A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU
CONRAD Z. ZHONG*
ABSTRACT
Recent controversies surrounding the Consumer Financial Protection Bureau (CFPB) have revolved around its perceived lack of accountability to Congress and the administration. Notable critics of the CFPB, such as the Chairman of the House Financial Services Committee Representative Jeb Hensarling, have characterized the CFPB as a rogue agency. A key legislation sponsored by Rep. Hensarling is the Financial CHOICE Act, which contained such reforms to the CFPB as subjecting its entire budget to the appropriations process. The CHOICE Act has recently passed the House. Though reform of the CFPB is necessary, subjecting its entire budget to the congressional appropriation process risks undermining its effectiveness and independence as a dedicated federal regulator for consumer financial protection. In this paper, I propose an alternative funding solution to reform the CFPB without substantively changing its powers and structure: the hybrid funding model, with part of the CFPB’s budget self-funded and the balance appropriated by Congress. The hybrid funding model is a pragmatic compromise that allows the CFPB’s valuable mission to be preserved while enhancing its perceived accountability. Under this model, the CFPB will have two types of budget, with each earmarked to providing funding for certain functions of the CFPB. The self- funded budget (the size of which is determined by the CFPB) supports its administrative, operational, and other back-office functions of the CFPB. The congressional appropriations budget (the size of which is determined by Congress) covers costs related to the more politically sensitive activities of the CFPB, including its research, regulatory, supervisory, monitoring, and enforcement activities. The hybrid funding solution aims to provide the CFPB with both agency autonomy and congressional accountability while ensuring that the CFPB has a baseline amount of budgetary resources sufficient for it to maintain its basic operational needs.
A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
2 UC Davis Business Law Journal [Vol. 18
TABLE OF CONTENTS
I. INTRODUCTION ...... 3 II. THE CFPB’S STRUCTURE, POWERS, AND LIMITATIONS ...... 5 A. Structure of the CFPB ...... 5 B. Powers of the CFPB ...... 7 1. Regulatory Activities ...... 7 2. Enforcement Activities ...... 8 3. Other Functions ...... 11 C. Limitations of the CFPB ...... 12 III. LEGAL CHALLENGES TO AND REFORMS SUGGESTED FOR THE CFPB ...... 12 IV. THE HYBRID FUNDING MODEL ...... 16 A. Reasons for adopting the hybrid funding model ...... 17 1. Changing the CFPB’s leadership structure does not adequately check against arbitrary decision-making by the CFPB ...... 17 2. Subjecting a significant portion of the CFPB’s budget to congressional appropriation makes the CFPB more accountable and less able to engage in arbitrary decision- making ...... 18 3. The hybrid funding model is a pragmatic compromise that allows the CFPB’s valuable mission to be preserved while enhancing its perceived accountability ...... 19 B. Mechanics of the Hybrid Model ...... 21 1. Self-funded bucket ...... 21 2. Congressional appropriations bucket ...... 23 3. Source of funding for the hybrid model ...... 27 C. Evaluation of the Hybrid Model ...... 31 V. CONCLUSION ...... 32
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Ed 1] A New Way to Fund the Consumer Financial Protection Bureau 3
I. INTRODUCTION
Since its inception in 2010, the CFPB has played a preeminent role in the federal regulatory landscape and, in the process, has generated many headlines and controversies. There are several key characteristics of the CFPB from which it derives its power: its sole Director, whom once nominated and confirmed, can only be removed for cause;1 its broad rule-making authority under the Dodd- Frank Act (DFA);2 its ability to bring enforcement actions before courts or its own administrative law judges;3 and most importantly for the purposes of this paper, its funding, which is guaranteed up to a statutorily-set percentage of the operating expenses of the Federal Reserve System as specified by the DFA.4 The CFPB in its current form is not without its checks and balances.5 Nevertheless, the CFPB has been the target of constitutional challenges as a result of being an independent agency led by a sole Director and having a statutorily fixed budget that is not subject to the annual congressional appropriations process. The latest of these challenges was PHH Corporation v. CFPB, which saw the D.C. Circuit initially rule the CFPB’s current leadership structure as unconstitutional.6 The D.C. Circuit subsequently granted the CFPB’s request for a rehearing en banc on February 16, 2017, vacating its earlier ruling on the constitutionality of the CFPB’s structure.7 The vacated initial opinion, written by Circuit Judge Brett Kavanaugh, demands that the CFPB Director be removable at will by the President of the United States, transforming the CFPB into an executive agency.8 Commentators had mixed reactions to the initial ruling, with
* J.D. 2017, Harvard Law School. I am grateful to Professor Howell Jackson and Lauren Semrau for their invaluable comments and guidance on this paper. 1 12 U.S.C. § 5491 (2010). 2 12 U.S.C. § 5511(c)(5) (2010). 3 12 U.S.C. § 5514 (2010); 12 U.S.C. § 5515 (2010); CONSUMER FINANCIAL PROTECTION BUREAU, Administrative adjudication proceedings, https://www.consumerfinance.gov/administrati ve-adjudication-proceedings/ (Nov. 2017). 4 CONSUMER FINANCIAL PROTECTION BUREAU, THE CFPB STRATEGIC PLAN, BUDGET, AND PERFORMANCE PLAN AND REPORT 9 (2016), http://files.consumerfinance.gov/f/201602_cfpb_report _strategic-plan-budget-and-performance-plan_FY2016.pdf. 5 See Adam J. Levitin, The Consumer Financial Protection Bureau: An Introduction, 32 REV. BANKING & FIN. L 322, 355-58 (noting the CFPB’s lack of substantive power in supervision and enforcement); Arthur E. Wilmarth, The Financial Services Industry’s Misguided Quest to Undermine the Consumer Financial Protection Bureau, 31 REV. BANKING & FIN. L. 899, 909-11 (listing limits imposed on the CFPB, including cost-benefit analysis and restrictions on the CFPB’s rulemaking authority). 6 PHH Corporation, et al. v. Consumer Financial Protection Bureau, No. 15-1177, at *8-9 (D.C. Cir. Oct. 11, 2016). 7 Order Granting the Respondent’s Petition for Rehearing en banc, Case No. 15-1177 (Feb. 16, 2017), https://www.cadc.uscourts.gov/internet/opinions.nsf/5D0253C4E25B93FB852580C9005F3 AE1/$file/15-1177-1661681.pdf. 8 PHH Corporation, No. 15-1177 at *18. A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
4 UC Davis Business Law Journal [Vol. 18 some saying that it would have placed significant constraints on the CFPB’s independence,9 and others believing that the vacated remedy would not have made a notable difference.10 Regardless, with the pending en banc rehearing and a potential appeal to the Supreme Court, the future structure of the CFPB is unsettled. To complicate the matter further, in March 2017, the Justice Department filed an amicus brief stating that the exception to the President’s for-cause removal should not apply to a single-headed agency like the CFPB.11 The Justice Department has taken a position adverse to that of the CFPB, which further undermines the latter’s viability during the present administration. Without for- cause removal protection, the head of the CFPB can be removed by the sitting President for any reason, even for one that is entirely politically motivated. Instead of changing the CFPB’s leadership structure, I argue for an alternative solution to make the CFPB more politically acceptable as an independent agency: a hybrid funding model, combining both features of self- funding and congressional appropriations. Under this model, the operational components of the CFPB would be self-funded through a budget determined by the CFPB, while the enforcement and regulatory components would be subject to a budget determined through the congressional appropriations process. The primary source of funding for both the self-funded budget and the congressionally appropriated budget would be assessment fees levied upon entities over which the CFPB has supervisory authority. The hybrid model allows the CFPB to preserve its basic operations while giving discretion to Congress to adjust the level of resources the CFPB can utilize to carry out its substantive regulatory mission. This hybrid model can be implemented without making fundamental changes to the CFPB, including its leadership structure. Under the hybrid funding model, if Congress thinks the CFPB needs to be controlled more tightly, it can reduce the CFPB’s budget for enforcement and regulatory activities through appropriations. While usual appropriation bills are subject to filibuster (which would require a 60-vote supermajority in the Senate to be overcome by invoking cloture), neither budget resolutions nor reconciliation
9 See, e.g., Lorraine Woellert, Conservatives Win Big in Landmark Ruling against Consumer Finance Protection Bureau, POLITICO (Oct. 11, 2016), http://www.politico.com/story/2016/10/ consumer-finance-protection-bureau-court-ruling-229601. 10 See, e.g., Alison Frankel, The D.C. Circuit’s gratuitous ruling on CFPB constitutionality, REUTERS (Oct. 11, 2016), http://blogs.reuters.com/alison-frankel/2016/10/11/the-d-c-circuits- gratuitous-ruling-on-cfpb-constitutionality/; Adam Levitin, PHH v. CFPB: A Blessing in Disguise for the CFPB (Oct. 11, 2016), https://www.acslaw.org/acsblog/phh-v-cfpb-a-blessing-in-disguise- for-the-cfpb. 11 Brief for the United States as Amicus Curiae Supporting Petitioners at 2-3, PHH Corporation, et al. v. Consumer Financial Protection Bureau, No. 15-1177 (D.C. Cir. Oct. 11, 2016). A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
Ed 1] A New Way to Fund the Consumer Financial Protection Bureau 5 bills can be delayed by a filibuster.12 Budget resolutions require the approval of both the House and the Senate prior to their adoption, but do not require Presidential approval and thus lack the force of law.13 A budget resolution notes how various congressional committees should modify legislation to reach the budgetary goals set out in the resolution. These reconciliation instructions from the budget resolution are then taken up by these congressional committees, which work together with the budgetary committees of the House or the Senate to create an omnibus reconciliation bill for consideration by the entire House or Senate.14 The reconciliation bill brings the force of law to the portions of the budget resolution that it addresses. Because filibuster is not a valid strategy against the adoption of reconciliation bills, the majority party in Congress possesses greater flexibility in passing funding measures through it than a normal appropriations bill and its related continuing resolutions. After Part I, the Introduction, the rest of the paper is divided into three parts. Part II provides an overview of the CFPB, discussing its structure and highlighting its powers and limitations. Part III examines the controversies surrounding the CFPB and the reforms that target it. Part IV, the core of the paper, explains the reasons for and the mechanics of the hybrid funding model in detail. Elements will be drawn from existing funding models of federal financial regulators as needed.
