Why are we so critical of the CFPB?

Readers of our blog know that we question the Bureau's use of broad discretionary power, specifically its UDAAP authority. We have criticized its policies as being shortsighted at times. We have argued that certain CFPB directives do more harm than good for both consumers and the financial services industry.

Isn't that just the way politics and government work? On any given issue, isn't someone going to disagree? Isn't it just sour-grapes to complain about the CFPB? Can't these problems be fixed in the voting booth?

In one word, no.

The issue isn't so much what the CFPB does; the real issue is how the CFPB does it. Stated differently, the biggest problem with the Bureau isn't the decisions it makes or even the actions it takes. The biggest problem is the complete lack of oversight and accountability.

Any high school civics student can tell you that the US government is predicated on checks and balances and separation of power. Federal executive agencies operate in this system of checks and balances—or at least they are supposed to. Most executive agencies receive funding through congressional allocation, meaning Congress can exercise some oversight and supervision through the allocation process.

But, not the CFPB. The Bureau's funding mechanism and leadership structure put it above the law (or, above the Constitution, more precisely). Congress doesn't directly control the CFPB's annual funding; rather, the Bureau receives a percentage of the budget of the Federal Reserve. This is significant because it means Congress cannot exercise oversight using its power of the purse. This is compounded by the fact that the Director of the CFPB, who controls the policy agenda, serves a five-year term and can only be fired for cause.

How could this have happened? Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, why would Congress give this new agency and its Director so much power? Keep in mind that the Dodd-Frank Act was a direct response to the Great Recession and the complete lack of consumer confidence in the financial system. Congress reacted to an unprecedented problem with an unprecedented mandate. However, now almost six years removed, we are seeing the unintended (or possibly intended) consequences of an agency that is above checks and balances.

So, is anyone going to do something about this? Possibly yes.

Over the last few years, there have been several bills introduced in Congress to restructure the funding and leadership of the CFPB. While these bills stand no chance of becoming law under President Obama, as we have discussed, the 2016 election could result in a funding or leadership renovation. Also, it appears we are beginning to see more bipartisan criticism with key Democrats in Congress speaking up against CFPB initiatives.

Also, as recently as this month, the U.S. Court of Appeals for the D.C. Circuit heard oral arguments on the constitutionality of the CFPB. In a high-profile appeal brought by PHH Corp., The Wall Street Journal reports that the court is considering the problems described above. That is, PHH is arguing, among other things, that the Bureau is a “super executive agency” not subject to congressional oversight with a director who has too much authority. A decision in the case is expected in the next few weeks.

We criticize the CFPB's policies and actions from time to time, but the real criticism is on structure of the Bureau and lack of oversight. That is the true root-cause of the consumer finance industry's frustration.

And, that is why we are so critical of the CFPB.