Kill Dodd-Frank (II)

The Bureau of Consumer Financial Protection (“CFPB”), we saw yesterday, is a truly “independent” agency. Under the Dodd-Frank Act, the President appoints the CFPB Director with the advice and consent of the Senate. However, he may remove the director only for good cause. The CFPB is established “in” the Federal Reserve. The Fed’s Chairman is also non-removable except for good cause, and he in turn may not remove any officer of the CFPB—for good cause or (if the statute means what it says) for any reason whatever. That’s unconstitutional.

Out of Bounds

Dodd-Frank was signed into law in July 2010. Had the Solons who crafted this masterpiece glanced at its content, the Supreme Court Reporter, and ideally both, they might have noticed that the CFPB Director’s tenure protection is a clear no-no. We have it on appalling but still-binding authority that Congress may insulate (principal) officers against presidential removal, see Humphrey’s Executor v. United States (1935). And we know on equally appalling authority that an “inferior” officer’s “for cause” removal protection is constitutional so long as his or her supervisor serves at the pleasure of the President, see Morrison v. Olson (1988). However, Congress may not combine those protections into a double-layer for-cause removal arrangement. So said the Supreme Court in Free Enterprise Fund v. Public Company Accounting Oversight Board (PCAOB), decided on June 28, 2010.

(Disclosure: I serve as Chairman of the Competitive Enterprise Institute, co-counsel in PCAOB and in the Dodd-Frank case. I am removable for any reason, including this post.)

Predictably, the plaintiffs in SNB v. Geithner—the pending challenge to Dodd-Frank—hang much on PCAOB. The differences between that case and theirs either don’t matter or else, support the SNB plaintiffs. The PCAOB’s officers were appointed by the Securities Exchange Commission (SEC) rather than the President, but that’s neither here nor there: it’s the removal that’s at issue. The PCAOB’s members are very probably “inferior” officers (they are appointed by and report to the SEC). If the “inferior” description also applies to the CFPB Director, this case is PCAOB II. If the Director is viewed, far more plausibly, as a “principal” officer (because he is appointed by the President, and because an official who has the entire financial industry by the short hairs really ought to be so appointed), the arrangement is unconstitutional a fortiori. Could Congress create an independent Secretary of State, with double-layer removal protection and authority to help himself (as the CFPB Director may) to a fixed portion of the Fed’s earnings? I didn’t think so, either.

Wait, There’s More

The SNB plaintiffs need no further argument to prevail on their challenge to the CFPB. This, though, is a blog, not a brief; so let’s pursue this a bit:

The CFPB is an “independent” agency (bureau? Whatever) of a form never before seen in 225 years of our history. It is more independent from the President than the “independent” agencies of New Deal notoriety, on account of the two-layer removal protection. Indeed, the CFPB is independent even from Congress: instead of asking for appropriations, it simply sends a demand letter to the Chairman of the Federal Reserve. (Dodd-Frank contains additional Congress-disabling provisions, but this one will do for present purposes.) And this agency is empowered to “declare” “unfair, deceptive or abusive acts or practices.” “Unfair” and “deceptive” are terms that (at least to lawyers and compliance officers) have a tolerably clear meaning, distilled in decades of regulation and litigation. “Abusive,” in contrast, is totally new. It must mean “acts or practices” that are fair (more precisely, not unfair) and non-deceptive. So there’s a set of perfectly suitable products, advertised with perfect candor and truthfulness, that are nonetheless “abusive.” And the contours and content of that set will be “declared” by the Director, in whatever form and forum (regulation, enforcement, guidance, or maybe front porch soliloquy) he may choose.

Schechter Poultry, anyone? In that famous 1935 case, the Supreme Court unanimously dinged President Roosevelt’s National Industrial Recovery Act (NIRA), as exceeding the bounds of the Commerce Clause and an impermissible delegation of legislative power. The act purported to authorize “industry advisory committees,” acting under federal agencies’ oversight, to create “codes of fair competition,” effective upon the President’s signature.

The NIRA was explicitly modeled on Mussolini’s Italy; the CFPB has come to us from Harvard Law School. Codes of fair competition had to be codes, and they required the President’s approval; the CFPB’s “abusiveness” standards may be “declared” ex cathedra (and apparently ex post, in enforcement proceedings), with no elected official anywhere in sight. In all other respects, this looks like a replay of Schechter.

