WASHINGTON — The Consumer Financial Protection Bureau is in the direct crosshairs of a federal lawsuit questioning the bureau's leadership structure. But in a larger context, it might be the independence of all federal agencies on trial.
The full D.C. Circuit Court of Appeals heard
The case is playing out as many independent financial regulators are facing increased skepticism from leaders in Congress and even among a certain segment of the public who want to rein in their autonomy.
“With this new administration, this theme is definitely back,” said Mayra Rodríguez Valladares, managing principal at MRV Associates. “I’m a big believer in accountability, but I think it’s incredibly dangerous not to have independent regulators.”
Those questions could gain attention if the CFPB case goes before the Supreme Court and would have ramifications for the independence of regulators like the Federal Reserve Board and Federal Deposit Insurance Corp., which largely operate without influence from the White House. Even the Office of the Comptroller of the Currency, technically a bureau of the Treasury Department, is authorized to set regulatory policy independent of the administration.
To be sure, the case of PHH v. CFPB rests on whether the consumer bureau is a special case — whether its power exceeds previous standards. Plaintiffs in the suit argue that an agency led by a single director who cannot be removed by the president — rather than leadership by a board — is unconstitutional.
Those previous standards were set to a degree by Supreme Court cases, including Humphrey’s Executor v. United States in 1935, which dealt with the Federal Trade Commission, and the 1988 case of Morrison v. Olson.
But a lawyer arguing on behalf of PHH suggested that if the appeals court sides with the CFPB — ruling that the consumer bureau's power does not exceed the limits set by those previous cases — then the Supreme Court should reconsider whether those previously set limits make sense.
“If you conclude that this goes no further than Humphrey’s Executor and Morrison, then the next step is the Supreme Court,” said Theodore Olson, a former U.S. solicitor general who is representing PHH, during the oral arguments.
Olson said the danger of a court validating the CFPB's single-director structure is that it could be extended to undermine the executive branch's ability to oversee other agencies and departments, whose leaders now serve at the pleasure of the president
“If the powers that are given to the [Environmental Protection Agency], and to the Treasury Department and to the antitrust agencies and so forth — if all are vested in one individual, this one director, why not?" he said. "If it can be done with [the CFPB], it can be done with other people, and then what is left of the executive power?”
Independent bodies have been formed by the U.S. government almost since its foundation to insulate offices from political interference. The OCC, for example, was established in 1863. But the proliferation of similar regulatory bodies has also brought increased scrutiny of the constitutional basis for new agencies.
In response to Olson, Judge David Tatel, a Clinton appointee on the D.C. Circuit, said it would be a more appropriate question for the Supreme Court, rather than the appeals court, to weigh in on the appropriateness of single-director versus multiple-director agencies.
“This debate about the difference between multimember agencies and single member is fascinating, but I don’t really understand how we can take account of that,” Tatel said. “You need to go back to the Supreme Court and say, ‘You need to take a more careful look at this.’ From where we sit, I don’t see how we can go beyond what the court has now said.”
But if the CFPB prevails before the full D.C. Circuit — as many observers now
Pamela Karlan, a law professor and co-director of the Supreme Court litigation clinic at Stanford Law School, said she does not think the high court has a great deal of appetite for a broad revisiting of the modern administrative state. But the court has been “nibbling at the edges” of more innovative administrative arrangements, and the CFPB’s unique construction and recent vintage may make it fair game.
“Do I think the Supreme Court is interested in getting rid of the Federal Communications Commission and the like? No,” Karlan said. “Do I think there are some justices on the Supreme Court who are suspicious of new and innovative ways of setting agencies up? Yes.”
Also influencing the debate are what many perceive as the benefits of independence.
Aaron Klein, a fellow at the Brookings Institution, said the partisanship surrounding the CFPB makes it easy to forget that the bureau and other relatively new agencies were created not for the wanton exercise of concentrating executive power but because the agencies that preceded them were either captured by the industries they were supposed to oversee or ineffective.
