insulate the CFPB from what is known as "agency capture." Agency capture occurs when forces external to an agency are positioned to influence to their advan-tage the agency's policy formulations. By definition, when agency cap-ture occurs, the affected agency becomes unable to promote the public good. Agency capture has been a real and persistent concern for many years.(fn30) Usually, external forces implicated in agency capture scena-rios are non-governmental groups characterized as "special interests." Congress was clearly mindful of special interests as it assembled the Dodd-Frank legislation.(fn31) But in this instance Congress was con-cerned as well about undue influence from the federal government it-self. The Democratic Party-controlled Congress, correctly or incorrectly, worried that Republican Party-controlled Congresses of future years might move to undo the CFPB and reverse any gains it might have made.

The end result is a new agency like no other. Is the CFPB's as-sembly of empowerments and immunities wise? Not everyone thinks so, as one commenter termed it, " . . . if one were to sit down and design a policymaking agency that embodied all of the pathologies scholars of regulation have identified over the past several decades, one could hardly do better than the CFPB . . . ."(fn32)

Is this assembly constitutional? There are four features that call constitutionality into question. They are (a) the agency's broad em-powerment; (b) its relative immunity from Congressional oversight, courtesy of the agency's self-funding authority; (c) its relative immu-nity from executive oversight, courtesy of the Director's removal pro-tections; and (d) its relative immunity from judicial oversight, courtesy of the requirement for courts to review the CFPB's statutory interpretations with high deference. As a group, agencies have often been called the "Fourth Branch" of government. They have secured this moniker because they can operate to some degree independent of the three constitutional branches of government. If agencies as a group are the "Fourth Branch," it may be that the CFPB can lay claim to a status of "Fourth Branch Once Removed." If it is too far "re-moved," if it is de facto a satellite in its own orbit, a "junior varsity government" in its own right, it surely violates the Constitution. The next sections of this Article discuss these four features.

II. ISSUES OF CONSTITUTIONALITY

A. BROAD EMPOWERMENT

Established as an "independent bureau" within the Federal Re-serve System,(fn33) the Consumer Financial Protection Bureau ("CFPB") boasts rulemaking, adjudication, and so-called guidance powers to be used "as may be necessary or appropriate to enable the [CFPB] to ad-minister and carry out the purposes and objectives of the Federal con-sumer financial laws, and to prevent evasions thereof."(fn34) Even a cursory review of this language makes obvious the generous breadth of discretion it proffers. First, the language authorizes regulation lim-ited only by the CFPB determination that the regulatory initiative is "necessary or appropriate . . . ." "Necessary" means "required" or "una-voidable."(fn35) "Appropriate," means "suitable" while "suitable" means "unobjectionable."(fn36) All of these supposed limits on exercises of discretionary authorities are hardly limits at all. Would an agency ever endeavor to regulate "unsuitably," for example? The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010(fn37) ("Dodd-Frank") in other words, frees the agency to formulate standards and policies to govern the financial sector of the domestic economy essen-tially as it wishes. When it does so by rule, it need not consult the Congress.

In addition to broadly enabling affirmative regulation of the fi-nancial sector as "necessary or appropriate," Dodd-Frank authorizes the CFPB to "conditionally or unconditionally...