December 4, 2017

CFPB Chaos Shows Why It Needs a Bipartisan Commission, Not a Sole Director

Brian Knight

Director of the Program on Financial Regulation
Summary

The consumer protection bureau's director debacle highlights its flawed structure.

The Consumer Financial Protection Bureau was supposed to be a nimble, aggressive "cop on the beat." Instead, it is in chaos.

A dispute between the president of the United States and outgoing CFPB Director Richard Cordray over who is authorized to appoint an acting director has resulted in two people claiming the position; there is litigation and confusion over who actually leads an agency with sweeping power over consumer financial affairs. It also highlights one of the original and fatal flaws of the CFPB: its sole-director leadership structure.

Rather than promoting agility and effectiveness, the sole director model has created paralysis and frustration. The current fiasco will have a silver lining if it prompts policy makers to change the CFPB into a bipartisan commission like the more effective financial and consumer protection regulators.

Numerous regulators, including the Securities and Exchange Commission, which governs capital markets, and the Federal Trade Commission, which is a consumer protection regulator, are led by five-member commissions with representation from both major parties and sometimes independents. By tradition, the chairperson of a commission offers to step down when a new president is elected, but the other members almost always remain. As a result, there is never a leadership void while a new chair is being selected.

This arrangement avoids the embarrassment that is the current CFPB schism. Commissions also tend to breed compromise and consensus, with most decisions being unanimous. Even where there is disagreement, the dissenting commissioners can help keep the agency honest and provide important information to Congress and the public.

Opponents of turning the CFPB into a commission have argued that it will weaken the agency's ability to function over the long term. A closer look shows that this fear is unwarranted.

Nothing prevents a commission from having the same legal authorities and jurisdiction the CFPB currently possesses. (Whether or not it should have such broad powers is a separate question.) Opponents of a commission would likely counter that even if the authorities were the same, the commission structure would inhibit the agency's ability to use them; decisions would get bogged-down and commission compromises would be inferior to the pure, unadulterated decisions of a sole director.

But is a sole director actually more effective? Putting aside the current insanity, the likes of which are not seen in ordinary commission transitions, we should ask whether a Commission of Consumer Financial Protection would be more effective in the long term. As currently designed, is the CFPB likely to engage in policy swings without building a durable regulatory framework that can provide the certainty essential to functioning markets?

While the CFPB has been aggressive, it also has faced numerous setbacks in court and in Congress. Moreover, many of its decisions are likely to be reversed by new leadership, which may, in turn, see its decisions reversed when a new president is elected. Compared to the generally gradual, stable and durable regulation emanating from commissions, the single-director model is not more effective; it is simply more wasteful.

Why should we be concerned that commissions foster compromise rather than purity? There is broad agreement on many issues: nobody, for example, likes fraud. In areas where there are disagreements, a compromise everyone can live with is often better than a decision one side views as perfect and the other side views as intolerable.

Take, for example, the CFPB's rule concerning the ability of companies to settle customer disputes through mandatory arbitration. A compromise arbitration rule could well have been preferable to the current situation. The CFPB rule went so far as to draw opposition not only from Wall Street but also community banks and credit unions. Congress eventually overturned it, and in doing so may even prevent the CFPB from addressing the issue again.

Ask yourself, is the problem with American government too much compromise?

The CFPB debacle is embarrassing, but it can also help us take a hard look at how the agency needs to be reformed to better fulfill its legitimate mission of protecting consumers. Turning it into a commission to make it more stable and resistant to chaos would be an important first step.