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The Consumer Financial Protection Bureau Explained

May 11, 2011
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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, according to incoming enforcement chief Richard Cordray.

Elizabeth Warren serves as the de facto head of the bureau, though she is nominally only a “special advisor” to the president and Treasury Department. The agency launched its website in February of this year, and is set to begin its enforcement role on July 21st. On that date, the CFPB will be a unit of the Federal Reserve, and will receive a set percentage of the Fed’s budget as its source of funding. Until then, it makes recommendations to the Treasury Department without the power to enforce them.

Its 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. Its creation, though, was passed over the strong objections of congressional Republicans, and the bureau remains swamped in political controversy.

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 Council: The 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.

Republicans want a weaker bureau, or none at all

Despite the bureau’s significant oversight, many Republicans worry that the CFPB is authoritarian, burdensome to businesses, and intrusive. Rather than repeal Dodd-Frank in its entirety, or even eliminate the bureau altogether, they seek to weaken and de-fund it. According to Democrats, repealing Dodd-Frank altogether would cause significant political backlash, so the GOP chips away at the legislation piecewise.

The bureau’s position itself is the result of such efforts. Republicans strongly opposed an independent consumer financial protection bureau, so Democrats agreed to house the agency inside of the Federal Reserve when Dodd-Frank was passed.

Most regulatory agencies have some leeway with their budgets. The Office of the Comptroller of the Currency, for example, can increase its assessment on banks without any oversight. However, a GOP-led effort to reduce regulators’ budgets has resulted in smaller funds for the SEC and CFTC, both of which monitor the financial industry. The Consumer Financial Protection Bureau receives a set percentage of the Fed’s operating budget, and cannot raise money without congressional approval. Some Republicans would go one step further, setting the CFPB’s budget through the congressional appropriations process, increasing the legislative branch’s power.

On May 2nd, 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 is replaced with a five-person board of directors.
  • The CFPB relies on the Congressional appropriations process for funding.
  • The Financial Stability Oversight Council has greater veto power.

House GOP cites open director’s seat as cause for concern

Senate Republicans’ efforts to block the director’s confirmation notwithstanding, Representatives Spencer Bachus of Alabama and Shelley Moore Capito of West Virginia introduced a bill to replace the directorship with a five-member committee, with neither party holding more than three seats.

“We’re realistic enough to know that going after the entire bill is probably an unreachable goal,” said Congresswoman Moore. “We’re trying to reshape parts of Dodd-Frank. If we’re going to have to live with it, then let’s make it better than it is right now.”

Congressman Bachus said that his bill was primarily motivated by the fact that President Obama has yet to choose a nominee. “This is an agency that on July 22 will start enforcing the law,” he said. “We’re, what, 90 days out?” However, confirming an appointee without a supermajority is an arduous process.

The delicate dance of Senate confirmations

President Obama and the Democrats, clearly, are unhappy with the Republicans’ demands. They believe that public opinion is strongly on their side, and that attempts to block the director’s confirmation will cause the GOP to seem intransigent and sacrificing efficiency for ideology. While President Obama has spoken forcefully against the proposed changes, Republicans note that he has reversed course on other issues such as the Bush-era tax cuts.

However, Obama seems poised to push his nominee through with a recess appointment. The Constitution allows the president to bypass the Senate confirmation process if the legislative chamber is not in session, a tactic famously used to confirm President George W. Bush’s contentious nominee, John Bolton, as ambassador to the United Nations.

In addition to threatening to block all of his nominees, Republicans are considering a little-known tactic known as a pro forma session. The procedure is generally used to satisfy the Constitutional requirement that no chamber of Congress adjourn without the other’s consent, and consists 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.

Republicans’ pro forma faces logistical and legal challenges

Pro forma sessions have been used as political tactics before. 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.

Some GOP senators also 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.”

Can a pro forma session really prevent a recess?

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.

How bin Laden may save the CFPB

Elizabeth Warren has essentially acted as the Consumer Financial Protection Bureau’s director ever since it set up shop, and most expect that she will receive the nomination to officially lead it. Warren continues to court community banks, touring the country to hold meetings. Even if she is nominated, though, Republicans made clear that her confirmation is less than certain.

A number of banking analysts believe that momentum swung towards the President following Osama bin Laden’s death. He might well decide to spend some of his newfound political capital on a recess appointment, especially if he believes that public opinion supports a strong regulatory agency.

“In the wake of the bin Laden announcement, the White House has to be brimming with confidence,” said political analyst Brian Gardner. “That was a significant development for [the Obama administration], and it probably makes it a little bit easier for them to go ahead with a recess appointment if it were to come to that.”