What does Treasury want to do to the CFPB?

The Treasury Department’s first report on regulatory reform written pursuant to President Trump’s executive order was released earlier this…

Hamilton 2 will have a rap about the CFPB, I’m sure of it.

The Treasury Department’s first report on regulatory reform written pursuant to President Trump’s executive order was released earlier this week. This report is the first in a series that will evaluate and provide recommendations for financial regulation across the financial sector. While this report primarily dealt with the U.S. Banking system, it also touched on other issues, including the CFPB. But what did it say about the CFPB? Well, let’s find out.

Important but flawed

The Treasury acknowledges that the CFPB was created to serve an “important mission” in consolidating federal consumer financial protection regulation in one central regulator. This acknowledgment, taken in conjunction with the Treasury’s recommendation elsewhere in its report that Congress consider consolidating agencies to eliminate redundancy could indicate that the Treasury would oppose disbanding the CFPB and returning to the status quo pre-Dodd-Frank act.

However, while the Treasury may appreciate having a central consumer financial protection regulator that does not mean that it appreciates the current CFPB. In fact, the Treasury believes that the CFPB is flawed in its structure and authority, and recommends significant changes.

Structure

The Treasury believes that the CFPB’s current structure of having a sole director removable by the President only for cause enables abuses and prevents accountability. While the Trump administration has taken the position elsewhere that the CFPB’s structure is unconstitutional, and the report acknowledges the question of constitutionality, it doesn’t rely on that point.

Instead, Treasury makes the argument that the structure produces perverse outcomes by preventing appropriate democratic accountability. This includes the CFPB leadership being insulated from Presidential control, both in terms of personnel and by not being subject to Office of Management and Budget (OMB) approval for how it spends money. Likewise, the CFPB is insulated from accountability to Congress. The CFPB is not subject to Congressional appropriations. Instead it receives funding directly from the Federal Reserve, with no Congressional control over the amount, and from its civil penalty fund (though those funds are somewhat limited as to what they can be used for).

The Treasury recommends that the CFPB’s structure be changed to either a director removable at will or a multi-member commission. It also recommends that the CFPB be subject to congressional appropriations, be subject to OMB control, and have its use of civil penalty funds limited to only making payments to actual victims of malfeasance.

Statutory Authority

Treasury also critiques the scope of the CFPB’s authority and how it has been used. Treasury argues that the statutory grant of authority to the CFPB to prohibit “unfair, deceptive, and abusive acts or practices” is too vague. First, the meaning of “abusive” remains largely undefined, and the CFPB has not pursued rulemaking to clarify what conduct would qualify. Second, even though “unfair” and “deceptive” have been defined through past use by the Federal Trade Commission and the courts, the CFPB is free to adopt different meanings. Treasury argues that this lack of predictability creates regulatory uncertainty.

The Treasury also criticizes the CFPB’s statutory ability to deviate from existing interpretations of rules or laws that the CFPB inherited from other agencies without a set procedure for making those changes known, avoiding notice-and-comment rulemaking in favor of informal guidance or regulation by enforcement.

Additionally, the Treasury believes that the CFPB’s supervision authority is duplicative, unnecessary, and a poor fit for the CFPB’s mission. In the case of depository institutions Treasury believes that CFPB supervision is unnecessarily duplicative, since those institutions are also subject to supervision by their prudential regulators. It considers the CFPB’s supervisory authority over non-bank financial companies to be inappropriate because those firms are not granted a charter or powers by the federal government and do not enjoy federally-backed deposit insurance. Further, those firms are licensed and supervised by state regulators, making the CFPB redundant.

Finally, the Treasury believes that the retrospective review requirements imposed on the CFPB by Dodd-Frank are insufficient and recommends that the CFPB be subject to a more robust retrospective regulatory review, similar to what bank regulators are required to do. Treasury also suggests that the CFBP’s authority to collect information on small business lending be revoked on the grounds that it will impose undue burdens on small business lenders and limit access to credit for small businesses.

Use of Authority

In addition to criticizing the scope of the CFPB’s authority, the Treasury also criticizes how the CFPB has used its authority. According to Treasury the CFPB has sought to use its authority to expand the agency’s power and jurisdiction, rather than providing notice to regulated entities or stability. The Treasury points to the tendency of the agency to practice regulation by enforcement rather than by promulgating rules, its application of retroactive changes to rules to increase enforcement penalties (as seen in the PHH case) and its pursuit of parties outside the scope of the CFPB’s authority, including indirect auto lender and college accreditation organizations.

Further, the Treasury accuses the CFPB of using administrative enforcement and civil investigative demand (CID) proceedings that it believes provides insufficient protections to targeted firms and give the CFPB an unfair advantage. The Treasury also criticizes the CFPB’s consumer complaint database as lacking appropriate safeguards, including failing to verify the truth of the allegations made against a company and lacking essential context to give users a realistic picture of firms and industries.

The Treasury also criticizes the CFBP for failing to fully use its authority to develop a meaningful no-action letter policy. Treasury’s view is that the CFPB’s policy is too restrictive and imposes too high a bar for companies to meet to be eligible for no-action relief.

To address these problems the Treasury recommends that the CFPB be required to undertake rulemaking before it changes or adopts a new position on what constituted unfair, deceptive, or abusive practices or when it departs from previous precedent. The Treasury also recommends the CFPB bringing enforcement actions in federal court or at least providing regulatory guidance as to when it will pursue administrative proceedings. Similarly Treasury argues that the CFPB’s CID process should be reformed, including allowing appeals of CIDs to remain confidential and giving CID targets the ability to go to court to have the CID dismissed (something the CHOICE Act would do). Treasury suggests that the CFPB’s complaint database should mirror the database maintained by the FTC, which is not publicly facing. While many of these changes could be done by the CFPB itself, Treasury also acknowledges that it may be advisable for Congress to codify changes to prevent future CFPBs from regressing.

Conclusion

The Treasury Department’s critiques of the CFPB are generally not novel or unexpected. Rather, they reflect real and well known problems with the CFPB as it currently stands. However, it is worth noting how relatively moderate the suggested improvements are. The Treasury is not calling for the CFPB to be disbanded, it isn’t even going as far as the CHOICE 2.0 Act in terms of restructuring. Instead of insisting that the CFPB go away or fundamentally change, Treasury is recommending that it be improved, so it can pursue its “important mission” without the excesses and abuses that have unfortunately attended the agency since its creation.