II. THE CFPB’S STRUCTURE, POWERS, AND LIMITATIONS
A. Structure of the CFPB
The CFPB was founded by the DFA of 2010 and became effective on July 21, 2011.15 Its mission is to protect consumers of financial products and services. Specifically, the CFPB aims to “protect consumers from unfair, deceptive, or abusive practices and take action against companies that break the law.”16 The CFPB is led by a single Director who serves a five-year term and,
12 Filibuster and Cloture, UNITED STATES SENATE, https://www.senate.gov/artandhistory/history/ common/briefing/Filibuster_Cloture.htm; Tonja Jacobi & Jeff Van Dam, The Filibuster and Reconciliation: The Future of Majoritarian Lawmaking in The U.S. Senate, 47 UC DAVIS L. REV. 261, 297 (2013). 13 CENTER ON BUDGET AND POLICY PRIORITIES, Introduction to Budget “Reconciliation,” http:// www.cbpp.org/research/federal-budget/introduction-to-budget-reconciliation (last updated Nov. 9, 2016). 14 Jacobi & Van Dam, supra note 12. 15 Consumers Count: Five Years Standing Up for You, CONSUMER FINANCIAL PROTECTION BUREAU (July 21, 2016), http://www.consumerfinance.gov/about-us/blog/consumers-count-five- years-standing-you/. 16 The Bureau, CONSUMER FINANCIAL PROTECTION BUREAU, https://www.consumerfinance.gov/ about-us/the-bureau/ (last visited Nov. 3, 2017). A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
6 UC Davis Business Law Journal [Vol. 18 once nominated by the President and confirmed by the Senate, removable only for cause (cause defined as “inefficiency, neglect of duty, or malfeasance”).17 The for-cause removal clause shields the CFPB Director from removal solely on political grounds. The single Director leadership separates the CFPB from most other independent agencies, which are led by a bipartisan body of several individuals. The SEC, for instance, has five commissioners, with no more than three from one political party.18 The CFPB is classified as an “independent regulatory agency” under the Paperwork Reduction Act.19 This classification significantly increases the flexibility with which the CFPB makes rules. Pursuant to Executive Order 12866, an independent agency does not bear the full weight of Office of Information and Regulatory Affairs (OIRA) review, which would require the extensive use of cost-benefit analysis.20 An important practical implication of not being subject to Executive Order 12866 is that the CFPB does not have to identify regulatory alternatives (including the alternative of not regulating) that may be less burdensome than its proposed rule. The CFPB receives its annual budget as a fixed percentage of the expenditure of the Federal Reserve System. Funding is capped at 12 percent of the Federal Reserve System’s operating expenses, subject to future inflation.21 Presently, the CFPB is the only financial regulator with a statutory cap on its budget.22 For 2017, the CFPB could have asked for a maximum of $646.2 million, of which it asked for $636.1 million.23 Because the CFPB’s budget is set in statute, Congress cannot withhold the CFPB’s funding unless it amends the DFA (which, practically speaking, requires 60 votes in the Senate).24 In addition to funding from the Federal Reserve, the Director of the CFPB can request additional funding from the Congress through the appropriations process up to a certain limit.25
17 12 U.S.C. § 5491 (2010). 18 Current SEC Commissioners, U.S. SECURITIES AND EXCHANGE COMMISSION, https://www.sec. gov/about/commissioner.shtml/ (last visited Nov. 3, 2017). 19 44 U.S.C. § 3502(5) (1995). 20 Executive Order 12866 of September 30, 1993, https://www.whitehouse.gov/sites/. . ./eo12866/eo12866_10041993.pdf. 21 CONSUMER FINANCIAL PROTECTION BUREAU, SEMI-ANNUAL REPORT OF THE CONSUMER FINANCIAL PROTECTION BUREAU 113 (May 2014), http://files.consumerfinance.gov/f/201405_ cfpb_semi-annual-report.pdf. 22 CONSUMER FINANCIAL PROTECTION BUREAU, CFPB STRATEGIC PLAN: 2013-17 37 (Apr. 2013), http://www.consumerfinance.gov/f/strategic-plan.pdf. 23 THE CFPB STRATEGIC PLAN, supra note 4, at 17. 24 Filibuster and Cloture, supra note 12. 25 CFPB STRATEGIC PLAN: 2013-17, supra note 22. A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
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The main organizational divisions of the CFPB are listed in the following table:26
Division Name Primary Function Operations Facilities and infrastructure Consumer Education and Educational and financial literacy programs Engagement Supervision, Enforcement, Regulatory and enforcement activities and Fair Lending Research, Markets, and Conducting cost-benefit analyses and Regulations maintaining the CFPB’s consumer complaints databases Legal Ensuring CFPB’s compliance with laws External Affairs Community outreach initiatives
B. Powers of the CFPB
1. Regulatory Activities
The CFPB has made a significant impact on the regulatory landscape since its start in 2011. Some of the CFPB’s most important final rules relate to the mortgage market. Examples of its leading mortgage-related regulations are the “Know Before You Owe” information disclosure requirements (“Integrated Mortgage Disclosure Rule Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z)”)27, as well as the “Ability to Repay” rules requiring lenders to evaluate a borrower’s ability to pay back the loan prior to issuing the loan (“Ability to Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z)”).28
26 THE CFPB STRATEGIC PLAN, supra note 4, at 5. 27 12 C.F.R. § 1024 (2013); 12 C.F.R. § 1026 (2013); 2013 Integrated Mortgage Disclosure Rule Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z), CONSUMER FINANCIAL PROTECTION BUREAU (Feb. 2016), https://www.consumer finance.gov/policy-compliance/rulemaking/final-rules/2013-integrated-mortgage-disclosure-rule- under-real-estate-settlement-procedures-act-regulation-x-and-truth-lending-act-regulation-z/. The Integrated Mortgage Disclosure Final Rule went into effect on October 3, 2015. 28 12 C.F.R. § 1026 (2013); Ability to Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z), CONSUMER FINANCIAL PROTECTION BUREAU (Jan. 2013), A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
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Beyond final rules, the CFPB has other important regulations currently in the process of rulemaking. A key proposed regulation is its rule on payday lending assessment (“Notice of Proposed Rulemaking on Payday, Vehicle Title, and Certain High-Cost Installment Loans”), which requires payday lenders and similar lenders of high-cost installment loans to evaluate the ability of consumers to repay the loan before issuing the loan, and further requires these lenders to give notice to consumers before withdrawing from their accounts.29 Proposed in June 2016,30 the final rule has not yet been issued by the CFPB. As a testament to the attention the proposed payday lending rule has attracted, by the time the commenting period closed, it had received around one million comments from the public.31
2. Enforcement Activities
In addition to issuing regulations, the CFPB has also been active in its supervision, examination, and enforcement activities. The CFPB has power to supervise, investigate, and bring enforcement actions over a “covered person,” defined in the DFA as “any person that engages in offering or providing a consumer financial product or services” and any affiliates that “acts as a service provider to such person.”32 The CFPB’s authority is delineated into three major categories based on the size and nature of the covered person: 1) banks and depository institutions with assets greater than $10 billion;33 2) banks and depository institutions with assets at or less than $10 billion;34 and 3) nondepository covered persons offering or providing consumer financial products or services.35
https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/ability-repay-and- qualified-mortgage-standards-under-truth-lending-act-regulation-z/. The Ability to Repay Final Rule went into effect on January 10, 2014. 29 12 C.F.R. § 1041 (2016). 30 Consumer Financial Protection Bureau Proposes Rule to End Payday Debt Traps, CONSUMER FINANCIAL PROTECTION BUREAU (June 2016), https://www.consumerfinance.gov/about-us/ newsroom/consumer-financial-protection-bureau-proposes-rule-end-payday-debt-traps/. 31 Yuka Hayashi, Rachel Witkowski & Gabriel T. Rubin, Dueling Payday-Lending Campaigns Deluge CFPB With Comments, THE WALL STREET JOURNAL (Oct. 10, 2016), https://www.wsj .com/articles/dueling-payday-lending-campaigns-deluge-cfpb-with-comments-1476131725. 32 12 U.S.C. § 5481 (2010). 33 12 U.S.C. § 5515 (2010). 34 12 U.S.C. § 5516 (2010). 35 A nondepository covered person over whom the CFPB has supervisory authority includes: a person that offers services related to loans secured by real estate; a person that offers or provides private education loan; a person that offers or provides payday loans; a person who is a “larger participant of a market for other consumer financial products or services”; and a person whom the CFPB has reason to believe “is engaging, or has engaged, in conduct that poses risks to consumers A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
