The Consumer Financial Protection Bureau's Lack of Candor to the Court, Continued

By Adam J. White Yale Journal on Regulation February 03, 2023

Having closely followed the Consumer Financial Protection Bureau since its inception, I’m struck by the arguments that the CFPB is now making to the Supreme Court. After all, they squarely contradict a decade’s worth of the CFPB’s own statements. I’ve detailed that on Notice & Comment and elsewhere, but here is one more example, involving a 2016 brief that the CFPB filed with the Government Accountability Office.

As I sketched out in an earlier post, the Dodd-Frank Act perpetually empowers the CFPB to claim nearly $1 billion dollars from the Federal Reserve annually, funds that would otherwise revert to the U.S. Treasury. All of this is a function not of appropriations laws, but of the Dodd-Frank Act of 2011, and it poses a real problem under the Constitution, which requires that “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” 

As I suggested in my earlier post, this grant of perpetual power for the CFPB to fully fund itself seems an outright delegation of Congress’s power of the purse, allowing it to spend Treasury funds without appropriations by law.........To Read More...

How the U.S. Supreme Court Will Decide the Threat to CFPB’s Funding and Structure: Part I - The eyes of the consumer finance world are now on the Supreme Court as it decides whether to grant the CFPB’s certiorari petition in CFSA v. CFPB. In the decision, a Fifth Circuit panel held the CFPB’s funding mechanism violates the Appropriations Clause of the U.S. Constitution. We first review the background of CFSA’s lawsuit, the mechanism through which the CFPB is funded, and Congress’s policy rationale for the mechanism. We then examine the reasoning behind the Fifth Circuit’s conclusion that the funding mechanism is unconstitutional, the CFPB’s strategy in response to the decision, and the issues CFSA is expected to raise in a cross-petition for certiorari............

How the U.S. Supreme Court Will Decide the Threat to the CFPB’s Funding and Structure: Part II - The eyes of the consumer finance world are now on the Supreme Court as it decides whether to grant the CFPB’s certiorari petition in Consumer Financial Services Association Ltd. v. CFPB. In the decision, a Fifth Circuit panel held the CFPB’s funding mechanism violates the Appropriations Clause of the U.S. Constitution................. 

Appeals court finds CFPB funding unconstitutional

A three-judge panel of the 5th U.S. Circuit Court of Appeals ruled in a case brought by a payday lending group against the CFPB's 2017 payday lending rule.

 

By Katy O'Donnel 10/19/2022 

An appeals court on Wednesday ruled that the Consumer Financial Protection Bureau’s funding mechanism is unconstitutional, in a victory for lenders that have targeted the agency’s structure in a years-long bid to tamp down regulation.

A three-judge panel of the 5th U.S. Circuit Court of Appeals ruled that the design of the CFPB violated the Constitution because it receives funding through the Federal Reserve, rather than appropriations legislation passed by Congress. Democrats established the structure when they created the CFPB in the 2010 Dodd-Frank law as a way to shield the bureau from political pressures that could impact its oversight of the finance industry............“Congress’s decision to abdicate its appropriations power under the Constitution, i.e., to cede its power of the purse to the Bureau, violates the Constitution’s structural separation of powers,” the judges wrote...........The Supreme Court in 2020 ruled that another provision of the agency’s structure — a single director who could only be fired for cause, rather than at will, by the president — violated the Constitution’s separation of powers............To Read More....

Consumer Financial Protection Gone Awry

By Star Parker April 13, 2022 

The crises of recent years tend to erase from memory those that preceded them. One, as you may recall, was the financial collapse of 2008 -- a collapse deemed by many as the worst since the Great Depression. That collapse swept into power a government like the one we have now -- the White House and both houses of Congress controlled by Democrats...............Indeed, the new Democrat administration followed this advice and used the financial crisis as an opportunity for a major expansion of government.

Democrats wasted no time to ascribe the financial collapse to business greed and insufficient regulation of banks and other financial institutions. In 2010, the 2,300-page Dodd-Frank Act was passed -- with no Republican votes in the House and three in the Senate -- adding 400 new regulations on financial institutions. Included in this tsunami of new financial regulation was the creation of a new independent agency -- the Consumer Financial Protection Bureau............ Now our financial institutions -- banks, securities firms, credit unions, payday lenders, etc. -- fall under the purview of the Consumer Financial Protection Bureau and must submit to its scrutiny and oversight.

The CFPB has just announced sweeping new changes in its "supervisory operations to better protect families and communities from illegal discrimination"  Firms must make available to CFPB "their processes for assessing risks and discriminatory outcomes, including documentation of customer demographics and the impact of products and fees on different demographic groups."...........Can a government bureaucrat really determine why a banker did or did not make a loan, and should the heavy hand of government be involved here?..............By 2008, according to Wallison, just before everything collapsed, "More than a majority of all mortgages in the U.S. financial system was sub-prime, required low or no down payment, or were otherwise risky.".............Today, Democrats are back at it.

