One of President Donald Trump’s early official acts in February 2017 was to sign an executive order stating a series of “Core Principles” for the regulation of the US financial system and directing the secretary of the Treasury to report, in consultation with the members of the Financial Stability Oversight Council, on the extent to which existing laws, regulations, and other regulatory requirements promote the Core Principles. In response to the executive order, the US Department of the Treasury has just released a wide-ranging report (Report) addressing many aspects of current US financial regulation and recommending changes to the current regulatory framework.

One important part of the Report addresses the structure, funding, and operations of the Consumer Financial Protection Bureau (CFPB). The Report makes 11 recommendations to reform the CFPB:

  1. Leadership Structure. Convert the unitary director to a noncareer (political) appointee who may be terminated at will by the president, convert the unitary director structure into a multimember commission, or use some combination of these two options. Under existing law, the director serves a five-year term and may be removed by the president only for cause.
  2. Appropriations Accountability. Fund the CFPB from a congressional appropriation just as almost all agencies are funded. Under existing law, the CFPB draws as much as 12% of the Federal Reserve Bank’s budget, and that budget is, in turn, not appropriated or subject to oversight by Congress.
  3. Rulemaking Cost-Benefit Analysis. Require that all proposed rules be subject to a cost-benefit analysis. Under existing law, the CFPB’s rules are not subject to such a requirement.
  4. Spending Oversight. Require that the Office of Management and Budget (OMB) review and approve the CFPB’s spending plan. Under existing law, there is no such requirement, and because the CFPB’s funding source is not appropriated, there are no effective fiscal controls ensuring that spending is consistent with public policy.
  5. Rules and Guidance for New Interpretations. Require that the CFPB promulgate rules or guidance to explain new interpretations of the law rather than relying on its Enforcement Division to create new interpretations and precedents. Under existing law there is no such requirement. This is a significant recommendation because regulated entities routinely complain that the CFPB’s Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) authority is so broad, and the agency’s interpretative guidance so lacking, that knowing the right thing to do in a given circumstance can be impossible.
  6. No Action Letters. Require that there be a clear-cut and efficient process for regulated entities to obtain “no action” letters. Under existing law, the process is complex, time consuming, and so riddled with uncertainty that such letters are of little practical value.
  7. Enforcement Actions in District Court. Require that contested enforcement matters be filed and litigated in district court. Under existing law, the CFPB may elect to proceed before an administrative law judge (ALJ) or in district court. ALJs are appointed at the CFPB director’s discretion, and appeals from an ALJ are taken to the director and thereafter to the US Court of Appeals for the DC Circuit, depriving targets of the opportunity to be heard before an Article III judge.
  8. Due Process for CID Recipients. Authorize an affirmative means for recipients of civil investigative demands (CIDs) to challenge that compulsory process in district court. Under existing law, although CIDs are issued in the director’s name, appeals to modify a CID are taken to the director and there is no opportunity to challenge the CID in district court unless the CFPB files a complaint seeking to judicially enforce the CID. For regulated entities such as banks and other entities that may be undergoing due diligence as part of a merger or acquisition, the prospect of disobeying the compulsory process may be a severe complicating factor.
  9. Regularized Retrospective Reviews. Require that the CFPB undertake a regularized plan to review the effectiveness of its rules. Under existing law there is no such requirement.
  10. Consumer Complaint Database. Provide due process administrative protections for targets of consumer complaints. Under existing law, complaints may be submitted anonymously, but the target of a complaint is named even if there is no merit to the complaint. The Report makes favorable reference to the Federal Trade Commission’s (FTC’s) consumer complaint database, Sentinel, which has existed for many years but is available for law enforcement purposes only.
  11. Supervision. Eliminate the CFPB’s authority to examine and supervise regulated financial consumer firms. Under existing law, the CFPB has supervisory and examination authority over a broad swath of regulated entities, despite the fact that other federal and state financial regulatory agencies have had that authority for many years.

Takeaways

While the Report’s CFPB recommendations are consistent with the Trump administration’s financial services deregulatory objectives, the Report seeks to balance the president’s commitment to regulatory reform with his commitment to protecting consumers, many of whom are likely strongly supportive of the CFPB. Thus, the changes to the CFPB’s authority are significantly more tailored than those contained in the Financial CHOICE financial reform legislation, which recently passed the House but has, at best, limited prospects in the Senate. The Report’s recommendations, if enacted into law, would significantly curtail the CFPB’s more controversial practices, but would leave an agency fully capable of protecting consumers, subject to a congressional determination of financial priorities. As a result, some of the Report’s CFPB recommendations might have elicited some congressional Democratic support in a different political climate, but current partisan rancor makes a compromise unlikely.

Taken as a whole, the recommendations would transform the CFPB into the “financial sibling” of the FTC, which has functioned under different policy and political constructs for more than 100 years. The recommendations also implicitly recognize that even if Congress were to deauthorize the CFPB entirely, the states would be in a position to take the lead on financial consumer regulatory enforcement without the participation of the federal government, inasmuch as all 56 state and territorial attorneys general have the authority to prosecute financial consumer fraud and unfair practices under general unfair and deceptive acts and practices (UDAP) authority. Thus, as we have previously discussed, active financial consumer regulatory enforcement would simply shift even further to state attorneys general, primarily Democrats, in the same manner that Republican attorneys general routinely challenged the Obama administration’s regulations and other regulatory activities. State banking regulators may also heighten their examination activities should federal examinations appear to falter in any way.