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For banks and depository institutions with assets of more than $10 billion, the CFPB has extensive power to supervise and monitor. The CFPB has “exclusive authority to require reports” from and “conduct examinations” of these institutions for purposes of “assessing compliance with the requirements of Federal consumer financial laws” and “detecting and assessing associated risks to consumers and to markets for consumer financial products and services.”36 In terms of enforcement power against these large banks and depository institutions, the CFPB is given primacy over other federal agencies: “To the extent that the Bureau and another Federal agency are authorized to enforce a Federal consumer financial law,” the CFPB has “primary authority to enforce that Federal consumer financial law.”37 The mandate of the CFPB shifts with respect to banks and depository institutions with assets of at or less than $10 billion. Instead of having the “exclusive authority” to supervise and examine, the CFPB “may, at its discretion, include examiners on a sampling basis of the examinations performed by” other financial regulators.38 Additionally, other financial regulators have the “exclusive authority (relative to the Bureau)” to enforce consumer protection laws against these smaller banks and depository institutions.39 For nondepository covered persons, the CFPB has “exclusive authority” to “conduct examinations, require reports, or issue exemptions” with respect to such a person.40 The CFPB, after consultation with state agencies, may also require nondepository covered persons to register with the CFPB.41 In terms of enforcement, the CFPB’s power with respect to nondepository covered persons is the same as its power with respect to banks and depository institutions with assets of more than $10 billion: it has “exclusive authority” to enforce consumer financial laws.42 The CFPB can bring enforcement actions under 18 different enumerated federal consumer financial statutes. Examples include the Homeowners Protection Act, the Consumer Leasing Act, the Truth in Lending Act, and the statute in contention in PHH Corporation v. CFPB, the Real Estate Settlement Procedures Act.43 In addition to enforcing the statutes, the CFPB is also with regard to the offering or provision of consumer financial products or services.” 12 U.S.C. § 5514(a) (2010). 36 12 U.S.C. § 5515(b) (2010). 37 12 U.S.C. § 5515(c) (2010). 38 12 U.S.C. § 5516(c) (2010). 39 12 U.S.C. § 5516(d) (2010). 40 12 U.S.C. § 5514(d) (2010). 41 12 U.S.C. § 5512(c)(7) (2010). 42 12 U.S.C. § 5514(c) (2010). 43 The complete list of statutes the CFPB can enforce can be found in CONSUMER FINANCIAL PROTECTION BUREAU, CFPB Supervision and Examination Manual 7 (2012), http://files.consumer finance.gov/f/201210_cfpb_supervision-and-examination-manual-v2.pdf. A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
10 UC Davis Business Law Journal [Vol. 18 authorized to protect consumers from Unfair, Deceptive, or Abusive Acts and Practices, also known as UDAAP for short.44 The CFPB can bring an UDAAP enforcement action against any covered persons, and it has made substantial use of its UDAAP enforcement power: around half of all its enforcement actions alleges some form of UDAAP.45 Knowingly engaging in UDAAP could lead to a penalty of $1 million per day.46 Besides bringing enforcement actions before federal courts, the CFPB can bring adjudication proceedings47 before its own administrative law judges in its Office of Administrative Adjudication.48 A CFPB in-house proceeding usually begins with the CFPB issuing a Civil Investigative Demand, which parallels a judicial discovery process.49 After a decision is handed down by a CFPB administrative law judge, it can be appealed to the CFPB Director, and if necessary, to a federal court for judicial review under the Chevron doctrine.50 The PHH Corporations v. CFPB case followed this path from a hearing by an administrative law judge in the CFPB, to appeal to Director Cordray, and then onto the D.C. Circuit, where the court had issued its now-vacated opinion in favor of PHH Corporation. To date, the CFPB has brought in $11.7 billion in penalties from its enforcement activities.51 Highlights of the CFPB’s enforcement activities include a $727 million judgment against Bank of America for deceptive credit card marketing, a $500 million judgment against SunTrust for illegal mortgage servicing practices, and a $92 million judgment against Rome Finance for predatory lending.52 In March 2016, the CFPB brought its first enforcement action related to online data security with its action against Dwolla.53 This action
44 12 U.S.C. § 5531 (2010). 45 CFPB Defines ‘Unfair,’ ‘Deceptive’ and ‘Abusive’ Practices Through Enforcement Activity, SKADDEN (Jan. 2015), https://www.skadden.com/insights/cfpb-defines-unfair-deceptive-and-abu sive-practices-through-enforcement-activity. 46 Id. 47 12 U.S.C. § 5563 (2010). 48 Anthony Rollo, Gerard E. Wimberly, Jr., and Gabriel A. Crowson, The ABC’s of a CFPB Adjudicatory Proceeding (Part I), 16 CONSUMER FIN. SERVICES L. REP. 3 (2012), http://www.mcglinchey.com/Files/Publication/e7f9c054-475e-4b82-8ad10ea15cd3e7d3/ Presentation/PublicationAttachment/cc922be5-ab84-4076-89e11421c2d16f4b/RolloCrowson Wimberly_10_12.pdf. 49 Id. 50 Id. 51 Consumers Count, supra note 15. 52 CONSUMER FINANCIAL PROTECTION BUREAU, CONSUMER FINANCIAL PROTECTION BUREAU: ENFORCING FEDERAL CONSUMER PROTECTION LAWS 2, 5, 13 (July 2016), http://files.consumer finance.gov/f/documents/07132016_cfpb_SEFL_anniversary_factsheet.pdf. 53 CFPB Brings First Ever Data Security Enforcement Action: Review and Analysis, DAVIS POLK (Mar. 2016), https://www.davispolk.com/publications/cfpb-brings-first-ever-data-security-enforce ment-action-review-and-analysis/. A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
Ed 1] A New Way to Fund the Consumer Financial Protection Bureau 11 signals the CFPB’s intent to exercise its regulatory power in new areas of concern for consumer finance. In fact, the CFPB’s enforcement actions have been considered by some to be so far-reaching that they have accused the CFPB of regulating by enforcement, a claim that Director Richard Cordray deflected, but did not fully reject.54
3. Other Functions
Besides promulgating regulations and bringing enforcement actions, the CFPB also engages in a variety of ancillary functions to further its mission of consumer protection by conducting research and educating consumers.55 In its research function, the CFPB organizes conferences, updates credit market data on a monthly basis, and maintains a consumer complaints database. The consumer complaints database, in particular, has garnered serious opposition from the financial industry who accused it of lacking transparency.56 Regarding education, the CFPB provides resources to instruct consumers on general financial responsibility and on how to navigate major financial undertakings, such as receiving an auto loan or a mortgage.57 Research and educational activities, while important, take up a smaller proportion of the CFPB’s budget than supervision and enforcement. In 2017, the CFPB has set aside $47.8 million for research and $44.9 million for consumer education. By contrast, the CFPB has reserved $167.9 million for supervision and enforcement.58 Last but not least, the CFPB also runs a Civil Penalty Fund (CPF). The CFPB collects civil penalties obtained through enforcement actions and then deposits them into the CPF. The CPF focuses on redressing harmed victims. If
54 See CFPB Director Defends Regulation by Enforcement, Warns Executives, MORGAN, LEWIS & BOCKIUS (Mar. 2016), http://www.natlawreview.com/article/cfpb-Director-defends-regulation- enforcement-warns-executives; Letter from David H. Stevens, President and CEO, Mortgage Bankers Association, to Steven Mnuchin, Secretary of Treasury, Department of the Treasury, Re: Presidential Executive Order on Core Principles for Regulating the United States Financial System, 2 (Apr. 10, 2017), http://mba-pc.informz.net/mba-pc/data/images/AdvocacyDocuments/ 4%202017%20Letter%20to%20Mnuchin%20Re.%20Core%20Principles%20Executive%20Order %20CRE%20rev%20formatFalsepdf (claiming that the CFPB regulates by enforcement by “articulating new theories of liability in enforcement cases under laws assigned to it, rather than changing the underlying rules.”). 55 The Bureau, supra note 16. 56 Tobie Stanger, Days May Be Numbered for the Consumer Complaint Database, CONSUMER REPORTS (Feb. 2017), http://www.consumerreports.org/consumer-complaints/days-may-be-num bered-for-the-consumer-complaint-database/. Also see part II of this paper for a detailed discussion of Hensarling’s CHOICE Act reform of the CFPB, which includes removing the consumer complaints database. 57 Resources for Financial Educators, CONSUMER FINANCIAL PROTECTION BUREAU, https://www .consumerfinance.gov/adult-financial-education/ (last visited Nov. 3, 2017). 58 THE CFPB STRATEGIC PLAN, supra note 4, at 18. A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
12 UC Davis Business Law Journal [Vol. 18 victims could not be found or feasibly compensated, the CFPB can redirect the CPF to finance educational activities.59
C. Limitations of the CFPB
The CFPB has many limitations on its authority. It cannot conduct criminal enforcement, which is the purview of the Department of Justice.60 If its regulations negatively impact the “safety and soundness” of the financial system, they can be vetoed by the Financial Stability Oversight Council upon petition by any member agency of the Council.61 If the CFPB proposes a rule that regulates UDAAP, then it must consult with other federal agencies “concerning the consistency of the proposed rule with prudential, market, or systemic objectives administered by such agencies.”62 Similar limitations apply when the CFPB proposes a rule under any of its enumerated federal consumer protection laws.63 Additionally, the CFPB must use cost-benefit analysis in rulemaking by considering the impact of its regulation on consumers, specifically taking into account the “potential reduction of access by consumers to consumer financial products or services resulting from such rule.”64 Nonetheless, this burden is less exacting than that laid out in Executive Order 12866, which requires executive agencies to “assess all costs and benefits of available regulatory alternatives, including the alternative of not regulating.”65 For UDAAP rulemaking, the CFPB is held to a higher threshold of not resulting in “substantial injury [that] is not outweighed by countervailing benefits to consumers or to competition.”66 Complicating the situation further, the CFPB is required by the Regulatory Flexibility Act to consider the impact of all its rules on small businesses and examine potentially less burdensome alternatives.67
III. LEGAL CHALLENGES TO AND REFORMS SUGGESTED FOR THE CFPB
PHH Corp. v. CFPB is not the first instance that the constitutionality of the CFPB has been challenged in court because of its unique structure. In 2013,
59 Id. at 21. 60 Leaked Hensarling Memo Outlines Proposed Changes to the CFPB, DAVIS POLK (Feb. 2017), http://www.finregreform.com/single-post/2017/02/10/Leaked-Hensarling-Memo-Outlines- Proposed-Changes-to-the-CFPB. 61 12 U.S.C. § 5513(a) (2010). 62 12 U.S.C. § 5531 (2010). 63 12 U.S.C. § 5512 (b)(2)(B) (2010). 64 12 U.S.C. § 5512(b)(2) (2012). 65 Executive Order 12866, supra note 20. 66 12 U.S.C. § 5531(c)(1)(B) (2012). 67 Regulatory Flexibility Act, U.S. SMALL BUSINESS ADMINISTRATION, https://www.sba.gov/ category/advocacy-navigation-structure/regulatory-flexibility-act/ (last visited Nov. 3, 2017). A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
