President Obama, we learned (again) in Wednesday night’s debate, deems the Dodd-Frank Act of 2010 a great accomplishment in toto. Objection, Mr. President law-prof: lack of adequate foundation. You don’t know Dodd-Frank in its entirety or even in relevant part. Despite the prodigious length of the statute, its real-world content will depend on hundreds of mandated rulemaking proceeding in and by a dozen federal agencies. That job cannot be done: it would exceed the capacity of the regulatory agencies even if we quintupled their budgets and staff. And of the rules that the apparatus has managed to churn out, a good many have already been nixed by federal judges, Democrat and Republican appointees alike—for perfectly fine reasons, as Eugene Scalia has shown here.
President Romney, we also learned, would reform Dodd-Frank: keep the good parts, ding the parts that do harm and cost jobs. However, that cannot be done, either. By statutory design, the President of the United States has practically nothing to do with Dodd-Frank; in fact, he is affirmatively prohibited from meddling with its administration and those doing the administering. Changing that state of affairs would require 60 votes in the Senate, and good luck with that.
The good news is that (1) Dodd-Frank is unconstitutional and (2) a constitutional challenge—brought on behalf of a small bank, states, and the Competitive Enterprise Institute by a band of exceptional lawyers—is pending in district court. The complaint (hereinafter, SNB) contains counts against several parts of Dodd-Frank. They include counts against a particularly vicious part of Dodd-Frank, the Bureau of Consumer Financial Protection established under Title X of the act. (A better name for this Elizabeth Warren concoction would be the Bureau of Engraving: it will over time en-grave the American economy. But that title was taken, so now it’s the “CFPB.”)
The plaintiffs and their lawyers have by best wishes and prayers, but they don’t need either: on the merits, the CFPB part of their case is easy. I’ll quote from the statute because you have to see this stuff to believe it. Today, the way the CFPB world works; tomorrow, the Constitution.
The Powers That Be
What does the CFPB do? For illumination, turn to Subtitle C of Title X, entitled (without any intended irony ) “Specific Bureau Authorities”:
SEC. 1031. PROHIBITING UNFAIR, DECEPTIVE, OR ABUSIVE ACTS OR PRACTICES.
(a) IN GENERAL.—The Bureau may take any [civil enforcement action] to prevent a covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.
(b) RULEMAKING.—The Bureau may prescribe rules applicable to a covered person or service provider identifying as unlawful unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. Rules under this section may include requirements for the purpose of preventing such acts or practices.[…]
(d) ABUSIVE.—The Bureau shall have no authority under this section to declare an act or practice abusive in connection with the provision of a consumer financial product or service, unless the act or practice—
(1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
(2) takes unreasonable advantage of—
(A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
(B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or
(C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.
Try to make sense of this. Does “the consumer” mean a reasonable consumer? Average consumer? Marginal consumer? Any individual consumer? Any financial institution’s standardized products could be misunderstood or misused by some idiot or gambler. Which products, if any, are still legal?
Too, “abusive” (unlike, say, “unfair competition”) has no worked-out legal meaning. It is wholly novel term, and the purported definitions offer no help. Section (d)(2)(C) might mean that the bank clerk who hands me a brochure advertising the bank’s checking account choices has undertaken a fiduciary duty (of the sort a trustee might owe), for the violation of which there’s hell to pay. Then again if she doesn’t give me the brochure, she may have “materially interfered” with my ability to understand the terms and conditions of my account. Can those propositions both be right? Can either be right?
The true and correct answer is, “we’ll work this out over time.” Meanwhile, dear financial institution, take your best guess. And if you guess wrong, we may have to crush your kneecaps.
Who, pray tell, gets to exercise that sort of authority? Here, at last, the statute provides clarity.
Every Day is Independence Day
SEC. 1011. ESTABLISHMENT OF THE BUREAU OF CONSUMER FINANCIAL PROTECTION.
