Mr. Chairman Capito, Ranking Member Maloney, Members of the Subcommittee:
My name is Adam Levitin, and I am an Associate Professor of Law at the Georgetown
University Law Center in Washington, D.C., where I teach courses consumer finance, contracts,
and commercial law.
I have previously written on the need to reorganize federal consumer financial protection
from a tangle of multiple agencies of limited authority and with conflicted missions to a single,
dedicated, motivated agency.1 I am here today to urge the Subcommittee not to adjust the
structure of the Consumer Financial Protection Bureau (CFPB) or to roll back parts of the Dodd-
Frank Act. In particular, I would counsel the subcommittee against the changes proposed by
four bills, each of which I will address in turn:
(1) H.R. 1121, The Responsible Consumer Financial Protection Regulations Act of 2011,
(the “Bachus Bill”), which would replace the CFPB’s unitary Director with a five-person
commission.
(2) H.R. 1315, The Consumer Financial Protection Safety and Soundness Improvement
Act, (the “Duffy Bill”), which would reduce the voting threshold and findings necessary
for a Financial Stability Oversight Council (FSOC) veto of CFPB rulemakings.
(3) H.R. ____ (the “first Capito Bill”), which would postpone transfer of any regulatory
authority to the CFPB until a Director has been confirmed by the Senate.
(4) H.R. ____ (the “second Capito Bill”), which would eliminate authority for the CFPB
to participate in bank examinations before the designated date for transfer of regulatory
authority to the CFPB.
I. RESTRUCTURING THE CFPB FROM A UNITARY DIRECTORSHIP TO A FIVE-PERSON
COMMISSION (THE BACHUS BILL)
H.R. 1121, the Responsible Consumer Financial Protection Regulations Act of 2011 (the
“Bachus Bill”) would replace the CFPB’s unitary director with a five-person commission. While
I understand the belief that a five-person commission might result in a more collegial rulemaking
discourse, there are several strong reasons to eschew such a structure, which will
ultimately render the CFPB less effective and less accountable.
In structuring administrative agencies, Congress has variously elected between two
models: the Founders’ traditional model of a unitary agency director and the Progressive/New
Deal model of five-person commissions. The Founding Fathers’ model for executive agencies
featured a single principal officer appointed by the President with the advice and consent of the
Senate. This model is reflected in the federal cabinet agencies. Thus, the Treasury is governed
by a single Secretary, rather than by committee. The traditional unitary director model is also
featured in the Office of Comptroller of the Currency, the Office of Thrift Supervision, the
Internal Revenue Service, the Social Security Administration, Medicare, and the Environmental
Protection Agency. This model enhances accountability and enables streamlined, decisive
leadership and decision-making.
An alternative agency model arose during the Progressive era and was warmly embraced
by New Deal liberals. That is the five-person commission. Thus, Progressive era agencies like
the Federal Trade Commission and the classic New Deal agencies like the Securities and
Exchange Commission, Federal Deposit Insurance Corporation, National Credit Union
Administration (three-member board), and National Labor Relations Board feature five-person
commissions. The model is also featured by the Federal Reserve Board of Governors (albeit
with an unusual geographic appointment requirement), the Federal Communications
Commission, Federal Election Commission, Equal Employment Opportunity Commission,
Commodities Futures Trading Commission, and Consumer Product Safety Commission.
The five-person commission model encourages more collegial discourse and dealmaking,
but comes at the expense of accountability and efficiency. Moreover, it often provides
little protection for the minority party on the commission; minority commissioners’ views are
typically disregarded. Representative Bachus’ bill would reject the Founders’ traditional model
that Congress chose for the CFPB and instead replace it with the bloated, big government
structure favored by Progressives and New Dealers.
I would urge the Subcommittee against adopting a five-person commission model for the
CFPB. The CFPB has not yet had a chance to get up and running and there is no reason to think
that the unitary directorship is a particular problem; the CFPB should be given a chance to prove
itself before it is reconfigured by Congress.
The CFPB Is More Accountable Than Any Other Federal Agency
I am aware that some members of Congress are concerned that the CFPB is insufficiently
accountable for its actions. This concern is misplaced. The CFPB has more limitations on its
power than any other federal agency.
