Election Eve: What Will Be the Consequences for the CFPB?

One day before the presidential election, the outcome still seems up in the air.  So does control of the Senate. This week, I’ll assess what the possible outcomes could mean for federal regulation of consumer finance by the Consumer Financial Protection Bureau.

Who leads the Bureau in 2017 is not genuinely at stake. A President Clinton would presumably not ask or expect Director Cordray to resign. The Bureau and his work leading it are part of President Obama’s legacy, and a part that is particularly valuable to the more left-leaning parts of the Democratic coalition. A President Trump might want to replace the Director before the end of his five-year term (in July 2018), but I suspect he would not succeed. The Dodd-Frank Act says the Director is entitled to complete his term, absent “inefficiency, neglect of duty, or malfeasance in office.”

A panel of the D.C. Circuit recently held that provision unconstitutional (in PHH v. Consumer Financial Protection Bureau) and declared that the Director can be removed at will. However, the Bureau can be expected to seek en banc rehearing of that decision, especially if Trump wins the election. (The Bureau would be able to represent itself in the D.C. Circuit, even without the approval of the Department of Justice.) The en banc court would include 12 judges (in the event of a Trump election, Chief Judge Garland would presumably return to hearing cases; and Judge Randolph, though senior, was on the panel), of which the Bureau could expect 7 to disagree with the panel. A Supreme Court featuring a new Justice appointed by a President Trump might eventually decide the removal limitation is unconstitutional. Nevertheless, that decision would be unlikely to arrive before spring 2018, shortly before the Director’s term will expire anyway. A President Trump might try to force the issue by demanding the Director’s nomination; but if the Director resists, as he well might, the resulting litigation would not be any faster than the PHH case.

So, unless something tempts Director Cordray to leave, we can expect him to stay through his term regardless who wins the presidential election. What about executive orders that a new President might issue? That, too, would be a contest of wills. A major premise of the PHH opinion was that if the Dodd-Frank Act restricts the President’s ability to remove the Director, then the President also cannot bind him to comply with executive orders. While I find that premise dubious, it would give the Director justification for not complying with a new President’s executive orders while the constitutional issue remains pending in court.

The outcome of the congressional elections could be more significant, although in more subtle ways. Suppose that 2017 sees a President Trump and a Republican-controlled House and Senate. The Republican majorities would probably push legislation to disable or weaken the Bureau; the leading Republicans on the relevant congressional committees have long been unfriendly to the Bureau.

An outright repeal of the Consumer Financial Protection Act or abolition of the Bureau would be unlikely to succeed, so long as the filibuster remains as a tool for opposing legislation. But more subtle changes—and I include some fairly impactful amendments in that category—could be feasible. Many Republicans have long wanted to replace the Director with a multi-member Commission, or to eliminate the Bureau’s automatic funding mechanism so that the agency would be fully subject to the annual appropriations process. Consider a few other possibilities that would be even more subtle:

Congress could amend 44 U.S.C. § 3502 to reclassify the Bureau as an executive agency rather than an independent regulatory agency.

It could amend § 1013 of the Consumer Financial Protection Act to eliminate the Bureau-specific compensation scheme and put Bureau staff on the ordinary GS pay schedule. That would mean a substantial pay cut for many employees and could affect retention and hiring.

It could alter the Bureau’s litigating authority so that the Bureau must always get DOJ approval before representing itself. (Currently, the Bureau only has to consult with DOJ, and it only needs DOJ acquiescence to represent itself at the Supreme Court.)

It could limit the Bureau’s supervisory authority, for example by limiting the topics on which the Bureau can examine a company.

It could eliminate the Civil Penalty Fund and redirect the proceeds from civil penalties to the Treasury.

Because these smaller changes would be less politically salient than wholesale alteration of the Bureau would be, a Democratic filibuster would be harder to maintain. Trade groups and lobbyists pushing a smaller change would put pressure on Democratic Senators to support the amendment. And for many possible amendments a Democratic Senator might be able to construct a decent rationalization. How many, and which, of these smaller amendments avoid filibuster will depend on politics between Senators and industry donors; and on politics within the Democratic caucus, including how firmly each Senator is willing to stand by the Director.

That kind of environment will inevitably have an effect on the Bureau’s regulatory activities. Imagine the agency’s operating under the persistent threat that five or six Democratic Senators might conclude that the political cost of protecting the Bureau from a given legislative amendment is too high. That might motivate the Director to trim his sails a bit. Consider the PHH case: Declaring unlawful an industry-wide practice in which the Department of Housing and Urban Development had acquiesced for 15 years, the Director then overruled an administrative law judge to increase the company’s liability from $6 million to $109 million, while also taking the position (remarkable even if it were correct) that he was subject to no statute of limitations. Regardless what one thinks about the merits, this was an aggressive case. Would the Director have decided the same way if five or six Senators were the only thing protecting the Bureau from, say, losing its litigation authority? In a way, the world of a Trump presidency and a Republican Senate would be reminiscent of the Bureau’s early years. Back then, the Director needed Senate confirmation to ensure his authority. Early Bureau enforcement activity and rulemakings—including the major mortgage rulemakings of January 2013—came against this backdrop of needing to find enough senatorial support to overcome a filibuster.

That said, the environment of 2017 after a Republican victory tomorrow would obviously be quite different from 2013. It seems impossible to predict what a President Trump would actually do. If, for example, he tries to compel the Director to resign, that clash would consume some of the Bureau’s resources and the Director’s attention, and might even embolden the Bureau to accelerate aggressive enforcement or rulemaking activity. The politics of the fight might dominate any discussion of legislation, and stiffen the resistance of Democratic Senators to any change in the Bureau’s statute. The Director might try to generate more eye-catching cases and rules to magnify the stakes of the battle.

In short, while a Clinton victory would probably mean business as usual at the Bureau, a Trump victory could go a couple of ways. It could, if a Trump Administration chose its battles carefully, motivate the Bureau to be more cautious and modest. Or it could lead to a period of substantial turmoil in consumer finance—as in so much else.

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