The last couple of months have been difficult for the Consumer Financial Protection Bureau (CFPB). On October 11, 2016, the United States Court of Appeals for the D.C. Circuit ruled that the structure of the CFPB was unconstitutional in PHH Corporation v. CFPB. Then, on November 8, Donald Trump, who has described the Dodd-Frank Act as a “disaster,” was elected President, and Republicans prevailed in enough Congressional races to maintain their majority in both the Senate and the House. With Republican control in Washington for the first time since the Dodd-Frank Act was enacted, critics of the CFPB finally see a chance to reform the agency. What might we see in the near term?

Constitutionality of the CFPB’s Structure

Since the CFPB’s inception, critics have complained about the agency’s single-director structure. Under this structure, the director can be removed only “for cause.” As such, the director, acting with enormous power over the financial services industry, is seen as largely unaccountable and lacking the kind of constitutional “check” on power that exists with other federal agencies. Critics see this unchecked power as a major reason why the CFPB has pursued an aggressive financial regulatory agenda despite concerns from the industry and many lawmakers.

The D.C. Circuit’s decision in PHH could not have been a better result for the critics. Indeed, the court’s criticisms about the CFPB’s structure and operations can serve as part of the reform playbook. The court found that the CFPB’s director wields too much unchecked power, just the kind of power that the Constitution is intended to protect against. The CFPB must be governed by a multi-member commission or a director removable “at will” by the President in order to ensure accountability and pass constitutional muster, according to the court. The D.C. Circuit remedied the constitutional problem by severing the “for cause” removal provision from the Dodd-Frank Act, such that the President can remove the director “at will.”

The CFPB filed a petition with the D.C. Circuit on November 18, 2016, seeking a rehearing of the case before the full panel of the court. Pending a decision on this rehearing request, the earlier decision is stayed. If the CFPB does not prevail, the earlier decision becomes final, although the CFPB could then appeal to the U.S. Supreme Court. This process may take months to work itself out. During that time, the CFPB’s structure will remain the same – Director Richard Cordray may be removed only “for cause.”

While short on details, Trump has promised less financial regulation in order to promote economic growth. Indeed, the President-elect’s transition website states that the incoming administration will have a plan to “dismantle the Dodd-Frank Act.” Trump’s choice for Treasury Secretary, Steven Mnuchin, a former Goldman Sachs and IndyMac/One West Bank executive, stated upon his selection that rolling back parts of the Dodd-Frank Act is a “No. 1 priority on the regulatory side” and is needed in part to increase lending. Importantly, Mr. Mnuchin has significant experience in the housing finance markets, having overseen the mortgage trading desk at Goldman and leading an effort by private investors to purchase IndyMac Bank through an arrangement with the U.S. government during the height of the financial crisis. He, thus, has a practical appreciation for financial regulation. In addition to Mnuchin, Vice President-elect Mike Pence, and certain House Republicans who have been critics of the CFPB, will have the President’s ear and will have much influence in reform efforts.

Given all of this, and Director Cordray’s controversial past as a champion of financial regulation, the Trump administration can be expected to waste little time showing Director Cordray the door. Indeed, if the earlier PHH decision becomes binding precedent and the director becomes removable “at will” by the President, it’s reasonable to conclude that the Trump administration will remove Director Cordray in short order. Even before the PHH case works its way through the appeals process, the President could take action. The PHH opinion, as it now stands, would provide important persuasive precedent and political cover, and Trump could obtain opinions from his own White House counsel and the Department of Justice to support removing the director under the dictates of the PHH opinion. And it is certainly possible that he, Trump being Trump, might simply seek to have Director Cordray removed “for cause” (i.e., “inefficiency, neglect of duty or malfeasance of office”), thereby relying on existing law under the Dodd-Frank Act.

If Director Cordray is removed by the President, there will be a period of time, perhaps an extended period of time, during which the CFPB will operate without a director. This is the case because a replacement director will have to be appointed by the President and confirmed by the Senate, a process that history suggests can take quite a bit of time. During such interim period, the Dodd-Frank Act is not completely clear as to how the CFPB shall be governed – the Treasury Secretary is granted some leadership authority, as is the CFPB’s deputy director (someone named by the director, rather than by the President, with the advice and consent of the Senate). In either event, during such period, the CFPB can be expected to have a much more restrained approach to financial regulation and enforcement given the absence of a duly appointed and confirmed director. And, of course, any replacement to the CFPB director post named by the Trump administration certainly can be expected to have a much more restrained approach to financial regulation than Director Cordray.

House Republican Plan Of course, Congressional Republicans have their own ideas about reforming the CFPB. While many critics would like to see legislation abolish the agency, the conventional wisdom is that Congressional Republicans will focus on reforming the CFPB rather than eliminating it. Texas Republican Jeb Hensarling, Chairman of the House Financial Services Committee, will play an important role. He is expected to work closely with House Speaker Paul Ryan and Vice President-elect Pence, a long-time Congressional colleague, in advancing broader financial reform legislation that will include CFPB changes.

In this regard, Trump’s election is expected to give new life to financial reform legislation that House Republicans have already introduced. Chairman Hensarling’s Financial CHOICE Act, introduced in the House in September, is seen as the most likely vehicle for pursuing financial reform legislation in the new administration.

The Choice Act would make significant changes to the CFPB’s structure and authority by:

  • Renaming the CFPB the “Consumer Financial Opportunity Commission,” apparently in an attempt to erase the CFPB’s negative image among the industry;
  • Tasking the new commission with the dual mission of protecting consumers and seeking to promote robust market competition, with cost-benefit analyses required for proposed rules;
  • Replacing the current single-director structure with a bi-partisan, five-member commission that is subject to congressional oversight and appropriations (the CFPB currently obtains funding from the Federal Reserve Board);
  • Establishing an independent, Senate-confirmed Inspector General;
  • Requiring the commission to obtain permission before collecting personally identifiable information on consumers;
  • Repealing the authority to ban products and services the commission deems “abusive,” as well as its authority to prohibit arbitration; and
  • Repealing indirect auto lending guidance.

Of particular note, the CHOICE Act follows the lessons from the PHH case by eliminating the CFPB’s single-director structure in favor of a multi-member, bipartisan commission, thus ensuring that power is not concentrated in a single, unchecked director. Congress would also control the agency’s budget for the first time, which should serve to temper some of its regulatory activities.

Given a Republican administration and Congress, it would appear that such legislation has more than a fair chance of success. But legislation moves slowly (if at all), and much can happen along the way, so only time will tell. However, given the new political dynamic, one way or another, through administration action, legislation or both, a betting man would wager that significant changes are coming to the CFPB.