The Consumer Financial Protection Bureau: Savior or Menace?

Abstract

One of the centerpieces of the Dodd-Frank financial reform legislation was the creation of a new federal Consumer Financial Protection Bureau of the Federal Reserve. Few bureaucratic agencies in American history, if any, have combined the simultaneous degree of vast, vaguely-defined power and lack of public accountability of the new bureau. It is an independent agency inside another independent agency (the Federal Reserve). It is presided over by a single director (rather than a multi-member commission structure) appointed for a term of five years and insulated from removal by the President. It has a guaranteed budget drawn directly from the Federal Reserve and is thus outside of Congress’s appropriations process. Its actions are unreviewable by the Federal Reserve and can be checked bureaucratically only by a supermajority vote of the Financial Stability Oversight Commission (FSOC) and only if its actions would imperil the safety and soundness of the American financial services industry.Proponents of the new agency argue that this extreme level of independence is justified in order to provide the new bureau with insulation from political pressures. But the history of regulation has taught that insulation can be isolation, resulting in rudderless and inefficient regulation. In addition, scholars of regulation over the past several decades have identified a number of common pathologies associated with bureaucratic behavior. Astonishingly, the CFPB is structured in such a manner that it virtually guarantees the manifestation of those bureaucratic pathologies in practice: excessive risk-aversion, agency imperialism, and agency tunnel vision. Indeed, it is as if the CFPB were an agency frozen in amber during the Nixon Administration and thawed out today as if it were completely unaware of the lessons of the past several decades on how to structure an effective and efficient regulatory strategy.In the end, by manifesting these bureaucratic pathologies, the CFPB is likely to raise the price and reduce access to credit, thereby harming the very consumers it was founded to protect.