First, CFPB is subject to many of the same restrictions as other federal agencies. Thus,
the CFPB is subject to the Administrative Procedures Act and must follow notice-and-comment
procedures for rule-making and adjudication.2 This means that the CFPB will be required to take
account of and respond to a range of views and concerns on any regulatory issue on which it
undertakes rule-making. Similarly, CFPB rule-making is subject to Office of Information and
Regulatory Affairs (OIRA) review for small business impact.3 Only the Environmental
Protection Agency and Occupational Safety and Health Administration are subject to similar
requirements.
Second, the CFPB is specifically limited by statute in its rule-making power. Title X of
the Dodd-Frank Act requires that the CFPB make particular findings in order to exercise its
authority to restrict or prohibit acts and practices as unfair, deceptive, or abusive.4 Title X of the
Dodd-Frank Act also prohibits the CFPB from imposing usury caps5 and prohibits the CFPB
from regulating non-financial businesses.6
Third, the CFPB is subject to a budgetary cap unlike any other federal bank regulator. If
the Office of Comptroller of the Currency or FDIC or OTS wish to increase their budgets, they
can simply increase their assessments on banks without so much as a by-your-leave to Congress.
Similarly, the Federal Reserve can simply print money. The CFPB, however, is restricted to a
capped percentage of the Federal Reserve’s operating budget.7 This means that the CFPB
actually has less budgetary independence than any other federal bank regulator.
Fourth, CFPB rulemaking is subject to a veto by the Financial Stability Oversight
Council. This is unique for federal bank regulators.8 The OCC and OTS’s preemption actions,
for example, are not subject to review by other federal regulators, even though they were a key
element in fostering the excesses in the housing market.9 The FSOC veto provides an unusually
strong check on CFPB rulemaking, not least because no CFPB director would wish to risk a
FSOC rebuke.
Finally, the CFPB is subject to oversight by Congress itself, and this subcommittee’s
actions in the past month have shown that this oversight is serious, diligent, and exacting.
Congressional oversight is perhaps the best guarantor that the CFPB will not abuse the authority
delegated to it.
When viewed against this backdrop of multiple safeguards against arbitrary and
capricious agency action, it becomes apparent that changing the CFPB from a unitary
directorship to a five-member panel would add little. Instead, switching to a five-member panel
would tilt the balance at the agency to gridlock and inaction, would add unnecessary big
government bloat, and would reduce accountability.
The CFPB’s Unitary Directorship Fosters Efficient Decision-making and Avoids Gridlock
A single director is able to exercise decisive leadership in promulgating rules and
enforcing them. Such a streamlined decision-making structure avoids the gridlock that often
faces commissions. The five-person commission structure proposed by H.R. 1121, would induce
inefficiency in government, as it permit rules to be promulgated only when a quorum (generally
3/5 commissioners) affirmatively votes for the rules.
The quorum requirement is a particular concern because of the frictions in the Senate
confirmation process. Numerous administrative and judicial positions remain unfilled today
because of the difficulty at achieving confirmation of nominees given the Senate’s internal rules
that effectively create supermajority requirements not found in the Constitution. The effect has
been not only to block many nominations, but also to chill potential nominations. The Senate’s
confirmation process has become so dysfunctional that a bipartisan group of Senators (including
Majority Leader Reid, Minority Leader McConnell, and Senators Schumer, Alexander, Collins,
and Lieberman) has introduced legislation, S. 679, which would reduce or streamline the number
of executive branch positions requiring Senate confirmation by one-third.
This state of affairs presents the most serious threat to the effectiveness of the modern
administrative state—federal agencies have had to operate without directors or chairmen or even
quorums because of the increased frictions in the confirmation process. As a result, these
agencies are less effective or simply ineffective at ensuring that the law is carried out. Thus, in
recent years, the Federal Trade Commission, the Consumer Product Safety Commission, and the
National Labor Relations Board have all gone through spells where they have been unable to
operate because a quorum did not exist.
Simple math says that five confirmations are more difficult to achieve than a single
confirmation (even if multiple appointments sets up opportunities to make political deals on
appointments). Put differently, adopting a five-person commission instead of a unitary
directorship is likely to hobble the CFPB. While I would hope that is not the motivation for such
a proposal, it could well be the consequence.
