Can the Consumer Financial Protection Bureau Harm the Economy Yet?

Richard Cordray, the former Attorney General of Ohio and the nominee to be the new head of the Consumer Financial Protection Bureau (CFPB), had his confirmation hearing today before the Senate Banking Committee.

What can the CFPB do before he is confirmed? To some extent, there is a good deal of dispute. The American Bankers Association maintained that, because the bureau was meant to be mostly a one-man show, the CFPB can do little without an official Director. But the Treasury Department’s Inspector General says otherwise. In a January 2011 letter, Treasury asserted that Section 1066 of Dodd-Frank gives the Secretary of the Treasury the authority to do many of the things that the Director would otherwise be able to do until a Director is confirmed.

Specifically, if a law is currently on the books, such as the Truth in Lending Act, the Fair Credit Reporting Act, and the Equal Credit Opportunity Act, Treasury can enforce its provisions. Certain powers were transferred effective July 21, 2011 to the CFPB from other agencies. If those other agencies had those powers before, then Treasury insists that they have them now.

What the CFPB and Treasury cannot do, however, is create new law (yes, you read that right: law can indeed be created by an unelected bureaucracy under Dodd-Frank). Treasury agrees that it only has authority to enforce existing law, not to create new rules and regulations, most prominently the power to declare bank practices “abusive.” They also don’t have the authority to create rules for payday lenders and mortgage brokers who aren’t banks under the law.

CFPB will more than likely seek to create law by investigation, however. They can investigate banks and lenders to their heart’s content. Unless the target fights off the investigation, a settlement of some sort will set precedent for others.

Without certainty in terms of what the CFPB can and cannot do, the financial industry is on pins and needles wondering if and when Richard Cordray will be confirmed, or whether Congress will reform the law itself. Regulatory uncertainty is one of the driving factors for the economic stagnation we see today, and the strange (and unconstitutional) set-up and implementation of the CFPB is a major roadblock for economic recovery.

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