Ed 1] A New Way to Fund the Consumer Financial Protection Bureau 13 the CFPB filed an enforcement action against Morgan Drexen, a provider of paralegal support services.68 Morgan Drexen responded by challenging the constitutionality of the CFPB. Substantively, Morgan Drexen argued that the CFPB is unconstitutional because its director can only be removed for cause and it is funded by the Federal Reserve separate from typical congressional appropriations.69 Ultimately, the case was found invalid by the D.C. Circuit for lack of standing.70 In 2015, the CFPB was again challenged in the U.S. District Court for the District of Columbia, this time by The State National Bank of Big Spring, who alleged that Director Cordray’s actions were unconstitutional because he was appointed in 2012 during a recess.71 The District Court sided with the CFPB, but the holding only extended to the recess appointment.72 The CFPB has also been the target of legislative reforms. In April 2015, a bill passed the House of Representatives entitled “The Bureau of Consumer Financial Protection Advisory Boards Act,” which capped CFPB’s funding in 2020 to $655 million and funding in 2025 to $720 million.73 These figures are not subject to inflation adjustment, and given that the CFPB’s funding in 2017 is already $636.1 million,74 had the bill become law, it could have placed a real limit on the CFPB’s funding. In June 2016, another bill, titled the “CFPB Data Accountability Act,” was introduced in the House. Its key requirement is for the CFPB to verify any complaint before admitting it to the consumer complaints database.75 In February 2017, claiming that the CFPB operates without any accountability, Senator Ted Cruz introduced a self-explanatory bill titled the “Repeal CFPB Act.”76
68 CFPB Files Suit Against Morgan Drexen for Charging Illegal Fees and Deceiving Consumers, CONSUMER FINANCIAL PROTECTION BUREAU (Aug. 2013), https://www.consumerfinance.gov/ about-us/newsroom/cfpb-files-suit-against-morgan-drexen-inc-for-charging-illegal-fees-and- deceiving-consumers/. 69 Juan Carlos Rodriguez, Morgan Drexen Loses Constitutional Challenge in CFPB Suit, LAW360 (Jan. 2014), https://www.law360.com/articles/500905/morgan-drexen-loses-constitutional-challen ge-in-cfpb-suit. 70 BALLARD SPAHR, Suit Challenging Constitutionality of CFPB Fails for Lack-of-Standing and Other Procedural Defects, D.C. Circuit Holds; Morgan Drexen files for Bankruptcy (May 2015), https://www.cfpbmonitor.com/2015/05/04/suit-challenging-constitutionality-of-cfpb-fails-for-lack- of-standing-and-other-procedural-defects-d-c-circuit-holds-morgan-drexen-files-for-bankruptcy/. 71 Adam Lidgett, CFPB Gets Win in Constitutional Challenge, LAW360 (July 2016), https://www.law360.com/articles/816838/cfpb-gets-win-in-constitutional-challenge. 72 Id. 73 H.R.1195, 114th Cong. (2015), https://www.congress.gov/bill/114th-congress/house-bill/1195. 74 THE CFPB STRATEGIC PLAN, supra note 4, at 9. 75 H.R.5413, 114th Cong. (2016), https://www.congress.gov/bill/114th-congress/house-bill/5413/ text. 76 S.370, 115th Cong. (2017), https://www.congress.gov/bill/115th-congress/senate-bill/370. A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
14 UC Davis Business Law Journal [Vol. 18
On March 21, 2017, the House Financial Services Committee held a hearing called “The Bureau of Consumer Financial Protection’s Unconstitutional Design.”77 During the hearing, both the CFPB’s single Director leadership structure and its current funding model were challenged, with former Solicitor General Ted Olson (who is also representing PHH in PHH v. CFPB) arguing for both the elimination of for-cause removal protection and subjecting the CFPB to the appropriations process.78 Thus far, the most influential reform to the CFPB belongs to the proposed legislation by Representative Jeb Hensarling (R-TX). His vision for the CFPB is laid out in the Financial CHOICE (Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs) Act. The CHOICE Act has been passed by the House, and its key proposed reforms to the CFPB are:
The single Director of CFPB is to become removable at will by the President, which would turn the CFPB into an executive agency.79 Requirements applicable to executive agencies, such as OIRA cost- benefit analysis, would become applicable to the CFPB under this reform. Given the inherent unquantifiable uncertainties involved in financial regulation, the value of cost-benefit analysis as applied to financial regulation remains questionable.80
A number of divisions within the CFPB would be eliminated, including those related to consumer education, research, and fair lending (which encompasses payday lending, auto lending and other analogous loans).81 Accordingly, the CFPB’s consumer complaints database would be taken offline and out of public view.82
The CFPB would lose significant portions of its authority under CHOICE Act, including its UDAAP powers in enforcement and rulemaking. Its
77 Memorandum from FSC Majority Staff to the Members of the Committee on Financial Services (Mar. 21, 2017), https://financialservices.house.gov/uploadedfiles/032117_oi_memo.pdf. 78 CFPB Reform: The Latest Developments, DAVIS POLK (Mar. 23, 2017), http://www.fin regreform.com/single-post/2017/03/23/CFPB-Reform-The-Latest-Developments. 79 CHOICE Act 2.0: House Financial Services Committee Revises Regulatory Reform Bill, COVINGTON 16 (Apr. 24, 2017), https://www.cov.com/-/media/files/corporate/publications/2017/ 04/choiceact20housefinancialservicescommitteerevisesregulatoryreformbill.pdf. 80 See, e.g., John C. Coates IV, Cost-Benefit Analysis of Financial Regulation: A Reply, 124 YALE L.J. 305 (2015), (arguing that reliable and precise cost-benefit analysis as applied to financial regulation remains elusive). 81 CFPB Reform, supra note 78; Financial CHOICE Act “2.0,” SULLIVAN & CROMWELL 3 (Apr. 21, 2017), https://www.sullcrom.com/siteFiles/Publications/SC_Publication_Financial_CHOICE _Act_2.0.pdf. 82 See Financial Choice Act “2.0,” supra note 81, at 3. A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
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enforcement authority would be limited to its 18 enumerated federal statutes.83 Entities targeted by a CFPB enforcement action would be given the ability to transfer the proceeding to a federal court, which would be required to have less deference for the CFPB’s decision.84 In addition to the above, the CFPB would cease to be a supervisor over any entities it regulates.85
In terms of funding, the CFPB would no longer receive its funding as a percentage of the Federal Reserve budget, but rather through the appropriations process.86
Lastly, the CFPB is to be renamed as the “Consumer Law Enforcement Agency.”87
The Financial CHOICE Act seeks to reshape the nature of the CFPB towards deregulation and tighter congressional control. While greater accountability is a legitimate objective, the proposed reforms in CHOICE Act are so foundational that they risk undermining the original purpose behind the establishment of the CPFB, namely to consolidate the mission of consumer protection from several agencies and place it into the hands of one regulator with the power to regulate all subject matters areas of the consumer financial market.88 The reforms to the CFPB in Financial CHOICE Act undermines this purpose in at least three areas: the elimination of consumer education, the removal of payday lending regulation, and the loss of UDAAP enforcement powers and supervisory authority over financial institutions. Together with the other constraints that CHOICE Act seeks to impose upon the CFPB, the CFPB may no longer have a sufficiently robust regulatory presence to justify its existence. The CFPB’s potential struggle for political survival under the CHOICE Act regime would be made more difficult as its budget would be entirely subject to congressional appropriation. To take the deregulatory reform of the CFPB to its logical conclusion, it is possible that the CFPB may be broken up and its remaining functions become absorbed by other federal agencies (such as the SEC, the CFTC, the FTC, and banking supervisors
83 Id. 84 Id. at 4. 85 Id. at 3. 86 Id. at 5. 87 H.R.10, 115th Cong. (2017), https://www.congress.gov/bill/115th-congress/house-bill/10. 88 See Creating a Consumer Financial Protection Agency: A Cornerstone of America’s New Economic Foundation: Hearing Before the S. Comm. on Banking, Housing and Urban Affairs, 111th Cong. (2009), https://www.gpo.gov/fdsys/pkg/CHRG-111shrg54789/pdf/CHRG-111shrg54 789.pdf. A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
16 UC Davis Business Law Journal [Vol. 18 such as the Federal Reserve or the FDIC). If this scenario does come to pass, given the resulting loss of cohesiveness, regulatory costs could rise while regulatory effectiveness drops. More importantly, having multiple agencies involved in consumer financial protection may not lead to greater accountability in this space. Without a uniform decision-making process, it would be conceivably harder to keep track of multiple agencies than focusing on one main agency. Moreover, consumer protection would become a neglected objective because it is not any agency’s primary task.89 Instead of reforming the CFPB in accordance to the CHOICE Act (including subjecting it to full congressional appropriation), changing the CFPB’s funding to the hybrid model could be a more suitable means of achieving the optimal level of accountability. The next part of the paper, Part IV, discusses this model in detail.
IV. THE HYBRID FUNDING MODEL
Thus far, I have provided an overview of the CFPB and laid out its major suggested reforms. In Part IV, I seek to build upon this previous analysis and recommends a hybrid funding model as the solution to meet challenges to CFPB’s accountability. The hybrid funding model combines both self-funding and congressional appropriation – each its own funding bucket – to create a novel funding structure for the CFPB. The size of the self-funded bucket is determined by the CFPB, while the size of the appropriated bucket is determined by Congress.
The self-funded bucket supports administrative, operational, general legal costs and other back-office functions of the CFPB.
The congressional appropriation bucket covers costs related to all research, regulatory, supervisory, monitoring, and enforcement activities of the CFPB.
Each bucket remains separate from the other and will not be intermingled under any circumstances, as explained below. The actual source of funding for both buckets would come from assessment fees to be levied by the CFPB upon its covered persons. Before moving on to elaborating the mechanics of the hybrid model, I will first discuss the reasons for choosing this model over other types of reforms for the CFPB.