The CFPB inherited many consumer protection duties previously held by the Fed but that the central bank did not exercise before the crisis. In another example, the Federal Housing Finance Agency was a successor to the Federal Housing Finance Board and the Office of Federal Housing Enterprise Oversight, both of which were seen as ineffective. Both the CFPB and the FHFA are single-director agencies, Klein noted, which he said makes them more effective.
“One of the rationales for a single-agency head is, it’s easier to get highly qualified, strong regulators to run an agency … than it is to cobble together a board of five or seven experts who are independent and who can cohesively function,” he said.
Klein added that the Supreme Court may also be aware that, however skeptical it may be about one agency, its rulings can have ripple effects. He pointed to a case where the court did not strike down the existence of the Public Company Accounting Oversight Board, which was created by the Sarbanes-Oxley Act and is an independent body with another independent agency, the Securities and Exchange Commission.
“I believe — and this is a personal opinion — that the reason why the conservative justices mostly agreed on Sarbanes-Oxley … is [that] if you struck down the PCAOB, the second degree of independent regulator, then the same logic could be applied to the New York Fed," which is within the Federal Reserve System, Klein said. “And does an activist Supreme Court really want to overturn what is now a century of precedent?"
Regardless of whether the courts revisit regulatory independence, Congress still has the prerogative to recraft the bureau and other independent agencies and seems especially willing to do so.
The Financial Choice Act — the regulatory reform bill authored by House Financial Services Committee Chairman Jeb Hensarling, R-Texas — would significantly defang the CFPB. But it also seeks to weaken the independence of the Fed.
“Certainly the Choice Act indicates that the industry and its allies are determined to greatly if not fundamentally weaken the CFPB,” said Arthur Wilmarth, a professor at George Washington University's law school. “The industry has hated the CFPB from the time it was first put on the drawing board."
Wayne Abernathy, an executive vice president with the American Bankers Association, said the industry has competing interests when it comes to independent agencies. On the one hand, banks want regulators insulated from political interference. But on the other, they want regulators to be accountable.
“I think the correct answer, and I think people would say, ‘We don’t want political considerations in bank regulation,’ ” Abernathy said. “But on the other hand, they’ve got to be accountable to somebody. And that’s what is at the core of the PHH case: Has the consumer bureau passed beyond the level of accountability?”
Abernathy said the Fed is a good example of where the financial industry both supports and decries institutional independence under one roof. The Fed’s independence, he said, was initially a critical element of its effectiveness in managing U.S. monetary policy. But as the central bank has gained additional regulatory and supervisory authorities, its independence has become more of a problem, he said.
“The Fed’s independence was created with monetary policy in mind and before they had significant bank supervisory and regulatory responsibilities,” Abernathy said. “As those regulatory responsibilities have increased, the accountability has not kept up with it.”
Wilmarth said the Fed presents a special case insofar as it is a highly complicated system that is critical to the financial stability of the country. While Congress may still want to change the fundamental powers and makeup of the CFPB, once the president has his nominees leading the Fed, Wilmarth said, much of the urgency to change the central bank’s structure goes away.
“With the Fed, it’s so massive, it’s such an intricate operation of so many moving parts, it’s unlike any other agency in government,” Wilmarth said. “I could see the Republicans thinking, ‘Do we really want to get into that particular brier patch? If anything goes wrong, we’re going to be blamed for it.’ ”
But Valladares is skeptical that Congress will be content to rein in the Fed’s regulatory powers without also making restrictions on its monetary policy operations. The Choice Act would require the Fed to adopt a rules-based monetary policy as the default while preserving the Federal Open Market Committee’s ability to deviate from that rule with explanation.
That could open the door to political manipulation, Valladares said.
“I’ve worked in a lot of emerging-market countries, far-out places, and a lot of these places I see the damage of having politicians who are dictating the process,” Valladares said. “They want inflationary policies, they want loose regulations … but by the time you hear that some borrowers are paying late, it’s already too late. The damage is done, and it’s very difficult to unwind.”
