The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") created the Consumer Financial Protection Bureau ("CFPB") to oversee a broad array of financial products and services. Creation of the CFPB marked the first time in decades that Congress had formed a new federal agency. The political debate over who would lead the new agency initially overshadowed the more significant legal and policy concerns about the manner in which the CFPB was intended to operate. But now, after the procedurally controversial appointment of former Ohio Attorney General Richard Cordray on January 4, 2012, these broader concerns will be tested, both as a matter of governance and very possibly in the courts.
The CFPB has (i) independence from Congressional or Presidential oversight, (ii) centralized power in a single individual, and (iii) a guaranteed budget that is a percentage of the Federal Reserve's operating expenses. The principal questions this memorandum asks are whether these characteristics of the agency are constitutional or well-advised, particularly in light of the significant powers that the CFPB possesses.
The first sections of this memorandum provide a description of the powers of the CFPB and its structure. Because it is hard to appreciate the agency's structure in the abstract, we have provided a chart (Appendix A at the end of the memorandum) to highlight the differences between the CFPB's structure and those of other federal government agencies charged with related tasks. In the next part of the memorandum, we discuss briefly the question of whether the CFPB's operational procedures are consistent with the requirements of the Constitution. Finally, we turn back to the policy question of whether it is "good government" for Congress to authorize an agency (or, as a practical matter, the single person that is its head) to act with such independence from restraint or oversight from any of the legislative, executive, or judicial branches of the federal government.
The questions raised in this memorandum are not a function of the agency's goal; that is a separate issue entirely. This memorandum instead primarily addresses the CFPB's structure within the government, and while this issue has been discussed since the early drafting stages of the Dodd- Frank Act, it is immediately relevant now that a CFPB director has started the agency's work.1
II. CFPB Purpose and Jurisdiction
A. Formation of the CFPB
The stated purpose of the CFPB is to implement and enforce federal consumer financial law: to enable all consumers to access the markets for consumer financial products and services while ensuring that these markets are fair, transparent, and competitive.2 Previously, these functions were intended to be served, in large measure, by other parts of the government. Pursuant to the Dodd- Frank Act, however, the CFPB assumes to a significant degree the consumer financial protection functions of the following federal agencies: the Federal Reserve Board, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the former Office of Thrift Supervision.3 The CFPB also assumes jurisdiction of the Department of Housing and Urban Development ("HUD") with respect to HUD's authority pursuant to the Real Estate Settlement Procedures Act, the S.A.F.E. Mortgage Licensing Act, and the Interstate Land Sales Full Disclosure Act.4
B. Key Definitions
In addition to the consumer protection functions previously performed in these other agencies, the CFPB also has newly created regulatory and enforcement powers tied to three important principal definitions (and one subsidiary definition):
1) "consumer financial product or service,"
2) "covered person" (and the related subsidiary definition of "service provider"), and
3) "federal consumer financial law."
"Consumer financial product or service" is defined in Dodd-Frank as a financial product or service "offered or provided for use by consumers primarily for personal, family, or household purposes."5 This is a very broad concept, including each of the following categories of products or services:6
- the extension of credit and servicing of loans,
- brokerage of leases of real or personal property,
- real estate settlement or appraisal services,
- deposit-taking activities or "otherwise acting as a custodian of funds or any financial instrument,"
- prepaid debit cards and other "stored value" instruments,
- check cashing, collection, or guaranty services,
- payment processing or "other financial payment processing,"
- financial advisory services,
- credit reporting services, and
- debt collection.
"Covered person" is defined in Dodd-Frank as "any person that engages in offering or providing a consumer financial product or service. . . ."7 This term is likewise expansive, expressly including an affiliate of a covered person who "acts as a service provider" to the covered person.8 The term "service provider" includes any person that provides a "material service"9 to a "covered person" in connection with a consumer financial product or service.
