Why the CFPB showdown threatens the independence of financial regulators

Rarely does financial regulation resemble a Mad Max movie, but two people are claiming to be Acting Director of the Consumer Financial Protection Bureau (CFPB) and only one can leave. This clash will impact financial regulation and consumer protection and potentially undermine one of the bedrock principles of modern financial regulation: independence of financial regulators. To understand why, appreciate the nuances behind the drama, with a focus on one key element: the President is attempting to place a senior White House official to head the CFPB, which is part of the Federal Reserve System and a voting member of other key financial regulators.

First, the details on the clash: the two people claiming to be Acting Director of the CFPB are Leandra English and Mick Mulvaney. Ms. English is the CFPB’s Deputy Director and former chief of staff to the prior director, Richard Cordray. Mr. Cordray appointed Ms. English as Deputy Director and hence Acting Director given his departure. She seems likely to carry on his legacy. Mr. Mulvaney is the Director of the Office of Management and Budget (OMB), one of, if not the top, position in the White House that requires Senate confirmation. Subsequently, President Trump designated Mr. Mulvaney as Acting Director and then tweeted disparaging remarks about the CFPB’s performance over the tenure of Mr. Cordray.  Prior to becoming OMB Director, Mr. Mulvaney called CFPB a ‘sick, sad joke’ and opposed its creation while serving in Congress.

The legal debate centers on a conflict between the Federal Vacancies Reform Act of 1998, which governs all federal vacancies, and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which established the CFPB. On a high level, if the Vacancies Act governs, then President Trump can appoint OMB Director Mulvaney. If Dodd-Frank governs, then Ms. English is in charge. The Justice Department has written in support of the President, as has the CFPB’s own general counsel, and some legal experts. Former Congressman Barney Frank (D-MA) and other legal scholars have taken the opposite opinion, with an insightful piece from Georgetown Professor Adam Levitan in support of Dodd-Frank/Ms. English.

This is an unnecessary conflict. President Trump could (and still can) simply nominate a new CFPB Director. That nominee would require Senate confirmation, but given Senate rules and Republican control, that nominee could be confirmed without any bipartisan support. Or President Trump could strive to replicate Director Cordray’s confirmation, which garnered the support of nearly two-thirds of the Senate (66-34 vote). Either way, the tenure of an Acting Director could be weeks if the President wanted to find a nominee acceptable to a majority of Senators.

The second point is how this conflict over appointing an Acting Director can set a far broader precedent. The CFPB was created as an independent bureau within the Federal Reserve System. The Director of the CFPB was given broad autonomy from the Federal Reserve Board of Governors on policy matters, communication with Congress and the public, and the ability to vote on other regulatory bodies. However, the Bureau is technically a part of the Fed, subject to oversight by the Fed’s Inspector General, and funded as part of the Fed’s budget. The CFPB director simply requests funding from the Fed, subject to a cap set in place by Dodd-Frank.

The Fed’s budgetary independence from Congress was one of the main reasons the Bureau was created in this manner. It allows the CFPB to be on par with other financial regulators who are not funded through annual Congressional appropriations. Budgetary independence is a key element of financial regulatory independence, providing additional freedom to make difficult regulatory decisions. This principle was evident during the run-up to the financial crisis when the former regulator of Fannie Mae and Freddie Mac was regularly pressured through Congressional appropriations to take it easier on these housing finance companies. Congress wisely created funding autonomy when it established the new Federal Housing Finance Agency (FHFA) with strong bipartisan support under President George W. Bush.

Yet President Trump is proposing to put his budget chief in charge of the CFPB. The Office of Management and Budget oversees not only the entire federal budget process that is under the President’s control, but also regulation that is subject to Presidential approval. By placing CFPB under the same leader as OMB, the President is in effect, eliminating CFPB’s independence. The Acting CFPB Director could now simply request a smaller budget for the agency and voluntarily submit regulations for OMB approval. Both of these steps could be done without Congressional input. It would be awkward for CFPB to ask for a budget or approve a new regulation that the White House would not support, given the dual role of OMB Director Mulvaney.

The attempt to install OMB Director Mulvaney as CFPB Director will impact other financial regulators in ways the Vacancy Act may never have anticipated.  In addition to running the Bureau, the Director sits on the board of the Federal Deposit Insurance Corporation (FDIC) and the Financial Stability Oversight Council (FSOC). As a voting member of those other financial regulators, the CFPB director’s influence extends beyond just consumer protection, impacting all financial regulation. The FDIC is also structured to be an independent regulator, so having a White House official voting on its policies would diminish independence. The Secretary of the Treasury chairs the FSOC, but the majority of the Council is comprised of independent agency heads. If OMB Director Mulvaney is allowed to wear two hats, it would set up a scenario whereby he would vote on the FSOC along with the Treasury Secretary. Dodd-Frank went to great lengths to avoid giving the Treasury Secretary additional voting power, even creating an independent insurance expert position solely to sit on the Council instead of having the head of Treasury’s own federal insurance office who was made a non-voting member. Or perhaps the prohibition in the Vacancy Act against appointing people to multi-member Boards and Government Corporations will prohibit Acting Director Mulvaney from serving on the FDIC Board or FSOC Council (although Acting Director English could). The FDIC Board has five voting members, subtract one and gridlock, or even the inability for the FDIC Board to form a quorum given other vacancies, could follow.

This debate is already headed for the courts, with a lawsuit already filed: English VS. Trump and Mulvaney. The legal ruling will have long-standing implications. The unnecessary maneuvering to pick a fight over Acting Director was a mistake as opposed to going through regular order and simply nominating a new director. Recall, the Comptroller of the Currency (OCC) placed his former Chief of Staff as Acting Comptroller during a similar transition between the Bush and Obama Administrations. None of this drama ensued. Further, the President chose to put his OMB Director in charge of the CFPB. OMB is an arm of the White House, not even that of an executive branch agency or another independent financial regulator. Those who value preserving the independence of financial regulators ought to condemn the path taken by the White House. This move is unnecessary and sets a precedent that could undermine the independence and effectiveness of other financial regulators.