While the U.S. consumer watchdog created in the aftermath of the 2008 financial crisis was already vulnerable to partisan tugs-of-war, this week’s Supreme Court ruling makes the future of its power over banks and lenders as hard to predict as the presidential election.
In deciding that the Consumer Financial Protection Bureau (CFPB)’s current leadership structure is unconstitutional, the highest U.S. court ruled that the president can now remove the bureau’s director at will, rather than being restricted to very limited circumstances involving poor performance or negligence.
In essence, the teeth behind consumer protections on everything from high-interest payday loans to class-action lawsuits may now depend largely on who is in the Oval Office and what’s politically convenient at any given time.
- The U.S. Supreme Court ruled that the president can remove the director of the Consumer Financial Protection Bureau at any time for any reason
- The ruling makes it much more likely that the bureau’s actions will align with a sitting president’s policies
- The Supreme Court left the CFPB intact, deeming its independent director unconstitutional but refusing to invalidate its existence
- Banks and consumer advocates continue to debate how the leadership of the bureau should be structured—a sole directorship versus a commission
Still, the ruling wasn’t a clear win for financial services providers. In fact, banks and others who had advocated for the single director to be replaced by a bipartisan multi-member commission came no closer to that goal, with the Supreme Court refusing to invalidate the agency and leaving it to Congress to make any decisions about a redesign.
“Democrats have come to the consensus view that a commission would water down the effectiveness of the agency. I don’t think that’s gonna have any traction,” Richard Cordray, who was appointed by former President Barack Obama as the CFPB’s first director, said in an interview with The Balance. “I think it’s dead on arrival in the Congress.”
Congress established the CFPB as part of the 2010 Dodd-Frank Act, a package of financial reforms put in place after the housing and financial markets collapsed in 2008. The bureau imposes fines, seeks restitution for consumers, and tracks complaints about a wide range of financial and credit products—from student loans and mortgages to credit cards and money transfers.
While the president already had the authority to appoint the CFPB director, the June 29 court decision—a 5 to 4 vote—changed how quickly the sitting president can influence the direction of the CFPB.
To be more precise, before the decision, the president could only put an early end to the director’s five-year term with good cause—if there were “inefficiency, neglect of duty, or malfeasance in office,” according to the law. Now, the president has the freedom to swap out directors whenever it’s politically expedient.
The intention of the original structure, say consumer advocates, was to shield the director from being swayed by proponents of light-touch regulation.
“The CFPB needs a director who can stand firm against pressures—including White House pressures—to back off from the agency’s statutory mandate to enforce consumer protection laws against the powerful financial industry,” explained Scott Nelson, an attorney at Public Citizen, one of several advocacy groups that filed briefs with the court in support of the bureau’s structure.
CFPB’s Track Record
To be sure, the CFPB’s track record of enforcement actions and penalties would indicate the president’s leanings already have a big influence on how aggressive it is in policing the industry. During Cordray’s tenure—between 2012 and 2017—the CFPB initiated about 200 enforcement actions, resulting in billions of dollars in refunds and other financial redress.
After Cordray stepped down in November 2017, President Donald Trump named Mick Mulvaney as acting director of the bureau. An outspoken critic of the CFPB, Mulvaney, as a congressman in 2014, called the agency a “wonderful example of how a bureaucracy will function if it has no accountability to anybody. It turns up being a joke, and that's what the CFPB really has been, in a sick, sad kind of way.”
Under the year or so that Mulvaney led the bureau, the number of CFPB enforcement actions dropped significantly, as did monetary relief, according to a March 2019 analysis by the Consumer Federation of America. The number of actions dropped from 55 in 2015 to just 11 in 2018, the study showed. (And since the beginning of 2019, there have been 34 actions, according to the CFPB’s online database.)
What’s more, for every week in office, Cordray returned roughly $43 million in restitution to consumers, compared to $6.4 million under Mulvaney and $925,000 under the current director, Kathy Kraninger, according to the analysis.
Additionally, in the final months of Cordray’s tenure, which overlapped the Trump administration for approximately 10 months, Cordray finalized two high-profile rules that have either been nullified or have yet to take effect.
“There was a fair amount of pressure to back us off from being too aggressive at reining in financial companies,” Cordray said. “We were doing some things that were going to pinch the financial companies in ways they don’t like.”
In July 2017, the bureau finalized a new rule aimed at severely curbing the use of forced arbitration in financial products and services. Forced arbitration is the practice of using a clause in a customer’s contract to bar the customer from bringing or joining in a class-action lawsuit against the company. Instead, a customer with a legal grievance must enter into private arbitration where damages may be limited and there is far less opportunity for an appeal of the arbiter’s ruling to a court.