A Five-Person Commission Would Create Unnecessary Big Government Bloat and Waste
Changing from a unitary directorship to a 5-person commission would also contribute to
big government bloat. There is no reason to pay five people top-of-the-executive-branch pay
scale salaries and benefits for work that could be done by one person, not to mention the personal
staff, office space, and other accommodations for five commissioners. A five-person
commission is simply wasteful and should not be pursued, particularly when we are facing a
federal budget crisis.
A Five-Person Commission Would Reduce CFPB Accountability
A single CFPB director is clearly accountable to both Congress and the American people.
A CFPB Director who oversteps his authority or who fails to do enough to protect consumers
cannot deflect blame for his actions. A gang of commissioners, on the other hand, can always
avoid responsibility by pointing to the other four people who make up the commission. If
Congress wants to maximize CFPB’s accountability, responsiveness, efficiency, and
effectiveness, the unitary directorship should be retained.
The CFPB’s Unitary Directorship Is Necessary as a Counterweight to the OCC
A major reason for the creation of CFPB was that federal banking regulators—
particularly the Office of the Comptroller of the Currency (OCC), which regulates national banks
and the Office of Thrift Supervision (OTS), which regulates federal thrifts—consistently put the
short-term profit interests of banks ahead of the long-term interests of consumers and the
economy and country as a whole. The failure of OCC and OTS to police the mortgage markets
were a critical factor contributing to the financial crisis.
The OCC has been a powerful advocate for bank interests, but this has been at the
expense of consumer protection. The overpowering logic for creating a CFPB was that a
counterweight was necessary to the OCC in order to protect consumers’ interests; the OCC has
amply proven that when tasked with both bank safety-and-soundness—that is profitability—and
consumer protection, it will always favor banks over consumers. If CFPB is to be an effective
counterweight to the OCC, it needs a parallel structure that will allow it to act quickly and
forcefully when necessary. The CFPB’s current single-director structure is necessary to ensure
that it can protect the interests of consumers and the overall economy.
If Subcommittee is convinced, however, that a five-person commission is the proper
structure for the CFPB, I would urge the Subcommittee to also adopt a five-person commission structure for the Office of Comptroller of the Currency, which would then be the sole federal
financial regulator with a unitary directorship.
II. FINANCIAL STABILITY OVERSIGHT COUNCIL REVIEW AUTHORITY (THE DUFFY BILL)
H.R. 1315, the Consumer Financial Protection Safety and Soundness Improvement Act,
(the “Duffy Bill”) would amend section 1023 of the Dodd-Frank Act10 to reduce the thresholds
for a Financial Stability Oversight Council veto of CFPB rulemaking. It would do so in two
ways. First, it would reduce the necessary vote from a supermajority of 2/3s of the FSOC
members (including the CFPB Director), that is 7 out of 10 votes if all members were present, to
a simple majority of FSOC members, not including the CFPB, that is 5 of 9 votes. It would also
reduce the necessary finding from the CFPB “regulation or provision 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” to a less exacting finding merely that the CFPB rulemaking is “inconsistent
with the safe and sound operations of United States financial institutions.” Finally, by deleting
section 1023(c)(5) of the Dodd-Frank Act, the bill would require the FSOC to take a vote if any
FSOC member raised an objection to a CFPB rulemaking.
The FSOC veto power provides an unnecessary and possibly unconstitutional check on
the CFPB and should be eliminated, rather than made more stringent.11 Irrespective, the Duffy
Bill’s proposed finding for an FSOC veto would render virtually every CFPB rulemaking in
doubt. Indeed, under the Duffy Bill’s proposed standard—whether the CFPB rulemaking is
“inconsistent with the safe and sound operations of United States financial institutions”—it
would be impossible for the CFPB to implement several recent pieces of Congressional
legislation, including Title XIV of the Dodd-Frank Act, the Mortgage Reform and Anti-
Predatory Lending Act.12
Safety and soundness means, first and foremost, profitability. It is axiomatic that a
financial institution that is not profitable is not and cannot be safe and sound. To the extent that
a proposed CFPB regulation would reduce the profitability of a financial institution, it would
reduce that institution’s safety and soundness. Thus, any CFPB regulation, even if it merely
increased compliance costs, would be “inconsistent with the safe and sound operations” of a
financial institution.