Covered persons are subdivided further into three different types:
- large banks and other depository institutions, i.e., those depository institutions with assets greater than $10 billion,10
- small banks and other depository institutions, i.e., those depository institutions with assets of $10 billion or less,11 and
- non-depository institutions that offer or provide consumer financial products or services and which are not expressly excluded by Dodd-Frank or a rule of the CFPB.12
The Dodd-Frank Act excludes the following from the definition of covered person: those persons engaged in activities regulated by the Securities and Exchange Commission ("SEC") or state securities commissions or by the Commodity Futures Trading Commission ("CFTC"); tax preparers, lawyers, or persons regulated by state insurance regulators or engaged in the business of insurance; employee benefit plans under ERISA or the Internal Revenue Code of 1986; persons regulated by the Farm Credit Administration; and car dealers, merchants, retailers, and other sellers of non-financial goods or services.13
However, otherwise excluded individuals and entities nevertheless may be "covered persons" regulated by the CFPB to the extent that they are otherwise engaged in CFPB-regulated activities and are not acting in their excluded capacity. These persons and entities also may be subject to CFPB regulation to the extent they act as service providers to covered persons.14
Finally, "federal consumer financial law" is defined in the Dodd-Frank Act by reference to a long list of federal laws that involve the offering or providing of a consumer financial product or service other than the Federal Trade Commission Act.15 That is, the Dodd-Frank Act enumerates federal consumer laws already in existence that now fall within the control of the CFPB. Accordingly, the CFPB has broad authority over dozens of financial acts ranging from the Homeowners Protection Act to the Consumer Leasing Act, the Truth in Lending Act, and sections 502 through 509 of the Gramm-Leach-Bliley Act.
III. Rulemaking Powers
The CFPB may "prescribe rules and issue orders and guidance, as may be necessary or appropriate to enable the Agency to administer . . . enforce, and otherwise implement the provisions of Federal consumer financial law" (as such term is defined in Section II of this memorandum).16 This rulemaking authority is exclusive to the CFPB,17 except where it shares rulemaking power with the Federal Trade Commission ("FTC") under the Federal Trade Commission Act.18 This expansive rulemaking power includes issuing new rules and guidelines and also revising ones already in existence.19 With the broad list of federal consumer financial laws within its jurisdiction, the CFPB has the power to rewrite a vast array of regulations.
Any final rules adopted by the CFPB may be set aside only where the Financial Stability Oversight Council ("FSOC")20 finds, by two-thirds majority, that the rule would "put the safety and soundness of the United States banking system or the stability of the financial system of the United States at risk."21 This is a high standard indeed; as a practical matter, the FSOC does not have meaningful veto power.
Courts must afford deference to the agency's determinations regarding the meaning or interpretation of federal consumer financial law as if the CFPB were the only agency authorized to apply, enforce, interpret, or administer that law.22 Accordingly, the CFPB may act contrary to the existing legal precedent and interpretations by other federal agencies, which will create at least some, perhaps substantial, legal uncertainty.23
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1 See, e.g., Hearing before the U.S. Senate Comm. on Banking, Housing, and Urban Affairs, 112th Cong. (Jan. 31, 2012) (summarizing and reviewing the first months of the CFPB's work), available at http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.LiveStream&Hearing_id=fdc6713a-a47c-4872-ac2df201e60cd26b .
2 Dodd-Frank Act § 1021(a). Elizabeth Warren, advisor to the President with respect to the agency, explained:
The purpose of the CFPB's work should be . . . to create a level playing field where both parties to the transaction understand the terms of the deal, where the price and risk of products are clear, and where direct comparisons can be made from one product to another. . . . American families need an agency that is actively monitoring consumer financial markets to ensure that they are fair, transparent, and competitive. Hearing before the Subcomm. on Fin. Insts. & Consumer Credit, H. Comm. on Fin. Servs., 112th Cong. 3-4, 12 (Mar. 16, 2011) (statement of Elizabeth Warren, Assistant to the President and Special Advisor to the Secretary of the Treasury on the Consumer Financial Protection Bureau) [hereinafter "March 16, 2011 Warren Testimony"], available at http://financialservices.house.gov/media/pdf/031611warren.pdf .
3 Dodd-Frank Act § 1061(a)(2)(A), (b)(1)-(4), (b)(6).
4 Id. § 1061(b)(7).
5 Id. § 1002(5).
6 Id. § 1002(15)(a)(i).
7 Id. § 1002(6)(A).
8 Id. § 1002(6)(B).
9 Id. § 1002(26). "Material services" involve design, operation, or maintenance of the product and certain processing functions.
10 Id. § 1025.
11 Id. § 1026.
12 Id. § 1002(5), (15). Consistent with recognizing the enforcement powers of state attorneys general, the Dodd-Frank Act codifies the Supreme Court's holding in Cuomo v. Clearing House Ass'n, LLC, 129 S. Ct. 2710 (2009). With regard to nationally chartered banks, the Act codifies the Supreme Court's holding in Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996). As such, state banking regulations are preempted as to national banks in three situations: if the state regulations (i) are discriminatory, (ii) "prevent or significantly interfere with the exercise by the national bank of its powers," or (iii) are expressly preempted. Dodd-Frank Act § 1044.