But those new protections were never implemented. In November 2017, Congress used the Congressional Review Act (CRA) to halt the arbitration rule, and under the terms of the CRA, the only way for a rule to be resurrected is if Congress passes a law authorizing it.
The Congressional Review Act gives lawmakers a brief window of time after a new regulation is finalized to pass a resolution nullifying it.
A second 2017 regulation involving payday loans and other short-term, high-interest financial products like auto-title loans has yet to take effect.
In October 2017, the CFPB released its final rule on the loans, which can carry the equivalent of a 300% annual percentage rate or more. The bureau’s research had found that more than four out of five borrowers of payday loans were left having to take out another loan within a month. Many were doing this repeatedly, ultimately paying much more in fees than the value of the loans.
The new regulation, which would have required most providers of such loans to verify that a borrower actually had the ability to repay the loan, was supposed to take effect in 2019. But under Kraninger, the CFPB proposed rescinding certain underwriting provisions in the rule and delayed the compliance date to November 2020. (The current status of the rule isn’t entirely clear from the bureau’s online posting system for regulations.)
In his opinion for the court’s majority, Chief Justice John Roberts noted that although the CFPB was not unique in being set up with a director protected from at-will dismissal, its structure is still unprecedented.
The Office of Special Counsel, the administrator of the Social Security Administration, and the director of the Federal Housing Finance Agency each have this distinction, but their agencies “do not involve regulatory or enforcement authority comparable to that exercised by the CFPB,” he wrote.
"Such an agency lacks a foundation in historical practice and clashes with constitutional structure by concentrating power in a unilateral actor insulated from Presidential control," Roberts wrote.
However, the court did not use this determination to invalidate the bureau’s existence, a move that some in the financial sector hoped would set the stage for a change from sole directorship to a multi-member commission.
In fact, the notion that the bureau would be better off headed by a bipartisan commission has dominated much of the debate around the case even though the petitioner—Seila Law, a California law firm that had received what’s essentially a subpoena for documents from the CFPB—sought the ruling after refusing to comply with the investigative demand.
Commission vs. Director
“The Court’s ruling eliminates the Bureau’s independence through the creation of an at-will Director, further exacerbating the political influence that has already plagued the Bureau,” Consumer Bankers Association President and CEO Richard Hunt said in a statement advocating instead for a bipartisan commission. “This outcome subjects consumers and the financial services industry to potentially radical regulatory shifts with each administration.”
The American Bankers Association and the U.S. Chamber of Commerce—the nation’s largest lobbying organization—also released statements this week reiterating their push for a bipartisan commission. This would enable longer-term stability in the agency’s policy-making and allow for more balance and continuity, financial trade groups have said.
“Where we've seen government act very quickly outside of emergencies, agencies have made mistakes and had to go back and constantly fix things,” said Ryan Donovan, chief advocacy officer at the Credit Union National Association. “When you have a deliberative process, you're going to produce better policy in the long run.”
Consumer advocates counter this idea, saying a commission is the goal for those who want to dilute the potency of the agency.
“Commissions in general are far slower to act and far less effective than a single director,” said Lauren Saunders, associate director of the National Consumer Law Center, which opposes the idea of a CFPB commission. “There is more infighting; entities that want to see less regulation and less aggressive oversight want to see a commission.”
Cordray was also skeptical about the financial industry’s motives for a commission structure.
“It would give them more targets to shoot at to get somebody to move away from a more aggressive stance,” he said. “If they had five members, they could pick them off one by one.”
Since the Supreme Court didn’t force a commission structure on the CFPB, making that change would require an act of Congress.
Like Cordray, Public Citizen’s Nelson said he doesn’t see that happening any time soon. Republicans would likely not leap to support a change that could interfere with Kraninger’s agenda, he said. Of course, while her official term as director is slated to last until 2023, the Supreme Court ruling means she could be removed at the discretion of the president—whoever that may be—any time before then.
“Today’s Supreme Court decision finally brings certainty to the operations of the Bureau,” Kraninger tweeted the day of the ruling. “We will continue with our important mission of protecting consumers with no question that we are fully accountable to the President.”
Interestingly, Cordray also views the ruling with a fair amount of optimism.
“I don’t agree that the structure was unconstitutional,” Cordray said. But, “in some ways it’s kind of a relief and a benefit to have this question answered in such a limited way.”