What is the Consumer Financial Protection Bureau?

Cross-posted by Forbes.com at WLF’s commentary page

Answer: This government agency has undefined and vast powers placed in the hands of an unelected and unaccountable bureaucrat.

Question: What is the Consumer Financial Protection Bureau?

Good question. One can now ask Richard Cordray, who was a five-time champion of Jeopardy! and whom President Obama has nominated to serve as the director of the Consumer Financial Protection Bureau (CFPB), bypassing the architect of the new government agency, Harvard law professor Elizabeth Warren. The CFPB is a hallmark of the law which created it, Dodd-Frank. Cordray is expected to face a tough confirmation in the Senate, but Warren has been absolutely unacceptable to many.

Back in February, the Wall Street Journal reported that Cordray, who Warren appointed to be the bureau’s chief enforcement officer, expected to expend significant effort on enforcing consumer protection rules relating to mortgages, credit cards, and student loans. As Ohio Attorney General, Cordray was a leading advocate of lawsuits for securities-fraud, and considered to be a trial lawyer ally.

That Cordray would be nominated is unsurprising given his “aggressive” attitude toward consumer protection and his earlier comments on his priorities.

We’ve had this whole new rash of issues in the last couple of years stemming from the downturn, new scams and frauds we haven’t seen before, federal stimulus package scams.”

So what should business expect from the CFPB? First off, don’t expect congressional oversight of actions and funding. The bureau is an unelected, unaccountable government agency operating within the Federal Reserve. In fact, its funds are not even appropriated by Congress; instead, they receive their funding from the Federal Reserve itself drawn from its “excess” earned on assets that previously was returned directly to the Treasury. The law explicitly bars the Congress from reviewing the funding of the bureau under Section 1017 of Dodd-Frank.

There’s also the fact that unlike the SEC, FTC, Consumer Product Safety Commission, and most other government agencies with broad powers, the CFPB is not run by a commission. The director is incredibly powerful, with the ability to implement and enforce all consumer-related laws that relate to the financial industry and credit. The bureau has exclusive rule-making authority to which courts must defer in the interpretation of its own rules, which can only be overturned by a supermajority of the Financial Stability Oversight Council (FSOC, another unelected board, but at least composed of the heads of an alphabet soup of other agencies such as the SEC, CFTC, FHTA, OCC, FDIC, Federal Reserve, and NCIU, as well as the Treasury Secretary). So unless the FSOC (they love acronyms in D.C.) gets around to overturning the CFPB’s decision, it will likely stand because Dodd-Frank took away the power of judicial review from the courts. Article III of the Constitution is repeatedly violated throughout the financial reform bill.

Under Section 1031 of the law, the CFPB can stop a company from “committing, or engaging in an unfair, deceptive or abusive act or practice” in offering or transacting a consumer financial product or service. The law is vague on what the terms actually mean, giving the CFPB broad discretion to play favorites with some and attack others.

The bureau can do this by, possibly, rewriting consumer financial protection laws. In labeling a product or service as “abusive,” the bureau does not necessarily have to find that terms and conditions (and the risks associated with engaging a financial services company) were not completely disclosed. They simply must find them to be abusive. The law also empowers the bureau to send government employees to examine the books of banks and investigate consumer complaints. It’s hard to see the CFPB and Cordray as its new director not using the blank check of authority to do pretty much whatever it wants, however it wants, with little oversight and accountability.

One can expect to see a legal challenge to the CFPB arise similar to the case brought against the Public Company Accounting Oversight Board (PCAOB). The U.S. Supreme Court found the Board to be unconstitutionally structured last year in Free Enterprise Fund v. PCAOB. Unlike the CFPB, PCAOB was subject to congressional oversight. Additionally, the director and employees of the CFPB cannot be removed by the Federal Reserve, so the courts would be unable to  do what they did in Free Enterprise Fund to keep the PCAOB alive.

Where the law will take business is anybody’s guess and much rides on the person chosen to implement and direct the new government bureau. But one thing is certain: there are bound to be legal challenges to the CFPB as it gets off the ground and starts writing new rules and attacking businesses.