What You Need to Know About the CFPB and the PHH Argument Yesterday

Oh boy, it is a new day in the world of CFPB.  Yesterday was the oral argument in the PHH case before the D.C. Circuit hearing the case en banc.  Let’s just cut to the chase:

Which is the better policy?  Having banking agency heads be removed for only malfeasance and wrongdoing, or be removed for any reason?  This question is the critical issue that the judge asked in yesterday’s oral argument that no one is talking about.

If it had been fleshed out, it would have been possible to dig into this issue.  Let’s do it. The reason banking agencies should be treated differently from executive agencies answerable to the president is that the banking agencies’ work is inherently apolitical, and the mandate of the agency is to rise above social and moral issues and look at the functioning of the financial system.  It is not glamorous stuff.

If the CFPB is more like banking agencies—think Federal Reserve Board and its ilk— then shouldn’t the removal power be restrained by an objective standard of performance rather than by the whims of the administration?  Well yes. But what this viewpoint assumes is questionable.

The issue really, is whether the CFPB is actually functioning like banking agencies.  The fact that, under federal law, the CFPB does not have a safety and soundness mandate is a key distinction.  Banking agencies make sure that banks and the financial system are safe; the CFPB makes sure that consumers are safe.  So—one might argue—its mandate is of a different and more political skew.  What is in a consumer’s best interest is, after all, susceptible to influence by political consideration.  And the CFPB certainly engages in politicized enforcement and monitoring activities that drive the CFPB’s often robust press office and public relations activities (think CFPB commercials on TV).  Be that as it may, what is in those press headlines?: large fines.  But these enforcement activities—while appropriate in some of the CFPB’s cases against consumer abuse—are implemented in a manner that is fundamentally at odds with safety and soundness considerations.  For example, large fines or public shaming for consumer protection violations based on harmless technical errors or never-before-announced agency interpretations of law are clearly at odds with the safety and soundness mandate of the other banking agencies.

But with the CFPB lacking a safety and soundness mandate, and with the Dodd-Frank Act giving  the CFPB tremendous leeway to build its own structure, there are no external or internal systemic incentives that reward the CFPB for showing restraint. And the external incentives are for aggressive bulldog tactics—as they reinforce the CFPB’s confidence that it is helping consumers in righteous ways, and make for better press, which permits the CFPB to shore up its survival kit when facing political attacks in arenas like the House and Senate.  (Let’s not forget that the argument about the CFPB’s structure is nothing new—we’ve seen this movie before; in 2011, the Senators objected vehemently to then-president Obama about the CFPB’s structure, which was done while the CFPB was in utero (two months before it was even born).)  In any event, the resulting systemic structures outside and inside the CFPB have encouraged the maximum use of power—thereby raising the likelihood of government abuse.  This is what the PHH appeal arose out of in the first place—an aggressive and headline-seizing ruling by the CFPB Director that departed wildly from a longstanding legal interpretation (by HUD) of the Real Estate Settlement Procedures Act, and sought to expand the CFPB’s authority to litigate beyond the temporal limit assured by the Dodd-Frank Act’s statute of limitations.

Human nature is what it is.  While the arcane, theoretical arguments jumping off of separation of powers cases from over 80 years ago in yesterday’s oral argument are fascinating reboots of 1L year of constitutional law, the real problem is that power has a downside for leaders who wield it.  The greater the power, the less able one is to see others’ perspectives.  While I have observed that career public officials at the CFPB have sincere intentions to perform the agency’s work, the benefits from self-reflection can never be overstated.  No human being is immune to the effects of unbridled power.  After all, power corrupts, and absolute power corrupts absolutely.  If you (Congress) give individuals in a new agency an unspecified mandate to cure consumers’ financial ills (no matter their cause), and empower them with authority to determine what this means with no legislative restriction—with an avid press looking on while the next group of politicians (Congress) are assailing it from the agency’s inception—the result is a guarantee that the agency will use its authority in alarming ways.  Indeed, as faithful government officers, they would see it as a dereliction of duty to not fulfill the statute the best way they know how and push the envelope wherever possible.

So that is the elephant in the room.  The issue is not whether a Director can be fired by the President at will, but whether the manner in which the CFPB executes (and is incentivized to execute) its discretion to fulfill what has been turned into a politicized mandate is consistent with American values and ideals.  Perhaps this is what is really being discussed by the law clerks in the closed-door chambers sessions, but we’ll never know.

J.H. Jennifer Lee

J.H. Jennifer Lee

Jenny represents large and regional banks, card issuers, mortgage bankers or mortgage insurance companies, online lenders, Fin Tech firms, private equity firms with consumer-facing specialty finance strategies, or any “covered person” delineated in the Bureau’s statute, title X of the Dodd-Frank Act. As a lawyer who worked inside the Consumer Financial Protection Bureau (Bureau) Office of Enforcement for several years beginning with the Bureau’s founding, Jenny possesses unique experience that she draws upon to provide clients with defense strategies for enforcement by or litigation with the Bureau....

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