Consumer financial protection is often inconsistent with bank profitability. Financial
institutions only engage in unfair, deceptive and abusive acts and practices because they are
profitable; they are not done for spite. While bank regulators have argued that consumer
protection goes hand in hand with safety and soundness because it is unsafe for a bank to
systematically exploit its customers or engage in unfair and deceptive practices, the run up to the
financial crisis provides clear evidence that federal bank regulators were unwilling to put the
brakes on unfair and deceptive mortgage lending. Similarly, the run up to the Credit CARD Act
of 2009 shows that federal regulators were unwilling to act on unfair and deceptive credit card
acts and practices until Congress itself started to move.
To understand just how overbroad the Duffy Bill’s proposed rule is, consider, for
example, consider if there had been a CFPB in 2005, and it had proposed a rule that would have
severely restricted the underwriting of payment-option adjustable-rate mortgages. Such a
restriction would have significantly curtailed Countrywide’s mortgage lending business, and
would surely have resulted in the OCC or OTS demanding an FSOC veto. Similarly, if the
CFPB had proposed rules like the ones Congress itself passed in section 1411 of the Dodd-Frank
Act13 or section 109 of the Credit C.A.R.D. Act14 that restrict lending without consideration of
the ability to repay, there would have been grounds for an FSOC veto under the Duffy Bill’s
standard.
Indeed, we actually have an example from 2008 of a bank regulator challenging a
proposed consumer financial protection regulation on safety-and-soundness grounds. In August
2008, Comptroller of the Currency John C. Dugan wrote to the Federal Reserve Board to urge it
to insert two significant exceptions to the proposed Regulation A (unfair and deceptive acts and
practices) credit card rule that would limit the ability of card issuers to reprice or colloquially
“rate jack” card holders.15 Duggan wrote that the restrictions “raise safety and soundness
concerns” because they limited the ability of issuers to re-price their loans if issuers determined
that the risk profile of the customer had worsened.16 If the CFPB had proposed such a rule, the
OCC would surely have challenged it before the FSOC as “inconsistent with the safe and sound
operations of United States financial institutions.” Yet, Congress itself passed an even tougher
restriction on credit card repricing less than a year later.17
Indeed, under the Duffy Bill’s standard, several laws passed by Congress in recent years,
such as the Credit C.A.R.D. Act and the Mortgage Reform and Anti-Predatory Lending Act
would themselves be unenforceable by regulation because the laws themselves might reduce
bank safety-and-soundness (i.e., profitability), so any faithful rule-making would have to as well.
The effect of the Duffy Bill would be to eviscerate several recent, popular, consumer financial
protection statutes.
The Consumer Financial Protection Bureau is a new agency tasked with protecting the
financial security of American families, ensuring that they can get the information necessary to
make responsible, informed financial choices. Congress created the Bureau to ensure that
American families can trust the financial products they use to help them achieve their goals,
rather than ensnare them with tricks and traps that lead to financial distress. The Duffy Bill’s
proposed expansion of the FSOC veto would place bank profits ahead of the well-being of
American families, and would put us on a return course to the financial crisis of 2008.
7
The FSOC Veto Is Possibly Unconstitutional
I would also note that the FSOC veto under section 1023 of the Dodd-Frank Act is
already of dubious constitutionality. On June 28, 2010, a fortnight before the enactment of the
Dodd-Frank Act, the Supreme Court handed down its judgment in a case captioned Free
Enterprise Fund v. Public Company Accounting Oversight Board.18 In this case, the Supreme
Court held that it was an unconstitutional violation of the separation of powers to restrict the
President in his ability to “remove a [principal] officer of the United States, who is in turn
restricted in his ability to remove an inferior officer, even though that inferior officer determines
the policy and enforces the laws of the United States”.19 This ruling raises the question of
whether by giving the FSOC veto power over CFPB rulemaking, Congress has impermissibly
restricted the power of the President to “take Care that the Laws be faithfully executed” through
his appointee as Director of the Bureau of Consumer Financial Protection.
