The “Consumer” Financial “Protection” Bureau

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The Supreme Court, in a 7-2 decision, upheld the funding mechanism for the Consumer Financial Protection Bureau (CFPB).  Frankly, this decision is a travesty, mocking both the Constitution and financial economics. Much of this discussion relies on a news release from the Competitive Enterprise Institute (CEI).For additional details, see this CEI article by Iain Murray.

CFPB Financing

I’ll leave the details of the law to actual lawyers.  But I do know that spending power lies exclusively with Congress.

U.S. Constitution, Article 1:

Section. 7.

All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.

Section. 9.


No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.

The CFPB draws its funding directly from the Federal Reserve.  While there is an annual limit ($750.9 million for fiscal year 2023), Congress has no oversight over the agency.  Here’s how the CFPB’s Financial Report for 2023 puts it (page 7):

Funding required to support the CFPB’s operations is obtained primarily through transfers from the combined earnings of the Federal Reserve System. Annual transfers to the CFPB may not exceed an amount equal to 12 percent of the Federal Reserve System’s total 2009 operating expenses, adjusted annually based on the percentage increase in the employment cost index for total compensation for state and local government workers as specified in the Dodd-Frank Act. The transfer cap for fiscal year 2023 is $750.9 million.

I’ll just add that this is the first time I’ve seen the percentage increase in the employment cost index for total compensation for state and local government workers used as an inflation index.  The government can raise the CFPB budget simply by giving its employees raises!

Here’s what the Gibson Dunn law firm has to say:

The Appropriations Clause states that “[n]o Money shall be drawn from the Treasury, but in Consequence of Appropriations made by law.” U.S. Const. art. I, § 9, cl. 7. When Congress created the Consumer Financial Protection Bureau (CFPB) in 2010, it determined that the CFPB would not receive its funding through an annual appropriation law, as most agencies do. Instead, it directed that the CFPB would receive funding directly from the Federal Reserve each year in an amount that the CFPB Director deems “reasonably necessary”—up to an inflation-adjusted cap. 12 U.S.C. § 5497(a)(1)–(2). The Federal Reserve, in turn, is also funded outside the ordinary appropriations process. 12 U.S.C. § 243.

Community Financial Services Association is an association of lenders that sought to set aside a CFPB regulation, arguing that it was promulgated through the CFPB’s use of funds received in violation of the Appropriations Clause. The Fifth Circuit agreed and vacated the regulation. It held that the CFPB’s funding structure violated the Appropriations Clause because the CFPB has unilateral discretion to determine its own funding level and the funds it receives are insulated from Congress’s control.

CFPB Economics

The CFPB was modeled on Sen. Elizabeth Warren’s (D-MA) ideas.  Its approach is more government control.  They have imposed price ceilings and tried to regulate economic activity that is trivially small.  They have also exceeded their authority, attempting to regulate auto loans.  Under the Dodd-Frank Act, auto loans are outside their jurisdiction.  One of its more amusing failures was trying to show racial discrimination in auto lending practices.  The problem is there is no racial information on auto loan documentation.  Not to be deterred by a complete lack of data, CFPB “analysts” assigned race based on the applicant’s name.  Later research found they had wildly overestimated the number of loans made to minorities. (I’m writing that from memory — please let me know if I’m wrong.)

CFPB About page The Consumer Financial Protection Bureau

CFPB About page (partial). Only one of their four mission statements is devoted to protecting consumers. (click for larger image)

You may remember the Wells Fargo “upselling” scandal.  The bank’s employees signed customers up for credit cards and other services that had never been requested.  The agency levied fines and trumpeted their success.  One slight problem: the upselling was originally uncovered by the Los Angeles Times in 2013.

Finally, the agency constantly tries to impose price controls.  For example, on March 5, 2024 they imposed caps on credit card late payment fees:

The Consumer Financial Protection Bureau (CFPB or Bureau) amends Regulation Z, which implements the Truth in Lending Act (TILA), to address late fees charged by card issuers that together with their affiliates have one million or more open credit card accounts (referred to as “Larger Card Issuers” herein). This final rule adopts a late fee safe harbor threshold of $8 for those issuers and provides that the annual adjustments to reflect changes in the Consumer Price Index (CPI) do not apply to this $8 amount.

This will have the same effect as any price cap.  Higher-risk applicants who are more likely to make late payments will simply have their card applications turned down.  If they do get a card, it will have a lower credit limit compared to the limit without a late fee cap.  As usual, measures designed to “protect the poor” will, in fact, hurt many of them.

Conclusion

The CFPB is unconstitutional.  I urge you to read the CEI article linked at the beginning of this article.  I’ve just scratched the surface.

 

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About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.