89 See Levitin, supra note 5, at 328 (noting the “poorly coordinated federal regulatory mélange” that existed prior to the CFPB, as well as the fact that consumer protection as a mission was “orphaned” prior to the CFPB because it was not the primary purview of any federal regulator). A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
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A. Reasons for adopting the hybrid funding model
1. Changing the CFPB’s leadership structure does not adequately check against arbitrary decision-making by the CFPB
There are two possible solutions for reforming CFPB’s leadership structure. The first, as laid out in CHOICE Act, calls for eliminating the for-cause removal protection for the Director of CFPB to ensure responsiveness of the Director to the President.90 However, being responsive to the President does not resolve the problem of arbitrary decision-making. Arbitrary executive decision- making by the President would become better channeled by the Director of the CFPB if the latter can be removed at will by the former. If for-cause removal protection is eliminated, the CFPB could take on a more political agenda reflecting the vested interests of the current administration.91 It may not be realistic to expect the President to ensure that an executive agency uses its power with restraint and acts less arbitrarily. For checks and balances to function well, the CFPB must be held to account by another branch of government. In another words, making the CFPB more dependent on Congress is a better means of achieving accountability for the CFPB than making it more dependent on the President. The second possible reform for changing the CFPB’s leadership structure is to replace the single Director with a multi-member commission similar to that of the SEC. This was the original governance proposal to the CFPB in an initial version of the CHOICE Act.92 The rationale was that a multi-member commission is likely more nonpartisan and thus less prone to arbitrary decision- making.93 In practice, however, this may not be the case. For instance, in recent years, the SEC has been beset with accusations of partisanship despite its multi- member leadership,94 with many decisions split along a 3-2 partisan line.95 The
90 PHH Corporation, et al. v. Consumer Financial Protection Bureau, No. 15-1177, at *56 (D.C. Cir. Oct. 11, 2016) 91 See Brief for Current and Former Members Of Congress as Amici Curiae Supporting Respondent at 13-14, PHH Corporation, et al. v. Consumer Financial Protection Bureau, No. 15- 1177 (D.C. Cir. Oct. 11, 2016) (noting that the for-cause removal protection shields the CFPB from political interests and allows politically unpopular action to be taken). 92 Trump Transition: Financial CHOICE Act — Only the Beginning, DAVIS POLK (Nov. 2016). 93 PH Corporation, et al. v. Consumer Financial Protection Bureau, No. 15-1177, at *21 (D.C. Cir. Oct. 11, 2016) 94 See, e.g., Carmen Germaine, SEC Unlikely To Escape Partisan Chokehold Under Trump, LAW360 (Jan. 20, 2017), https://www.law360.com/articles/883249/sec-unlikely-to-escape-parti san-chokehold-under-trump (noting the partisan decision-making nature of the SEC in recent times). 95 See Mark Schoeff Jr., How Partisan Politics have Poisoned the SEC, INVESTMENTNEWS (May 10, 2015), http://www.investmentnews.com/article/20150510/REG/150509926/how-partisan-politi A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
18 UC Davis Business Law Journal [Vol. 18 side with the majority can be expected to ignore the disagreement from the minority party and engage in decision-making that is considered unfavorable by the minority side. Moreover, commentators have noted the possibility that members in a multi-member commission could possibly trade votes to get each side’s partisan views expressed on different occasions.96 This observation goes against the notion that commissions give rise to more balanced decisions in every instance. While there may be some benefit to gain moving from a single-person leadership to a multi-member commission, this change may not provide the boost that the CFPB needs to meet the challenges to its accountability. Thus, given the inadequacies of reforming the CFPB’s leadership structure, the focus should be on keeping the CFPB accountable through another branch of government. Giving Congress the power to control significant features of the CFPB’s activities through the appropriations process offers a better chance of increasing the CFPB’s accountability.
2. Subjecting a significant portion of the CFPB’s budget to congressional appropriation makes the CFPB more accountable and less able to engage in arbitrary decision-making
Subjecting any regulatory agency to the congressional appropriations process places constraint on that agency.97 As Professor John Coates of Harvard Law School testified before the Senate, the SEC does not have the ability to regulate as it wishes because its budget is subject to the appropriations process.98 Further illustrating this point, the SEC asked for $1.72 billion in funding from Congress for FY 2016,99 but Congress appropriated only $1.55 billion,100 resulting in a shortfall of around $170 million. While the Congress could always
cs-have-poisoned-the-sec/ (noting that there were ten 3-2 partisan decisions during the first two years of Chairwoman Mary Jo White’s leadership). 96 Brief on rehearing en banc of Amici Curiae Financial Regulation Scholars in Support of Respondent, PHH Corporation, et al. v. Consumer Financial Protection Bureau, No. 15-1177, at 12 (D.C. Cir. Oct. 11, 2016). 97 See, e.g., Cyrus Sanati, For S.E.C., Self-Financing Remains but a Dream, N.Y. TIMES (Jun. 25, 2010), https://dealbook.nytimes.com/2010/06/25/for-s-e-c-self-financing-remains-but-a-dream/ (noting that the SEC is highly constrained by the appropriations process to the extent that it did not have sufficient resources for adequate regulation in the aftermath of the financial crisis). 98 Subcommittee on Securities, Insurance, and Investment of the Committee on Banking, Housing, and Urban Affairs United States Senate, Testimony of Professor John C. Coates IV, at 3 (Dec. 14, 2011), http://www.banking.senate.gov/public/_cache/files/1d24b42e-3ef8-4653-bfe8-9c476740faf a/33A699FF535D59925B69836A6E068FD0.coatestestimony121411.pdf. 99 Testimony on the Fiscal Year 2016 Budget Request of the U.S. Securities and Exchange Commission, UNITED STATES SECURITIES AND EXCHANGE COMMISSION (May 5, 2015), https://www.sec.gov/news/testimony/testimony-fy-2016-sec-budget-request.html. 100 H.R.5485, 114th Cong. (2016), https://www.congress.gov/bill/114th-congress/house-bill/5485/ text. A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
Ed 1] A New Way to Fund the Consumer Financial Protection Bureau 19 amend the CFPB’s budget by amending the DFA, modifying its budget through the appropriations process using budget resolutions and reconciliation bills is more flexible.101 If Congress believes that the CFPB is acting in a self-interested manner, it should have the opportunity to use the appropriations process to hold it more accountable. Nevertheless, accountability to some could mean political pressure to others. CFPB’s supporters consider its guaranteed funding to be a vital piece of the CFPB.102 As explained in more detail in the following section, Congress could provide the CFPB with advance appropriations or multiple year budget authority that specifies to some extent its budget beyond its current fiscal year, which could help bridge funding gaps and facilitate better long term planning by the CFPB in an environment of political volatility.103 Budget tools such as advance appropriations could give the CFPB greater confidence to carry out its regulatory mission without jettisoning the accountability that the appropriations framework supplies.
3. The hybrid funding model is a pragmatic compromise that allows the CFPB’s valuable mission to be preserved while enhancing its perceived accountability
The hybrid funding model attempts to bridge the gap between the lack of legal precedents directly ruling the CFPB’s structure unconstitutional and its political opposition and concerns of lack of accountability. The rationale behind the hybrid funding model is pragmatic policymaking and the realization that the CFPB’s current setup is politically unsustainable. To date, there have been no legal precedent that directly posits the CFPB as unconstitutional. The court in Morgan Drexen explicitly stated that “the structure of the CFPB does not violate the Appropriations Clause.”104 Furthermore, the validity of the CFPB as an independent agency has been established by Humphrey’s Executor.105 The nature of CFPB’s quasi-judicial and
101 See supra Part I. 102 See Brief for Current and Former Members Of Congress as Amici Curiae Supporting Respondent, PHH Corporation, et al. v. Consumer Financial Protection Bureau, No. 11-1177, at 15 (D.C. Cir. Oct. 11, 2016) (calling independent funding “absolutely essential to the independent operations of any financial regulator.”). 103 See CONGRESSIONAL RESEARCH SERVICE, ADVANCE APPROPRIATIONS, FORWARD FUNDING, AND ADVANCE FUNDING: CONCEPTS, PRACTICE, AND BUDGET PROCESS CONSIDERATIONS 3 (Oct. 8, 2015), https://fas.org/sgp/crs/misc/R43482.pdf (explaining advance appropriations); Mark Champoux & Dan Sullivan, Harvard Law School Federal Budget Policy Seminar Briefing Paper No. 15, Authorizations and Appropriations: A Distinction Without a Difference?, 15 (May 2006) (discussing multiple year budget authority). 104 CFPB v. Morgan Drexen, Inc., 60 F. Supp. 3d 1082, 1089 (C.D. Cal. 2014). 105 Humphrey’s Executor v. United States, 295 U.S. 602, 602-03 (1935). A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
20 UC Davis Business Law Journal [Vol. 18 quasi-legislative powers closely aligns with that of the Federal Trade Commission, the agency the Supreme Court validated in Humphrey’s Executor. Another precedent, Free Enterprise Fund v. Public Company Accounting Oversight Board, also does not directly support the notion that the CFPB is unconstitutional. The dual-level for-cause removal protection for PCAOB is problematic, the Supreme Court held, because it “withdraws from the President any decision on whether that good cause exists.”106 The holding states that the President must be given the ability to consider whether causes for removal are present. In the context of the CFPB, the President has the ability to determine whether any of the causes specified by statute to remove CFPB’s Director exists: inefficiency, neglect of duty, or malfeasance.107 The CFPB’s single Director with for-cause removal protection is thus distinguishable from PCAOB’s unconstitutional dual-level for-cause removal protection. A creature of its time, the CFPB is unique because the circumstances that led to its creation called for urgency and decisiveness. The financial crisis that started in the United States in 2007 was the most severe economic adversity since the Great Depression as evidenced by the devastating effect on the economic lives of ordinary Americans. Within three years of the onset of the crisis, 13 percent of mortgages in the United States were delinquent or nearing foreclosure.108 Mortgages, of course, are one of the core focuses of the CFPB’s regulatory and enforcement efforts. Beyond mortgages, eight million Americans lost their jobs,109 and with it, their ability to service their loans. In light of the extraordinary circumstances that the financial crisis had created, establishing the CFPB to protect consumers against the plight of their times was a necessary measure. Moreover, the CFPB continues to receive support from the American public. While no poll is free from bias, many results indicate that a significant segment of the American public supports the CFPB’s mission and would like to see it remain as part of the regulatory framework.110
106 Free Enterprise Fund v. Public Co. Accounting Oversight Bd., 561 U.S. 477, 478 (2010). 107 12 U.S.C. § 5491 (2010). 108 Lessons Learned from the Financial Crisis: The Need for the CFPB, CONSUMER FINANCIAL PROTECTION BUREAU (Sep. 15, 2011), https://www.consumerfinance.gov/about-us/newsroom/les sons-learned-from-the-financial-crisis-the-need-for-the-cfpb/. 109 Testimony of Chairman Timothy G. Massad Before the U.S. Senate Committee on Appropriations Subcommittee on Financial Services and General Government (Apr. 12, 2016), at 1, http://www.appropriations.senate.gov/imo/media/doc/041216%20CFTC%20Chairman%20Mass ad%20Testimony.pdf. 110 See, e.g., Nik DeCosta-Klipa, Trump Voters Don’t Want Trump to get rid of Elizabeth Warren’s Consumer Agency, BOSTON.COM (Dec. 21, 2016), https://www.boston.com/news/ politics/2016/12/21/trump-voters-dont-want-trump-to-get-rid-of-elizabeth-warrens-consumer- agency; Nikita Vladimirov, Poll: Trump Voters More Supportive of Federal Spending than other Conservatives, THE HILL (Dec. 20, 2016), http://thehill.com/blogs/blog-briefing-room/news/31116 8-poll-trump-voters-are-more-supportive-of-government-growth-that. A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
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The common theme from challenges to CFPB’s constitutionality is that the CFPB is unaccountable in its current form and poses a threat to liberty. In his initial opinion in PHH Corp, Judge Kavanaugh frequently invoked the concept of liberty to support the elimination of for-cause removal for the CFPB Director.111 The CFPB should be modified, but the modification should not be so foundational (such as those proposed by CHOICE Act discussed earlier in the paper) that it unreasonably undermines the intent behind the CFPB’s original purpose. With the hybrid model, Congress has the flexibility to provide for the CFPB knowing that the CFPB’s essential operations remain self-funded.
