Confronting the CFPB Question

A federal appeals-court ruling handed down in October rattled advocates of the Consumer Financial Protection Bureau, and they haven’t stopped quivering since. That’s because the decision from the U.S. Court of Appeals for the Fifth Circuit does what years of detractors’ objections and arguments have failed to do—it strikes at the legitimacy of the Bureau itself. That big question mark continues to hang over the Bureau, casting a shadow on its every movement.

We won’t rehearse all the details of the decision, which the Bureau in November petitioned the Supreme Court to review. What really matters is that the court ruled the CFPB is unconstitutional because of the way it is funded. That is, it derives its funding from the Federal Reserve, which itself is not directly supported by Congress. That insulation from the people’s legislature, in the court’s opinion, cannot pass muster in light of how arms of the federal government are meant to be responsive to the people’s will as mediated through their representatives.

This is the most radical threat the Bureau has faced since its founding nearly a dozen years ago—radical in the sense that it strikes at the Bureau’s very roots. But the matter isn’t settled. The Bureau could have appealed to the entire 17-member Fifth Circuit, as payments consultant Eric Grover points out, but instead, as we noted, it took its case to the Supreme Court.

And it’s not as if the Bureau is pulling in its horns. In December, it fined Wells Fargo $3.7 billion–$2 billion fines and $1.7 billion in redress to consumers—for what the agency said were incorrect charges on mortgages and auto loans, and other alleged misbehavior. That same month, it asked for public comment on a so-called violator registry to keep track of state and local enforcement actions. And, in October, it said it planned to regulate open banking through a set of rules governing data sharing.

The question is whether the CFPB should be reformed—as the Fifth Circuit ruling seems to suggest—or abolished altogether. The reform choice is most likely the better one and also the one more likely to win support politically. It also would correct a big mistake, which was the move to try to insulate the Bureau from Congress’s control in the first place.

The CFPB must be responsive to the people’s representatives. “When [the CFPB] was created, people said this [insulation from Congress] could be a problem, but in the absence of a lawsuit there was no way to test it,” our Payments 3.0 columnist, Ben Jackson, told us in October. Now the moment has arrived.

—John Stewart, Editor john@digitaltransactions.net