The existing FSOC veto power is already constitutionally suspect, and the Duffy Bill,
which would make exercise of the veto authority mandatory and on a hair-trigger basis, would
only increase the likelihood that section 1023 of the Dodd-Frank Act offends the Constitution.
III. POSTPONEMENT OF CFPB FUNCTIONS UNTIL A DIRECTOR IS IN PLACE
A presently unnumbered bill sponsored by Chairman Capito (the “first Capito Bill) would
delay transfer of all regulatory authority to the CFPB until a CFPB Director is in place.20 I urge
the Subcommittee not to postpone the transfer of authority to the CFPB in any way, including
making it contingent upon the appointment of a Director.
A critical reason for the creation of the CFPB was the recognition that the current system
of consumer financial protection does not work. In the current system, 17 separate statutes are
enforced by ten federal agencies with other primary and often conflicting missions.21 A chart at
the end of this testimony (Figure 1) illustrates the current crazy quilt structure. Not surprisingly,
consumer financial protection frequently falls between the cracks—it is an orphan mission.
Congress rightly recognized the severe shortcomings of the current system when it
enacted Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act and created
the Bureau of Consumer Financial Protection. Congress also recognized that the Senate
confirmation process has often become excruciatingly slow and therefore created transitional
authority for the Treasury Secretary to assume the functions of the CFPB Director under Subtitle
F of Title X of Dodd-Frank. While it would be preferable to have a true CFPB Director in place,
the exercise of CFPB’s Subtitle F powers by the Treasury Secretary is vastly preferable to the
current dysfunctional system of consumer financial protection.
IV. REMOVAL OF AUTHORITY TO PARTICIPATE IN EXAMINATIONS BEFORE THE DESIGNATED
CFPB TRANSFER DATE
A fourth bill, currently unnumbered (the “second Capito Bill”) would remove Section
1067(e) of the Dodd-Frank Act, which provides authority for the CFPB to participate in bank
examinations before July 21, 2011 (the “transfer date”) when the CFPB becomes effective.
Section 1067(e) provides that:
In order to prepare the Bureau to conduct examinations under section 1025 upon
the designated transfer date, the Bureau and the applicable prudential regulator
may agree to include, on a sampling basis, examiners on examinations of the
compliance with Federal consumer financial law of institutions described in
section 1025(a) conducted by the prudential regulators prior to the designated
transfer date.22
This provisions is designed to ensure a smooth flow in the examination process for compliance
with the 17 federal statutes and rulemaking thereunder that are being transferred to the CFPB. It
is an extremely prudent provision, to ensure that there is continuity in the examination process
and that CFPB examiners can learn from examiners at other bank regulators.
The reason for eliminating pre-transfer date examination participation is not clear; there
is no affirmative argument for doing so. Irrespective, the second Capito Bill would have a
significant effect on the on-going multi-agency federal-state investigation of mortgage servicing
fraud. The CFPB has provided federal and state regulators with advice regarding the
investigation and settlement possibilities and by all accounts has taken servicing fraud much
more seriously than some of the federal bank regulators. Eliminating pre-transfer date
examination participation prevents CFPB examiners from being able to examine bank mortgage
servicers, lest the CFPB’s examiners uncover further evidence of mortgage servicing fraud and
counsel for a more demanding resolution. This bill would have the effect of shielding a special
interest group—large banks—from the consequences of failing to comply with the law by
interfering with the bank regulatory process and an on-going investigation. While political
interference with the bank safety-and-soundness regulatory process is surely not intended, that
would be the inexorable effect of the bill, and I urge the Subcommittee not to adopt it.
CONCLUSION
The Consumer Financial Protection Bureau has not even had an opportunity to begin to
exercise its regulatory authority. It is simply premature to consider reforms to its structure, as it
is not yet clear whether any changes are needed, much less what those changes are. The four
proposed bills would all diminish the effectiveness of the CFPB as a regulatory agency. I
strongly urge the subcommittee not to adopt these bills, which would start us on the path back to
the pre-2008 period when the lack of effective consumer financial protection facilitated the
destructive housing bubble and financial collapse from which we have still not recovered.