B. Mechanics of the Hybrid Model
The hybrid model for funding the CFPB will have two buckets of funding: one that is self-funded, and another that is appropriated by Congress. Each bucket remains separate from the other. CFPB determines the size of the self-funded bucket while Congress determines the size of the congressional appropriations bucket. The critical decision to make, then, is to determine which functions of the CFPB are to be supported by self-funding, and which functions are to be subject to congressional appropriation. The CFPB already breaks down its budget by function in its annual strategic plan, which makes it possible to designate self-funded functions and those earmarked to receive appropriations.
1. Self-funded bucket
Self-funding refers to the act of the CFPB determining the budget. Functions to be self-funded should be relatively uncontroversial as compared to other CFPB functions. Self-funding should not be used to support powers of the CFPB that are quasi-judicial or quasi-legislative in nature, and it should also avoid providing for functions targeted by legislative reforms. This leaves administrative, operational, and general legal costs of the CFPB available for self- funding, even if those functions still ultimately relate to the CFPB’s substantive activities. Along this line of reasoning, the CFPB’s operations, centralized services (which includes costs for facilities, utilities, and IT systems), Office of the Director budget, and other miscellaneous expenses could be designated for self- funding.112 The following table aggregates the components that could be self-
111 Throughout his opinion, Judge Kavanaugh defends his position with the concept of individual liberty. In fact, he uses the phrase “individual liberty” more than 35 times in his opinion. Michael Hiltzik, A Conservative Federal Judge Takes an Overheated Slap at the Consumer Financial Protection Bureau, L.A. TIMES (Oct. 12, 2016), http://www.latimes.com/business/hiltzik/la-fi- hiltzik-cfpb-20161012-snap-story.html. 112 THE CFPB STRATEGIC PLAN, supra note 4, at 18. A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
22 UC Davis Business Law Journal [Vol. 18 funded and calculates their percentages of the total budget. All figures are from FY 2017.
Proposed components of Budget in FY 2017 (in % of total budget CFPB to be self-funded millions) (total budget for FY 2017 is $636.1 million) Office of the Director $10.1 1.6% All operations $135.4 21.3% Centralized services $201.3 31.6% External affairs $9.0 1.4% Legal $16.4 2.6% Total self-funded $372.2 58.6% components
As illustrated by the table above, proposed self-funded expenditures account for 58.6% of CFPB’s budget as of FY 2017. Because the CFPB has the power to determine its budget for these functions under the hybrid model, it has an incentive to classify its activities as part of the self-funded functions. For instance, the CFPB could attempt to re- characterize regulatory activities as part of its ordinary legal expenses, or consumer education as external affairs.113 This problem of re-characterization can be mitigated in two ways. First, the CFPB should be required to provide a detailed breakdown of the use of its self-funded budget at least every quarter to the Office of Management and Budget (OMB). The CFPB should also continue to be subjected to an annual audit by the Comptroller General and the Government Accountability Office as is currently mandated by the DFA.114 If any violation of the conditions of the hybrid model were found, the CFPB would lose its ability to set a self-funded bucket for the next fiscal year, and its entire budget would be subject to congressional
113 For an argument similar to this line of reasoning, see Professor John Coates’s analysis for the SEC regarding rulemaking on disclosures corporate political spending. Professor Coates differentiates “planning” a rule with “finalizing, issuing or implementing” the rule. Pete Brush, Prof Says SEC May Plan Political Money Rule despite Budget, LAW360 (Dec. 22, 2015), https://www.law360.com/articles/740987/prof-says-sec-may-plan-political-money-rule-despite- budget. 114 12 U.S.C. 5497 (a)(5) (2010). A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
Ed 1] A New Way to Fund the Consumer Financial Protection Bureau 23 appropriation. With the pressure of constant reporting and the threat of losing self-funding, the CFPB would be discouraged from aggressively re-characterizing its activities. Second, the CFPB should be made to justify its self-funded budget under greater congressional scrutiny if its self-funded budget exceeds the congressionally appropriated budget by a certain threshold. This could serve as a “self-funded budgetary litmus test” for the CFPB. For instance, if in a particular fiscal year, the CFPB’s self-funded budget is more than twice the congressionally appropriated budget, the CFPB should be required to provide a detailed explanation to justify the size of its self-funded budget before it is presumed to have complied with the conditions of the hybrid model. If the CFPB could not carry this increased burden, then it would lose the self-funding privilege for the fiscal year, and its entire budget would be subject to congressional appropriation. Another potential problem with the self-funded bucket would be a continued lack of accountability for functions covered by it. To give an illustration, the CFPB has been criticized for spending an excessive amount of money to renovate its headquarters in downtown Washington, D.C.115 In July 2015, however, the Inspector General of the Federal Reserve stated in an audit report that the CFPB’s building renovation was a reasonable expenditure.116 Under the hybrid model, costs for building renovation would be considered self-funded as part of the CFPB’s operations. To maintain the purpose behind the hybrid model, the CFPB should be given deferential treatment when it determines its budget with respect to any of its self-funded activities. To deter the CFPB against potential abuses of self-funding power, Congress can reduce the CFPB’s appropriated budget to offset for what it may perceive as lack of accountability in CFPB’s self-funded activities. As discussed above, a reduction of the appropriated budget would correspondingly lower the threshold at which the “litmus test” is triggered.
2. Congressional appropriations bucket
Under the hybrid model, the functions subject to congressional appropriations could include all regulatory, supervisory, monitoring and enforcement powers of the agency. Any funding used by the CFPB in connection with rulemaking, enforcing the 18 enumerated statutes or against UDAAP (a
115 See, e.g., Tim Devaney, GOP Blasts $215M Cost for Consumer Bureau Office with Waterfall, THE HILL (July 2, 2014), http://thehill.com/regulation/211235-ig-report-cfpbs-renovations-spiral- to-215m-in-rented-building (noting congressional criticism against the CFPB’s office renovation cost). 116 OFFICE OF INSPECTOR GENERAL, FEDERAL RESERVE, CFPB HEADQUARTERS CONSTRUCTION COSTS APPEAR REASONABLE AND CONTROLS ARE DESIGNED APPROPRIATELY (July 31, 2015), https://oig.federalreserve.gov/reports/cfpb-headquarters-construction-costs-jul2015.pdf. A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
24 UC Davis Business Law Journal [Vol. 18 separate action from the statutes), and conducting investigations could be provided for through the appropriations process. Funding for market research and the occasionally controversial Consumer Complaints Database could also be subject to congressional appropriation. Funding for any activities that would require a cost-benefit analysis to be performed could also be covered by the appropriations process. Additionally, a catch-all condition should stipulate that any CFPB division, function, or program not expressly provided to fall under the self-funded category is subject automatically to congressional appropriation. The CFPB would be allowed to take the initial step of proposing its suggested appropriated budget, contingent on Congressional approval, and Congress would be given the final authority to determine the size and scope of its appropriation. The following table aggregates the components to be subject to the appropriations process and calculates their percentages with respect to the total budget of the CFPB. All figures are from FY 2017.
