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Regulatory: The curious case of the Consumer Financial Protection Bureau

Due to presidential inaction, the Consumer Financial Protection Bureau has been rendered relatively ineffective.

The Consumer Financial Protection Bureau (CFPB) will come into existence on July 21. It likely will not be able to exercise any of the new powers that Congress granted it in the Dodd-Frank Act. This anomalous situation arose from a combination of the administration’s indecision and effective partisan opposition by Republican senators.  Consideration of the possible steps to resolve this impasse revolves around the president’s constitutional authority to make recess appointments and the ability of a Senate minority to counteract his power.

Congress created the CFPB to address its frustration with the failure of the bank supervisory agencies to use their rulemaking and enforcement authorities more aggressively to protect consumers. In the Dodd-Frank law, Congress stripped the existing powers from the banking agencies and centralized them in a specialized agency whose only function would be consumer financial protection. Congress simultaneously granted the CFPB significant new powers to respond to abuses that had occurred during the real estate bubble, including enforcement authority modeled on the Federal Trade Commission’s program. Under Dodd-Frank, in case the office of director is vacant on July 21, the existing statutory powers being transferred to the CFPB from other agencies can be exercised by the secretary of the treasury. However, the new powers granted by that statute, including the crucial responsibilities to issue consumer protection regulations and to take enforcement actions against those who violate the law, cannot be exercised until the first director of the agency takes office. Accordingly, until the current vacancy is filled, the new Dodd-Frank authorities are essentially a dead letter.

President Obama has never appointed a director, to avoid a Senate confirmation battle over the nomination of Elizabeth Warren, whose work inspired the CFPB’s creation.  Instead, the president named Professor Warren as a White House adviser, in charge of setting up the new agency and choosing its staff. This interim solution worked for several months. As time has passed, however, the president’s unwillingness to resolve the issue has jeopardized the consumer protection initiative and could now have negative effects on the entire federal financial regulatory program, depending upon how he acts next. 

The president originally had three options: nominate Professor Warren and risk a filibuster against her confirmation; nominate someone acceptable to conservative Republicans; or exercise his constitutional authority to make an “intrasession” recess appointment of Professor Warren during one of the scheduled short-term adjournments of the Senate. He failed to act in time. Republican senators ultimately recognized that the president’s inaction offered an opportunity to undermine the CFPB. Using a technique pioneered by the democratic minority to frustrate George W. Bush’s ability to make recess appointments, the Republicans have blocked the Senate from adjourning and insisted that the body stay in session, to meet in pro forma session for two minutes per day during scheduled recesses. 

Now, an intrasession recess appointment of Professor Warren while the Senate is in pro forma session would precipitate constitutional litigation whose outcome is uncertain and that would cast a cloud over the CFPB’s use of its new authorities. A confrontation strategy also would cause the Senate minority to express its displeasure by attacking the CFPB’s initiatives, withholding appropriations from the administration, and blocking the confirmation of other non-controversial nominees to fill the many existing high-level vacancies in the other financial regulatory agencies. The damage has already been done. Whatever path the president now chooses, the CFPB will be relatively ineffective through the 2012 elections, just as its opponents would prefer.     

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