13 Dodd-Frank Act §§ 1027, 1029.
14 Id. § 1027(n). Congress did vest the CFPB with some level of discretion to exercise restraint if it so chooses. The CFPB may exempt from regulation persons, entities, and affiliates that provide consumer financial products or services as the CFPB deems "necessary or appropriate" to carry out its purposes. § 1022(b)(3).
15 The Dodd-Frank Act § 1002(12) lists the following "enumerated consumer laws," id., which compose the federal consumer financial law:
(A) the Alternative Mortgage Transaction Parity Act of 1982 (12 U.S.C. § 3801 et seq.);
(B) the Consumer Leasing Act of 1976 (15 U.S.C. § 1667 et seq.);
(C) the Electronic Fund Transfer Act (15 U.S.C. § 1693 et seq.), except with respect to § 920 of that Act;
(D) the Equal Credit Opportunity Act (15 U.S.C. § 1691 et seq.);
(E) the Fair Credit Billing Act (15 U.S.C. § 1666 et seq.);
(F) the Fair Credit Reporting Act (15 U.S.C. § 1681 et seq.), except with respect to §§ 615(e) and 628 of that Act (15 U.S.C. §§ 1681m(e), 1681w);
(G) the Home Owners Protection Act of 1998 (12 U.S.C. § 4901 et seq.);
(H) the Fair Debt Collection Practices Act (15 U.S.C. § 1692 et seq.);
(I) subsections (b) through (f) of § 43 of the Federal Deposit Insurance Act (12 U.S.C. § 1831t(c)-(f));
(J) sections 502 through 509 of the Gramm-Leach-Bliley Act (15 U.S.C. §§ 6802-6809), except for § 505 as it applies to § 501(b);
(K) the Home Mortgage Disclosure Act of 1975 (12 U.S.C. § 2801 et seq.);
(L) the Home Ownership and Equity Protection Act of 1994 (15 U.S.C. § 1601 note);
(M) the Real Estate Settlement Procedures Act of 1974 (12 U.S.C. § 2601 et seq.);
(N) the S.A.F.E. Mortgage Licensing Act of 2008 (12 U.S.C. § 5101 et seq.);
(O) the Truth in Lending Act (15 U.S.C. § 1601 et seq.);
(P) the Truth in Savings Act (12 U.S.C. § 4301 et seq.);
(Q) section 626 of the Omnibus Appropriations Act, 2009 (Public Law 111-8); and (R) the Interstate Land Sales Full Disclosure Act (15 U.S.C. § 1701). Id.
16 Id. § 1022.
17 Id. § 1022 ("Notwithstanding any other provisions of Federal law and except as provided in section 1061(b)(5), to the extent that a provision of Federal consumer financial law authorizes the Bureau and another Federal agency to issue regulations under that provision of law for purposes of assuring compliance with Federal consumer financial law and any regulations
thereunder, the Bureau shall have the exclusive authority to prescribe rules subject to those provisions of law.").
18 Id. § 1061(b)(5)(B). Although the Dodd-Frank Act directs the CFPB and the FTC to cooperate in their rulemaking, it nonetheless raises the possibility of the promulgation and enforcement of conflicting directives.
19 Professor Elizabeth Warren, who is credited with designing the agency, stated:
It should be the job of the consumer agency to revise and update outdated regulations and useless disclosures as aggressively as it monitors the fine print layered on by lenders. If everything is on the table, including existing government regulations, the goals of transparency and consumer understanding can become a reality. March 16, 2011 Warren Testimony, supra note 2, at 7. In prescribing rules, the Bureau is constrained by certain standards:
namely, the Bureau must consider benefits and costs to consumers of a proposed rule including "the potential reduction of access by consumers to consumer financial products or services." Dodd-Frank Act § 1022(b)(2). Further, the Bureau must consider the impact of a proposed rule on small depository institutions (regulated under § 1026) and rural consumers. Id.
20 The Financial Stability Oversight Council was established by Title I of the Dodd-Frank Act for the purpose of serving as an early warning system as to systemic risks to the United States financial system. The Council consists primarily of the heads of various financial regulatory agencies. Dodd-Frank Act § 111.
21 Id. § 1023.
22 Id. § 1022(b)(4)(a)(B).
23 It is unclear whether the CFPB would in fact choose to disregard legal precedence, particularly if most CFPB staffers were former employees of other banking agencies. On the other hand, the CFPB not only has different leadership, it also may view its principal goals and policies differently than, for example, the banking regulators who are also responsible for the "safety and soundness" of the banking system.
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