Proposed components of Budget FY 2017 (in % of total budget CFPB to be provided for millions) (total budget of FY through the 2017 is $636.1 appropriations process million) Consumer Education and $44.9 7.0% Engagement Research, Markets, and $47.8 7.5% Regulations Supervision, Enforcement, $167.9 26.4% and Fair Lending Other Programs117 $3.3 0.5% Total components subject $263.3 41.4% to appropriations process
As illustrated by the table above, congressionally appropriated expenditures would account for 41.4% of CFPB’s budget based on FY 2017 figures. To achieve a higher degree of customization, Congress, through riders, could specify budget limitations for particular line items.118 Potential targets for a
117 Other programs include expenses for CFPB’s Administrative Law Judges. THE CFPB STRATEGIC PLAN, supra note 4, at 18. A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
Ed 1] A New Way to Fund the Consumer Financial Protection Bureau 25 rider would be the consumer complaints database or CFPB’s UDAAP power. As discussed earlier, both of these areas were suggested for elimination by the Financial CHOICE Act, and may be more likely subject to individualized constraints imposed by Congress.119 A set line item budget could be specifically earmarked for these areas. At the same time, the CFPB should be granted the ability to request from Congress the authority to reprogram the budget for another function within the congressional appropriation bucket.120 Subjecting CFPB’s regulatory, enforcement, and supervisory activities to congressional appropriation could raise concerns that the CFPB may be unable to feasibly plan its future programs due to the potential fluctuation from year to year of its appropriated funding. The CFPB would most likely be adversely affected if faced with a shortage of appropriated funding in a fiscal year. To assuage these concerns, the CFPB could ask for some form of advance appropriations or multiple year budget authority from Congress.121 While these options do not completely obviate the need to revisit the CFPB’s appropriated budget on an annual basis, they do give the CFPB a better understanding of its future budgetary resources. Advance appropriations are funding for an agency or program that become available at least one fiscal year after they were appropriated.122 Advance appropriations, like ordinary appropriations, can be qualified by riders that specify limitations on how they are used.123 Advance appropriations can be further customized by making them available over multiple fiscal years. Putting all the attributes together, advance appropriations can be made available and continuous for any number of years once they have been made accessible one year or more after their authorization.124 Advanced appropriations can give Congress a high degree of flexibility to provide the CFPB with future funding. Advance appropriations could also be a politically expedient method to reach a funding compromise. This is because
118 An example of a rider would be one contained in the Consolidated Appropriations Act, 2016 (also known as the omnibus appropriations bill) barring the SEC from using any funds made available to it under the Act to regulate the disclosure of political spending. H.R.2029, 114th Cong. (2016) (enacted), https://www.congress.gov/bill/114th-congress/house-bill/2029/text. 119 See supra Part III for a discussion of Rep. Hensarling’s proposed reforms to the CFPB. 120 See BUREAU OF THE FISCAL SERVICE, THE FEDERAL BUDGET PROCESS: CRADLE TO GRAVE 29 (Aug. 2014), https://www.fiscal.treasury.gov/fstraining/events/FederalBudgetProcessCradleto GravePARTS1AND2.pdf (discussing the requirements for reprogramming of congressionally appropriated funds). 121 Advance Appropriations, supra note 103, at 3. 122 Id. 123 Champoux, supra note 103, at 14, 19. 124 Advance Appropriations, supra note 103, at 3. A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
26 UC Davis Business Law Journal [Vol. 18 advance appropriations are not considered part of the appropriation for the current fiscal year,125 and thus they enjoy less political visibility. From the CFPB’s perspective, its best case scenario is to receive no-year appropriations (advance appropriations that do not expire) with no riders attached.126 The more likely scenario, however, is for the CFPB to receive advance appropriations for some of its functions that are seemingly on “autopilot.” These functions, such as market research, tend to have relatively stable funding needs from year to year. Congress may not be as willing to provide advance appropriations for more politically-sensitive, market-dependent activities such as rulemaking and enforcement. Even if Congress does provide advance appropriations for these activities, they would unlikely be of the no-year appropriations variety. There exists an inevitable tension between Congress’ interest in exercising tighter budgetary control and an agency’s want in having greater funding certainty, the latter being the primary rationale behind advance appropriations.127 A funding technique similar to advance appropriations is the multiple year authority. A multiple year authority for appropriations is analogous to advance appropriations in the sense that both cover funding need for the future, but there are two major differences between them. First, multiple year authority has to provide funding for a period of more than one year,128 whereas advance appropriations could be made to cover only one fiscal year. Second, unlike advance appropriations, a multiple year authority can begin in the last quarter of a fiscal year.129 To illustrate, a two-year multiple year authority can begin in the last quarter of a fiscal year 0 and end at the end of fiscal year 2 for a total period of 27 months. The availability of funding in the last quarter of a fiscal year could be helpful for the CFPB if it had to determine the scale of its programs in advance of a new fiscal year. While advance appropriations and multiple year authority provide the CFPB with greater funding certainty in the future, it is not unthinkable that the CFPB may find itself running out of funding from the appropriation bucket towards the end of the current fiscal year. This situation is what advance funding addresses. Should Congress choose to provide the CFPB with advance funding, the CFPB would have the ability to shift its appropriation from the succeeding
125 UNITED STATES GOVERNMENT ACCOUNTABILITY OFFICE, A GLOSSARY OF TERMS USED IN THE FEDERAL BUDGET PROCESS 8 (Sept. 2005), https://www.appropriations.senate.gov/imo/media/doc/ glossary-of-terms-used-in-the-federal-budget-process.pdf. 126 See id. at 22 (defining “no-year authority” as budget authority that remains available for obligation for an indefinite period of time). 127 Champoux, supra note 103, at 14. 128 Supra note 125, at 22. 129 Id. A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
Ed 1] A New Way to Fund the Consumer Financial Protection Bureau 27 fiscal year to the last quarter of the present fiscal year.130 The budget for the succeeding fiscal year is reduced correspondingly.131 In the presence of both advance appropriations and advance funding, the CFPB could reallocate its budget to be spent earlier in time. This allows the CFPB to meet and cover any potential shortage of appropriated funding, possibly occurring as a result of unanticipated new rulemaking or a need for more intensive supervision during the year. With the multitude of appropriation techniques available, an acceptable combination for the CFPB’s appropriated funding can be found.
3. Source of funding for the hybrid model
Thus far, the hybrid model has stipulated that the CFPB determines the size of its self-funded budget, while Congress determines the size of its appropriation for the balance of CFPB’s total funding. Regarding the source of funding for the CFPB’s budget, I suggest that the CFPB should move away from its current source, the Federal Reserve System, to levy assessment fees from its covered persons. Assessments from covered persons are a fair source of funding for the CFPB as most of its functions relate to reducing the detrimental impact that covered persons impose on consumers. By causing covered persons to internalize the cost of consumer financial protection, assessments by the CFPB can be construed as a cost of business. To the extent that the CFPB is engaged in activities primarily for the benefit of the general public and the broader economy (such as its consumer education programs), the CFPB could draw from the federal government’s general revenue. As the CFPB’s supervisory power with respect to covered persons is already segmented by asset sizes, assessment fees can also be tiered in accordance to the entities’ asset sizes. In levying assessments from covered persons, the CFPB could follow the examples of the Federal Depositary Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA).132 As the FDIC and the NCUA provide depository insurance to banks and credit unions respectively, they are funded by depository insurance premiums that they each levy to meet a certain reserve ratio at set assessment rates.133 For an
130 Id. at 8. 131 Advance Appropriations, supra note 103, at 3. 132 See Brief for Americans for Financial Reform et al. as Amici Curiae Supporting Respondent, PHH Corporation, et al. v. Consumer Financial Protection Bureau, No. 15-1177, at 7-8 n.2 (D.C. Cir. Oct. 11, 2016) (noting that federal bank regulators similar to the CFPB, including the FDIC, the NCUA, the Federal Reserve, and the Office of the Comptroller of Currency, are self-funded). 133 CONGRESSIONAL RESEARCH SERVICE, INDEPENDENCE OF FEDERAL FINANCIAL REGULATORS: STRUCTURE, FUNDING, AND OTHER ISSUES 27 (Feb. 28, 2017), https://fas.org/sgp/crs/misc/ R43391.pdf. A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
28 UC Davis Business Law Journal [Vol. 18 institution insured by the FDIC, its assessment is equal to its assessment rate multiplied by assessment base. The FDIC’s current assessment rates are a function of the depository institution’s risk profile, and range from 1.5 basis points (one basis point equals 0.01%) to 30 basis points per $100 of assessment base.134 Historically, the FDIC’s assessment base has been domestic deposits,135 but under the DFA, the FDIC has modified its definition of assessment base to average consolidated total assets less average tangible equity.136 Conceptually, the NCUA’s assessments are levied based on a similar principle to the FDIC.137 The PCAOB also provides an illustrative example in its collection of accounting support fees, collected from issuers as well as brokers and dealers.138 For an issuer, its accounting support fees are calculated based on its proportion of market capitalization relative to the market capitalization of all regulated issuers. For a broker or dealer, its accounting support fees are calculated based on the proportion of net capital the broker or dealer has relative to the sum of all net capital of regulated brokers and dealers.139 The PCAOB weighs each issuer or broker-dealer’s obligation to pay its share of accounting support fees based on its size relative to its peers. Following the examples of the FDIC and the PCAOB, the CFPB can base its collection on the asset sizes of its covered persons to impose its assessment fees. Because the CFPB’s regulatory power with respect to banks and depository institutions with assets greater than $10 billion is the most comprehensive relative to other covered persons under CFPB purview,140 CFPB’s primary focus for assessment should be on these entities. As of June 30, 2016, there are 113 banks and depository institutions with assets greater than $10 billion, with total assets worth $13.7 trillion.141 If the sum of $13.7 trillion is used as the assessment base, an assessment rate of around 0.46 basis point per $100 of assessment base is needed to reach the $636.1 million FY 2017 figure for the CFPB’s budget. In practice, this means that
134 Current Assessment Calculators, FEDERAL DEPOSIT INSURANCE CORPORATION (Dec. 31, 2016), https://www.fdic.gov/deposit/insurance/calculator.html. 135 12 CFR Part 327 (2011), https://www.fdic.gov/deposit/insurance/11rulead35.pdf. 136 12 CFR Part 327 (2011), https://www.fdic.gov/deposit/insurance/11rulead35.pdf. 137 Projected 2017 Share Insurance Fund Premium and Stabilization Fund Assessment Range, NATIONAL CREDIT UNION ADMINISTRATION (Nov. 29, 2016), https://www.ncua.gov/regulation- supervision/Pages/policy-compliance/communications/letters-to-credit-unions/2016/10.aspx/. 138 PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD, Accounting Support Fee, https://pcaobus. org/About/Administration/Pages/SupportFee.aspx. 139 Id. 140 See discussion supra Part II.B.2. 141 CFPB Banks and Thrifts (Based on 6/30/16 Total Assets), CONSUMER FINANCIAL PROTECTION BUREAU https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/CFPB_Institutions_20160630_ Dist.pdf. A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
