Warren’s Legacy Lives on at the Ridiculous “Consumer Financial Protection Bureau”

While Elizabeth Warren’s candidacy is over, her legacy and, more importantly, her politicized vision of rulemaking lives on in the Consumer Financial Protection Bureau. It’s easy to forget but in late November 2018, two government administrators showed up for the same job: to run the most powerful federal agency created in a generation, the Consumer Financial Protection Bureau. 

Filling a job vacated by outgoing director Richard Cordray, a Trump administration interim appointee, Mick Mulvaney, and Obama-era appointment, Leandra English, both essentially constituted themselves as acting Director (with accompanying dueling memos!).

One would think this seeming premise to an Office episode would be a cause of concern for defenders of consumer protection at the federal level. After all, no other bureau experienced administrative quagmires of that magnitude despite other examples of former adversaries taking over the reins of a reluctant agency. Yet the outrage at the time appeared driven more by frustration with Trump’s appointment of Mulvaney than the agency’s own murky constitutional underpinning. 

As a reminder, the CFPB was created as part of the Dodd-Frank reform act. Led by progressive stalwart—and now former presidential candidate—Elizabeth Warren, the agency was predicated on the assumption that consumers were not adequately recognized at the federal level due to pernicious influence by the financial industry. To provide consumers with adequate protection from financial firms, an agency with unprecedented administrative powers was warranted.

The bureau officially opened up for business in 2010 and soon dispatched game-changing rulings on everything from home mortgages to cell phone plans. In addition, the CFPB targeted specific banks and other financial firms to redress consumer wrongs. The trouble was that many of these efforts provided dubious benefits for consumers while creating real costs and constraints on credit markets. Moreover, a heavy emphasis on enforcement pushed firms away from services like free checking and private student loans. 

In the case of Ally Financial, the agency essentially strong-armed a financial company into settling a discrimination case. Ally had a pending application with the Federal Reserve to become a financial holding company, which would allow the company to maintain several key non-bank operations. The CFPB then used this as leverage to close a settlement case so that the application could be approved. (So much for nudges!)

The case of Ally is not the only incident where the bureau appeared to exceed their original mandate. In 2013, the CFPB released a bulletin entitled, “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act” that constrained how banks could offer credit to auto lending companies, allegedly in the name of credit fairness and eliminating racial bias. The presumption was that auto dealers were discriminating in assigning different interest rates to different customers in a way motivated by racial bias. The legitimacy of this claim is questionable given that those most vocally opposed to the legislation were members of the Congressional Black Caucus.

More recently, a California-based law firm named Seila Law sued the CFPB for violating the separation of powers due to the fact that its director cannot be removed from office except for cause. This in essence makes the appointment unaccountable to any branch of government, including the executive office. Indeed, over the course of his interim appointment, Director Mulvaney reversed many of the decisions made during the Obama administration with little in the way of Congressional interference. This court decision could even shut down the CFPB itself, though removal of the protective status of CFPB’s director is more likely. 

This seemingly unexpected trajectory for such a powerful agency is indeed foreseeable. In 2012, George Mason University law professor Todd Zywicki predicted the CFPB’s relatively loose constitutional structure would create long-term difficulties, including “a tunnel-vision selection bias and commitment to the regulatory mission, systematic risk-averse bias in agency decision-making, a tendency toward agency overreach and expansionism, and a heightened risk of regulatory capture by industry participants.”

As Zywicki’s analysis demonstrates, political institutions guide human behavior in predictable ways, even when this departs from the underlying set of motivating ideas. Put another way, people are far more malleable than institutions, and so reliance on the former without the hard constraints provided by the latter is a fool’s errand. Or as George Mason University Law Professor J.W. Verret explains, “If the CFPB’s single-director structure is the problem, Warren and others who designed it have only themselves to blame for not adopting a more deliberative bipartisan commission.”

A Warren presidency is no longer in the offering but her vision and those who share it continues to inform the political process, and this drives the likelihoods associated with various political outcomes. Tyler Cowen recently outlined multiple policy issues with the Warren campaign. In his withering critique, Cowen exposed the dangers a Warren administration would pose for the country’s institutions given her stated policy positions on health care, education, technology, financial regulation, etc. 

Nevertheless, many feel Warren’s vision is necessary to shake up the elites in a way that removes rent-seeking from the economy, with her more corrosive policies likely to fall short of congressional approval anyway. Indeed, Sheila Bair writing in the WSJ even calls these policies “market-oriented” with the goal being that everyone be included in the financial marketplace.

Speculating on these issues would seem to come down to political priors on whether the financial system is rigged, except for the fact that we already have evidence of what Warren’s vision would produce in the form of the CFPB: a reckless agency that has fallen far short of the vision of its founder. 

It is perhaps worth reminding ourselves what F.A. Hayek wrote in The Constitution of Liberty that “a belief, seemingly shared by many scientists, [is] that the range of our ignorance is steadily diminishing and that we can therefore aim at more comprehensive and deliberate control of all human activities. It is for this reason that those intoxicated by the advance of knowledge so often become the enemies of freedom.”

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