The non-delegation part of that case is often read as requiring an “intelligible” legislative standard for agencies and courts (i.e., “fair” is too vague). But that reading cannot be right. At the time, the Court had already sustained the FTC’s authority to enforce prohibitions against unfair competition, as well as the FCC’s authority to issue broadcast licenses in accordance with “public convenience, interest or necessity.” The Schechter Court discussed those cases and explained the differences.

A proscription against specified “unfair” practices, the Court said, is one thing; the regimentation of industries under prescriptive “fairness” codes is an entirely different proposition. To my eyes, the difference between “unfair/deceptive” and “abusive” in Dodd-Frank is just like that: ultimately, there’s no way of avoiding “abusive” without a regulatory safe harbor.

Likewise, the Schechter Court said, administrative agencies with due process-ish, reviewable procedures are one thing; stick-built committees, the likes of which we have never seen before and whose m.o. we do not recognize, are a wholly different matter. If that doesn’t describe the CFPB, I don’t know what does.

So read, Schechter stands not for a “magic words” doctrine of delegation but for two propositions: (1) delegation has to do with institutional context; and (2) if the government departs from a perfectly serviceable and well-accepted mode of economic regulation for no reason that it, or we, can articulate, that’s probably not a good sign. Go ahead and regulate; but this ain’t the way to do it.

Mr. Romney and President Obama sparred over financial services regulation for the best of all reasons: there is more than one way to skin this very large cat, and reasonable minds will differ. That’s why we have elections. The politicians, however, cannot do their job, and elections won’t matter, until and unless the judges and justices first do their job: kill the beast.

Reader Discussion

Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.

on October 08, 2012 at 14:17:57 pm
Image of R Richard Schweitzer
R Richard Schweitzer
on October 08, 2012 at 15:07:54 pm

Whatever the other merits of the lawsuit, there is no tiered tenure-protection problem here. Free Enterprise Fund does not apply to this case because the director does not have "tiered" or layered tenure protection. The director can be removed for certain causes (the same ones at issue in Humphrey's Executor) by the President . 12 USC 5491(c)(3). The director has the same level of protection that the Court upheld in Humphrey's Executor. Although the Bureau is within the Fed Reserve, the Fed has no role in removing the director of the Bureau. In PCAOB, however, there were two levels of tenure protection: one for the SEC (implied but assumed expressly by the Court) and one for the PCAOB (via statute), and the SEC (not the President) was the entity that could remove the PCAOB members. The Court invalidated the use of two tiers of tenure protection between the President and the PCAOB by severing the PCAOB's tenure protection and otherwise leaving the SEC with assumed tenure protection. Simply put, there are no layers of tenure protection here and thus no Free Enterprise Fund problem.

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Image of Admin Guy
Admin Guy
on November 26, 2012 at 18:17:01 pm

Come on Loren. First, its a real stretch to say Warren was so prsecient and the practices of the big banks would spell doom for the economy. Hyperbole much?Second, no one forces people to use credit cards, carry balances, fail to make timely pmts etc. and incur a bunch of fees. Its called being responsible. Unsecured credit is always risky to the person exending it, and if you are too incapable of handling credit, its your fault, not the bank for extending it. I suppose ice cream shops should also be regulated, and all you can eat pizza buffets, because the average person is too weak willed or ignorant to understand the connection between stuffing their face and being obese, and its much simpler to blame the seller than to actual look in the mirror.Third, the hand of the regulators had a major role in many of these practices. why do i think some academic is going to fix these abuses anyway? Finally, i am shocked, shocked, that a bank would actually bankrupt their customers to make money in the short term. I mean, really. Exercising their legal and contractual rights to actually protect the security of the loans they extended to the delinquent or non compliant party, how cruel. Its almost as if these banks were run as businesses, owned by shareholders, who actually demand a return on their investments.Try investigating the Nexus between Goldman SAchs, the rating agencies, wall street law firms and the federal govt and federal reserve. Now that is where the real abuse and corruption is taking place, why TARP was such a pay off and why our elites effortlessly glide between the SEC, FED, Treasury and congress and these same white shoe firms

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Image of Peter
on February 21, 2017 at 13:50:56 pm

[…] but why aim so low? The problem with the CFPB is not merely Richard Cordray.  The problem, as legal scholar Michael Greve put it, is that it “is an ‘independent’ agency (bureau? Whatever.) of a form […]

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Image of Trump wants to cut red tape? He should start with the CFPB. | New Trump News
Trump wants to cut red tape? He should start with the CFPB. | New Trump News

Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.