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The Consumer Financial Protection Bureau Explained

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Less than a year old and already mired in controversy, the Consumer Financial Protection Bureau is nonetheless still an unknown quantity. Whom does the CFPB regulate, and why? How do they go about making those regulations, and who said that they could? And – all right, we’ll say it – who watches the watchmen?

The mission: protect consumers’ financial products. We could have told you that.

The Consumer Financial Protection Bureau seeks to fill regulatory gaps, whether they are gaps in coverage (for example, non-bank entities like prepaid debit card issuers) or gaps in understanding (such as changing checking account disclosure forms to be more digestible).

The CFPB’s mandate is to enforce federal regulations, acting as a policeman and watchdog for the financial industry. The bureau will “enforce laws that outlaw discrimination and other unfair treatment in consumer finance” and “restrict unfair, deceptive or abusive acts or practices,” according to its website.

Current project include:

A lot of people are watching the watchmen, actually

The CFPB is subject to more oversight than any other banking regulator. Since it receives a flat amount of money from the Fed, it cannot unilaterally increase their operating budget like the FDIC or the Office of the Comptroller of the Currency. In addition, a number of regulatory agencies have veto power over its actions:

The Administrative Procedures Act: The bureau has to follow notice-and-comment guidelines for all of its activities, meaning that it has to post and hear responses on its regulations before they can go into effect. It also has to submit its proposals to the Office of Information and Regulatory Affairs to make sure they won’t hurt small businesses. According to Professor Adam Levitin of Georgetown Law, only the EPA and OSHA have similarly strict requirements.

The Financial Stability Oversight CouncilThe FSOC, which is part of the Treasury Department, would have veto power over the CFPB. The bureau is the only banking regulatory agency to have this check on their power.

Congress and the judiciary: Like any federal agency, the CFPB depends on Congress for its authority, and particularly requires Senate approval of its director. Similarly, egregious oversteps can be challenged in court.

A brief history of the CFPB

The Consumer Financial Protection Bureau was legislated into existence by the Dodd-Frank Bill of 2010 as part of an effort to overhaul financial regulation and make lending, especially mortgages and credit cards, fairer and more transparent for consumers. Its priorities will be mortgages, credit cards, and student loans, director Richard Cordray.

Dr. Elizabeth Warren, former Harvard Law professor and current candidate for Massachusetts’ Senate seat, oversaw the CFPB in its early days. The agency launched its website in February of 2011 under Warren’s supervision, but a threatened veto from Senate Republicans kept her from being confirmed as its director. Instead, Obama tapped the (somewhat) less controversial Cordray, who had previously served as Ohio’s attorney general.

However, an easy confirmation process wasn’t exactly in the cards. 44 of the 47 Senate Republicans led by Minority Leader Mitch McConnell and Richard Shelby sent a letter to President Obama detailing their concerns, primarily, that the CFPB director would have too much power. They threatened to block not only the director’s confirmation, but all financial services nominees, unless:

  • The one-person directorship was replaced with a five-person board of directors.
  • The CFPB would rely on the Congressional appropriations process for funding.
  • The Financial Stability Oversight Council would have greater veto power.

In December of 2011, the Republicans’ filibuster blocked Cordray’s nomination, and Dodd-Frank had specified that the bureau would have no enforcement power while it lacked a director. Obama used his executive power to appoint Cordray as the bureau’s head in a highly controversial recess appointment, during which the Senate was technically in session.

Since assuming the reins, Cordray has focused on applying behavioral economics, research and hard data to consumer finance. The agency is currently seeking comment on a number of disclosure initiatives, from student loan calculators to “plain-vanilla” mortgage applications.

Behavioral economics takes on D.C.

More so than previous regulatory efforts, the CFPB has emphasized behavioral economics, or the idea that the rational homo economicus that we all learned about in econ class doesn’t exist. Instead, humans are influenced by the presentation of information, so that the same disclosures displayed in different ways will foster different outcomes. The Bureau’s efforts are headed by Sendhil Mullainathan of Harvard, a leader in the field of behavioral economics.

Who is Richard Cordray?

Richard Cordray, the sandy-haired former attorney general of Ohio who bears more than a passing resemblance to 30 Rock’s Kenneth Parcell, was widely seen as a less controversial, more centrist nominee than Elizabeth Warren. He was extremely active in Ohio politics before heading to Washington, serving in the state House of Representatives, and as Ohio’s solicitor general, treasurer and attorney general.

He was also a five-time undefeated champion on Jeopardy in 1987, and reached the semifinals in the Tournament of Champions. He put his winnings – $45k plus – toward paying down his law school debts, paying Uncle Sam and getting himself a brand-new (okay, used) car.

Pro forma sessions and recess appointments explained

President Obama did something slightly unusual when he named Cordray to head the Bureau – and not simply a recess appointment. Democrats cried foul when President George W. Bush used the procedure, and Republicans did the same for President Bill Clinton. But Obama used what’s known as a pro forma session.

Pro forma sessions are generally used to satisfy the Constitutional requirement that no chamber of Congress adjourn without the other’s consent, and consist of a seconds-long session in which no business is conducted. A solitary member can gavel the Senate into session and leave, having fulfilled the requirements for a pro forma session. As long as someone does so every three days, the thinking goes, the Senate does not technically go into recess and the president cannot bypass the confirmation process.

In 2007, after the Democrats regained control of the Senate, Majority Leader Harry Reid used pro forma sessions to prevent President Bush from making recess appointments. However, times have changed: most importantly, the Republicans do not control the Senate. Even the legislators themselves aren’t certain that the minority party can call the Senate into session. Holding pro forma sessions also requires that, every three days, one senator flies back to Washington at the expense of constituent meetings, town halls and fundraising dinners.

Everyone from the Department of Justice to the President to Senate aides believes that gaveling the chamber into session every three days precludes a recess. According to Victor Williams of the Catholic University of America, though, the Constitution and the courts say otherwise.

The adjournment-consent clause of the Constitution requires that each house obtain the others’ permission before going into recess for more than three days. To work around the clause, chambers would regularly call pro forma sessions. However, the Constitution is unclear as to whether the clause applies to recess appointments as well. Over the past century, the Department of Justice has gone back and forth on the issue. The most recent brief came in 1993: President Clinton’s Justice Department implied that because the adjournment-consent clause permitted breaks of three days, a recess had to be three days or longer for the President to bypass the confirmation process.

The courts, as well as the Senate’s own research, disagree. According to the Congressional Research Service, the Constitution does not specify the length of the recess required for a recess appointment. In 2004, moreover, the U.S. Court of Appeals ruled that “The Constitution, on its face, does not establish a minimum time that an authorized break in the Senate must last to give legal force to the President’s appointment power under the Recess Appointments Clause.”

It is entirely possible that pro forma sessions are a figment of the federal government’s collective imagination, and that President Obama could confirm the CFPB director, and in fact all of his financial services nominees, as soon as the current Senate session is gaveled to a close. He would hardly be alone in extensive recess appointments: Theodore Roosevelt shoved 160 appointees through in one Senate-free day.

However, some GOP senators contend that the Dodd-Frank bill requires a “Senate-confirmed” director, thus disqualifying anyone appointed during recess. John P. Elwood, who worked at the Office of Legal Counsel, though, believes otherwise. “It is unconstitutional to draw distinctions between recess-appointed [and Senate-confirmed] officers, because it burdens the president’s recess authority.”

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