(a) BUREAU ESTABLISHED.—There is established in the Federal Reserve System, an independent bureau to be known as the ‘‘Bureau of Consumer Financial Protection’’, which shall regulate the offering and provision of consumer financial products or services under the Federal consumer financial laws. […]
(b) DIRECTOR AND DEPUTY DIRECTOR.—
(1) IN GENERAL.—There is established the position of the Director, who shall serve as the head of the Bureau.
(2) APPOINTMENT.—Subject to paragraph (3), the Director shall be appointed by the President, by and with the advice and consent of the Senate.
(3) QUALIFICATION.—The President shall nominate the Director from among individuals who are citizens of the United States.
While Sec. 1011(b)(3) would technically permit the appointment of my nine-year-old, it assures us that le bureau can’t be handed over to Monsieur Strauss-Kahn or some other expert form la grande nation or one of its former colonies. This is a big deal because in all respects, the CFPB is a sovereign entity. The President gets to appoint the director, by and with the consent of the Senate. Whereupon POTUS’s powers go to sleep (we are still in Sec. 1011):
(c) TERM.— (1) IN GENERAL.—The Director shall serve for a term of 5 years.
(2) EXPIRATION OF TERM.—An individual may serve as Director after the expiration of the term for which appointed, until a successor has been appointed and qualified.
(3) REMOVAL FOR CAUSE.—The President may remove the Director for inefficiency, neglect of duty, or malfeasance in office.
“Good cause” means something like theft or corruption; policy disagreement won’t do. The SNB plaintiffs contend that the present director (Richard Cordray) was not lawfully appointed in the first place. They are right. If they are wrong or fail to prevail on the claim, the Senate can keep Mr. Cordray in office for eternity, by the simple device of withholding consent to any new appointee.
Or can it? The CFPB, remember, is housed inside the Fed, Sec. 1011 (a). The President cannot remove the Fed Chairman, either; but maybe he can, at the expiration of Mr. Bernanke’s term, get himself a Chairman who agrees to remove or at least rein in a wayward CFPB director—no? No:
(c) AUTONOMY OF THE BUREAU.—[…]
(2) AUTONOMY.—Notwithstanding the authorities granted to the Board of Governors under the Federal Reserve Act, the Board of Governors may not—
(A) intervene in any matter or proceeding before the Director, including examinations or enforcement actions, unless otherwise specifically provided by law;
(B) appoint, direct, or remove any officer or employee of the Bureau; or
(C) merge or consolidate the Bureau, or any of the functions or responsibilities of the Bureau, with any division or office of the Board of Governors or the Federal reserve banks.
(3) RULES AND ORDERS.—No rule or order of the Bureau shall be subject to approval or review by the Board of Governors. The Board of Governors may not delay or prevent the issuance of any rule or order of the Bureau.
Hmm. So what does it mean for the CFPB to be established “in” the Federal Reserve? It means that the Fed Chairman gets to write checks:
SEC. 1017. FUNDING; PENALTIES AND FINES.
(a) TRANSFER OF FUNDS FROM BOARD OF GOVERNORS.—
(1) IN GENERAL.—Each year (or quarter of such year), beginning on the designated transfer date, and each quarter thereafter, the Board of Governors shall transfer to the Bureau from the combined earnings of the Federal Reserve System, the amount determined by the Director to be reasonably necessary to carry out the authorities of the Bureau […]
(2) FUNDING CAP.—
(A) IN GENERAL.—Notwithstanding paragraph (1), and in accordance with this paragraph, the amount that shall be transferred to the Bureau in each fiscal year shall not exceed a fixed percentage of the total operating expenses of the Federal Reserve System, as reported in the Annual Report, 2009, of the Board of Governors, equal to—
(i) 10 percent of such expenses in fiscal year 2011;
(ii) 11 percent of such expenses in fiscal year 2012;
(iii) 12 percent of such expenses in fiscal year 2013, and in each year thereafter.
This works out to somewhere north of $430 million, as determined by the Director in his sole and unreviewable discretion and for any non-prohibited purpose, including a really good pizza party. The Fed Chairman’s “oversight” is purely ministerial: sign the damn check, and deliver it.
Financial consumer regulation is like gravity, in that the President of the United States can’t do anything about either. However, gravity is constitutional. The CFPB is not. More tomorrow.