Ed 1] A New Way to Fund the Consumer Financial Protection Bureau 29 the largest institution supervised by the CFPB, JPMorgan Chase, with an asset size of more than $2 trillion, would pay around $92 million to the CFPB for its assessment fee.142 On the other hand, the smallest bank with assets greater than $10 billion, First Midwest Bank, would pay $460,000 to the CFPB.143 Understandably, this method of assessment imposes an almost disproportionately heavy burden on banks with large balance sheets. Because the risks posed by financial institutions to consumers is not perfectly correlated with the institution’s asset size, using this system of weighing may not be fair or politically palatable. Thus, other methods for imposing assessment fees should be considered. The simplest method would be to impose a uniform fee of around $5.63 million for every institution with assets greater than $10 billion to reach the sum of $636.1 million for FY 2017. A slightly more tailored assessment system could impose an assessment fee for institutions within different bands of asset sizes. The following table illustrates one possible form of this segmented assessment system:144
Asset size band Number of Assessment Total assessments institutions fee per within band institution >$50 billion 41 $6 million $246 million $20 billion - $50 40 $5.5 million $220 million billion $10 billion - $20 32 $5 million $160 million billion Total 113 - $626 million
The $626 million assessment fees levied under this system approximates the $636.1 million budget for the CFPB in FY 2017. Assessment fees could be adjusted to meet the CFPB’s budgetary needs on an annual basis to cover any shortfalls, and they can be supplemented with funding from general revenue. Furthermore, assessment fees levied on banks and depository institutions could be reduced to the extent the CFPB can systemically levy assessment fees on other institutions engaged in consumer finance. The CFPB also supervises mortgage originators and servicers, payday lenders, private student loan lenders,
142 Id. 143 Id. 144 Id. A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
30 UC Davis Business Law Journal [Vol. 18 as well as market participants in other areas related to consumer finance.145 If the CFPB could create an assessment scheme that accurately and fairly imposes costs on these additional organizations, then the CFPB should do so to reduce the assessment fee burden for banks and depository institutions. With respect to banks and depository institutions with less than $10 billion in assets, the CFPB already cedes the exclusive authority to supervise and enforce to other financial regulators.146 Because of this practice, the CFPB should not attempt to impose assessment fees against these entities under this proposed assessment scheme. The CFPB could vary its assessment fees on a case-by-case basis depending on how frequent and in-depth its monitoring and supervisory activities are with regards to an entity.147 This flexible measure is similar to that used by the Financial Industry Regulatory Authority (FINRA), which receives “contract services revenues” for its regulatory services, furnished by such things as investigations and examinations.148 FINRA collects both contract services revenue in addition to annual assessments.149 Based on the extensiveness of its monitoring efforts, the CFPB could impose additional fees as necessary and appropriate. It is important to note that the funding for supervisory and monitoring activities are subject to congressional appropriation,150 and thus the fees collected by the CFPB through its monitoring efforts are conceptually distinct from that of a revolving fund.151 During fiscal years when assessments collected exceed the CFPB’s budget, the surplus should be deposited into a mechanism similar to the SEC’s reserve fund. The DFA allows the SEC to establish a reserve fund, into which the
145 Institutions Subject to CFPB Supervisory Authority, CONSUMER FINANCIAL PROTECTION BUREAU, https://www.consumerfinance.gov/policy-compliance/guidance/supervision-examinations /institutions/ (last visited Nov. 3, 2017). 146 See discussion supra Part II.B.2. 147 See CONSUMER FINANCIAL PROTECTION BUREAU, CFPB SUPERVISION AND EXAMINATION MANUAL, OVERVIEW 11 (Oct. 2012), http://files.consumerfinance.gov/f/201210_cfpb_supervision- and-examination-manual-v2.pdf (noting that CFPB’s monitoring efforts will vary in “frequency and depth” based on an organization’s risk profile). 148 FINANCIAL INDUSTRY REGULATORY AUTHORITY, FINRA 2015 YEAR IN REVIEW AND ANNUAL FINANCIAL REPORT 19 (2016), https://www.finra.org/sites/default/files/2015_YIR_AFR.pdf. 149 Id. at 44. 150 See discussion infra Part IV.B.2. 151 A revolving fund is used to support “businesslike operations.” For instance, if the amount of funding the CFPB can spend on future monitoring and supervision efforts is dependent upon the amount of fees it has collected from past monitoring and supervision efforts, then this arrangement would fall under the concept of a revolving fund. UNITED STATES GENERAL ACCOUNTING OFFICE, OFFICE OF THE GENERAL COUNSEL, PRINCIPLES OF FEDERAL APPROPRIATIONS LAW, THIRD EDITION VOLUME III 86 (Sep. 2008), http://www.gao.gov/assets/210/203470.pdf. However, under the proposed hybrid model, the amount the CFPB can spend on monitoring and supervision is not dependent upon how much it has collected in the past, but rather on a limit set by Congress, so the collected fees are not considered a revolving fund. A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
Ed 1] A New Way to Fund the Consumer Financial Protection Bureau 31
SEC is permitted to deposit up to $50 million annually, with the fund limited to a maximum balance of $100 million.152 The SEC can use its reserve fund in any year for any purpose, but it must notify Congress within 10 days each time after dipping into the fund.153 Analogously, the CFPB could have a reserve fund set up for its own use. Given that $100 million is approximately 6.5% of the SEC’s $1.55 billion budget in 2016, the CFPB’s reserve fund could have a limit of $41 million, which is around the same percentage for its budget of $636.1 million in FY 2017. Annually, the CFPB could be allowed to deposit $20 million into the reserve fund. The CFPB should be allowed to withdraw from its reserve fund at any time and use the fund for any purpose, but similar to the requirement imposed on the SEC, the CFPB should notify Congress of its use of the reserve fund. The reserve fund provides the CFPB with buffer in case it faces a budget shortfall in a particular year. If the reserve fund is fully filled, any excess of assessments over the total budget should be turned over to the Treasury Department. Lastly, Congress should have the authority to force the CFPB to reduce its assessment fees if it believes that the CFPB is imposing an undue burden upon its covered persons. Congress could cover any shortfall in the CFPB’s budget as a result of a reduction in assessment fees with funding from the general revenue.
C. Evaluation of the Hybrid Model
The hybrid funding model is not without its potential drawbacks. It is a complex design. The compromise that it seeks to reach may not be easy to implement given the potential difficulties with separating out the various functions and their budgets into neat silos. The CFPB has to deal with the burden of tracking the funding in its activities to ensure that there is no spillover from one bucket to the other. Monitoring the CFPB would also be difficult for the same reasons. Nevertheless, despite the potential complications of the hybrid funding model, its advantages likely outweigh its disadvantages when viewed in light of the two common options for funding federal financial regulators: full self-funding or full congressional appropriations. Full self-funding is politically unworkable at this moment. On the other hand, subjecting the entire budget of the CFPB to congressional appropriations could lead to fluctuations in its funding levels depending on the prevailing majority in Congress. The current Republican majority in Congress could effectively shrink the CFPB by reducing its level of
152 Letter from Carl W. Hoeker, Inspector General, Office of Inspector General, to Mary Jo White, Chair, Securities and Exchange Commission, and Jeffery Heslop, Chief Operating Officer, Securities and Exchange Commission 2 (Jul. 6, 2015), https://www.sec.gov/files/evaluation-of-sec- use-of-reserve-fund.pdf. 153 Id. A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
32 UC Davis Business Law Journal [Vol. 18 funding.154 Uncertainty in funding could hamper the CFPB’s ability to plan and perform for the long term. Moreover, political swings may not perfectly correspond with market developments. For example, in the buildup to the financial crisis, the SEC’s staffing level was actually reduced.155 Without the buffer of self-funding, the CFPB could suffer a similar mismatch sometime in the future. Those who believe in the need for a compromise in funding may suggest that the solution could come from changing its level of funding in the DFA. The CFPB’s current annual budget cap stands at 12% of the operating expenses of the Federal Reserve.156 In 2015, the proposed “Bureau of Consumer Financial Protection Advisory Boards Act” sought to limit the budget of the CFPB in this manner by setting a numerical statutory limit.157 While a numerical limit is simple, it is rigid as well. Even though the rigidity of the numerical statutory limit can be ameliorated by a formula that increases or decreases the CFPB’s funding in response to certain conditions, no matter how creative the formula is, it suffers from the same problem as the current structure: once set in statute, Congress needs a 60-vote supermajority to overcome a filibuster in order to modify it. In addition, a numerical budgetary limit embedded in a statute is a blunt tool for holding the CFPB more accountable, because it cannot proscribe the CFPB from using the funding to engage in any particular activities, or to provide the CFPB with adjustments for unanticipated developments that techniques such as advance funding could offer. All in all, after taking into account the need for independence, accountability, and flexibility, the hybrid funding model offers a promising answer. Backed by quarterly reporting obligations, monitoring by the OMB, and an annual audit by the GAO, the hybrid model has the potential to be implemented and positively reshape the CFPB for the future.
V. CONCLUSION
A creature born in the wake of the financial crisis, the CFPB is as powerful as it is controversial. Because its current funding source is guaranteed, Congress cannot exercise its power over the appropriations process to influence the CFPB. To render the CFPB more politically acceptable, the CFPB’s current
154 For a similar line of argument for the SEC and the CFTC, see Levitin, supra note 10 (noting that because the SEC and the CFTC are subject to congressional appropriations, they have been “quietly asphyxiated” through budgetary constraints). 155 Speech by SEC Chairman: Statement Concerning Agency Self-Funding, SECURITIES AND EXCHANGE COMMISSION (Apr. 15, 2010), https://www.sec.gov/news/speech/2010/spch041510mls .htm. 156 12 U.S.C. § 5497(a)(1)-(2) (2010). 157 H.R.1195, supra note 73. A NEW WAY TO FUND THE CONSUMER FINANCIAL PROTECTION BUREAU_FINAL MACRO.DOCX (DO NOT DELETE) 11/22/2017 10:57 AM
Ed 1] A New Way to Fund the Consumer Financial Protection Bureau 33 funding model should be replaced with a new hybrid funding model, combining both self-funding and congressional appropriations. Under this model, CFPB’s operational components would be self-funded, while its regulatory, enforcement and research functions would be subject to appropriations purview. The hybrid funding solution aims to provide both agency autonomy and congressional accountability for the CFPB, and it ensures that the CFPB has the resources to continue its vital mission of providing financial protection to American consumers.