CFPB Director Rohit Chopra is gearing up to use his almost unilateral power to show he knows better than business and the marketplace what is good for consumers..........To Read More..

The Volcker Winter Storm — Bad Rule, Worse Implementation

by John Berlau on December 11, 2013

This appeared here and I wish to thank John for allowing me to publish his work.  RK

On a snowy day in Washington, several federal agencies packed some mean regulatory snowballs that will most likely overshoot their supposed destination of Wall Street and crash-land with a thud on the businesses and investors of Main Street. Rather than postpone the planned vote on Tuesday, when the federal government was officially closed, agencies sheltered themselves from public view and pushed through the rules.

According to USA Today, “CFTC spokesman Steven Adamske said his agency will not hold a public meeting, but commissioners will approve the rules in writing.” This lack of transparency on voting on the rule was symptomatic of a series of last-minute changes from the rule the agencies had initially proposed two years ago. The agencies never submitted these changes for public comment, and thus according to a Reuters analysis, may be vulnerable to lawsuits for violation of the Administrative Procedure Act.

Beyond that, nothing good ever comes when the government utilizes an opaque process to force “transparency” on the private sector. For all the supposed “toughness” of the new rule, there is nothing specific that would prevent something like J.P. Morgan’s much-despised “London whale” trade.

In the meantime, the new rules could sharply reduce the stream of initial public offerings that have been propelling the stock-market upsurge. And just as regulatory impediments to smaller IPOs were relaxed modestly with the bipartisan Jumpstart Our Business Startups (JOBS) Act signed by President Obama last year, the Volcker rule will likely erect new barriers to market making by Main Street banks underwriting the offerings of these smaller firms.

Even as written in the Dodd-Frank financial “reform” statute, the Volcker rule was a solution in search of a problem, or in search of a factor that was not even a minor cause of the financial crisis. The provision, often referred to a “Glass-Steagall lite” – after the 1930s law that was repealed by President Clinton in 1999 – maintains Glass-Steagall’s false dichotomy of inherently “risky” trading and inherently “safe” lending.

And it doesn’t ban or restrict trading based on level of risk, but on whether the trading is ”proprietary.” Most discouragingly, in the statute and in today’s edict, the Volcker Rule contains explicit exemptions for trading in risky government-backed securities, such as municipal bonds and foreign sovereign debt.

There is no evidence that proprietary trading — a bank trading for its own portfolio — is more dangerous than executing trades for customers. In the leadup to the financial crisis, banks traded mortgage-backed securities for themselves and for their customers, but at bottom the instruments were dangerous due to the underlying mortgage loans — loans encouraged by governmental entities such as Fannie Mae and Freddie Mac and by mandates such as the Community Reinvestment Act.

Moreover, even the rule’s architect, former Federal Reserve Chairman Paul Volcker, concedes that banks must do some incidental trading for their own portfolios to carry out other functions. This type of trading includes buying shares to “make markets” for companies they take public and to hedge the risk of ordinary loans such as mortgages.

But in practice, it’s very difficult to tell which type of trading is “proprietary.” As former Sen. Ted Kaufman, D-Del., who (wrongly) advocates bringing back Glass-Steagall, wrote in Forbes Tuesday after the rules were released:

Who’s to know what’s a hedge, what’s market making (trading on behalf of clients), and what’s trading for the bank’s own account? The paper trails can be inconclusive. Like angels on pins, there is never going to be an answer.

And IPOs, particularly for smaller companies, are likely to take a hit. In order to underwrite a stock market offering, banks have to engage in “market making.” They “make” a liquid market for the stock by buying shares in the company to generate demand. But the new rule, according to various interpretations (that will be further revised as the new language is examined), puts many new burdens on this traditional practice.

According to The Wall Street Journal, “the rule … will require banks to provide ‘demonstrable analysis of historical customer demand’ for financial assets they buy and sell on behalf of clients.” But how does a bank show “historical customer demand” for a company that has never gone public before?!

This could have the biggest impact on smaller IPOs, in which banks can’t easily measure “historical demand” and would have to likely buy more shares to create more demand than they would for a larger firm. Some banks may look at the compliance costs, and simply not underwrite smaller IPOs, harming innovation by entrepreneurs and wealth-building by ordinary investors.

This could also slow the growth of IPOs underwritten by non-Wall Street banks. In recent years, and since the modest regulatory relief from some Dodd-Frank and Sarbanes-Oxley provisions from the JOBS Act, regional banks such as Atlanta-based SunTrust and Cleveland-based Key Bank, have increased their sponsorship of new companies going public.

And in further showing that the Volcker Rule and its implementation is not focused on preventing risk, the new rules contain explicit and blanket trading exemptions for municipal bonds and foreign-based sovereign debt. And exemptions for banks to buy and sell securities in Fannie and Freddie, the two proximate causes of the crisis, were already in the Dodd-Frank statute.

The Volcker Rule may create the “perfect storm” of lessened innovation in the private sector and more-of-the-same gambling by government.