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Chairman Andy Barr (R-KY), left, and Rep. Byron Donalds (R-FL) attend the House Financial Services subcommittee hearing on the Consumer Financial Protection Bureau, March 9, 2023.
A Republican witness appearing at a House Financial Services Committee hearing on reforming the Consumer Financial Protection Bureau said Thursday that other financial regulatory agencies in the federal government that receive funding outside of the appropriations process are also out of compliance with his understanding of constitutional principles.
That sounds pretty obscure. But the testimony, from Devin Watkins of the Competitive Enterprise Institute, highlighted the serious threat presented from a federal court ruling, now pending for review at the Supreme Court, about the constitutionality of the CFPB’s funding structure. Opponents of the consumer agency have taken pains to argue that CFPB is somehow different from other agencies that receive some or all funding from somewhere other than appropriations—like the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the National Credit Union Administration, the Federal Housing Finance Agency, and several others. But Watkins was logically consistent in his view that all of those agencies are unconstitutional as currently structured.
Watkins even went so far as to recommend that Congress provide “conditional funding” to every agency in the government whose funding sits outside appropriations, in case such funding is ruled unconstitutional by the Supreme Court. In written testimony, he said, “Any ambiguity regarding the constitutionality of the Federal Reserve’s or other financial institution’s actions could result in significant problems throughout the financial system.”
The hearing thus inadvertently revealed a far-right mission to hobble the administrative state. Anger over the CFPB’s successful protection of consumers from financial predation has led to a theory about the appropriations process that could, by Watkins’s own admission, knock out a significant portion of the federal government—particularly the financial regulatory apparatus.
Rep. Andy Barr (R-KY), chair of the Subcommittee on Financial Institutions and Monetary Policy that held the hearing, tried to temper Watkins’s remarks by asking witnesses to “address these sky-is-falling concerns” that the upcoming Supreme Court ruling “would call into doubt the other federal bank regulators.” But Watkins was insistent, replying that “it isn’t just the CFPB. There are other agencies out there that do have non-appropriated funds, and Congress should review those as well and think about how to return those agencies to congressionally funded appropriations process as well.”
At issue is a ruling from the conservative Fifth Circuit Court of Appeals in a case involving payday lenders, claiming that Congress has “exclusive power over the federal purse,” and that the CFPB’s funding from the Federal Reserve, which gets its funding from bank assessments, is “double insulated” from congressional appropriations, since it gets money outside the process from an agency that gets money outside the process.
CFPB, in a statement when the ruling was announced, also noted that numerous mandatory programs, including Medicare and Social Security, are funded outside the appropriations process, and a rigid ruling about Congress’s exclusive power could throw those into question as well. (It’s also profoundly odd to argue that because Congress has exclusive power over the purse, it should face drastic new restrictions on how its laws fund decades-old agencies and programs.)
The hearing thus inadvertently revealed a far-right mission to hobble the administrative state.
The Fifth Circuit tried to limit the damage this would cause by claiming that CFPB’s “double insulation” sets it apart in some manner. But the internally consistent conclusion to the court’s claim, since double insulation is a concept that exists nowhere in the law or Constitution, is that any agency funded outside appropriations violates the law. Watkins made that claim on Thursday, much to the chagrin of Republican lawmakers.
Rep. Bill Foster (D-IL), the ranking member of the subcommittee, explained to Watkins that the Federal Reserve had consumer protection authority prior to the CFPB’s establishment. “In your view, was that unconstitutional?” Foster asked.
“It is my view that all federal agencies including the Federal Reserve should go through the federal appropriations process for their budget,” Watkins replied.
Foster countered, “So your view is it’s perfectly fine the next time Jay Powell comes in front of us, we say, ‘Look, if you raise interest rates we’re going to cut your budget.’ Do you think that’s a good future for the United States?”
“I don’t think that’s what Congress should do. I think it’s perfectly appropriate if you think the Fed is doing a good job to give it the money that it’s asking for,” was Watkins’s response. Congress set up the CFPB’s funding structure under the Dodd-Frank Act to maintain the very independence that Foster was describing with respect to the Fed.
Brian Johnson, a former CFPB deputy director in the Trump administration who now works for a corporate consultant and litigation support firm, tried to clean up Watkins’s commentary. He claimed that CFPB is different from other agencies that have a safety and soundness mission, and therefore can get money from the banking industry to serve that valuable purpose for financial institutions. Because CFPB is a market conduct regulator without a safety and soundness imperative, Johnson said, it stands apart.
Foster called this explanation a “tortured attempt,” adding that CFPB provides its own service of policing the market for bad actors, which is valuable to the rest of the industry.
Indeed, representatives of mortgage bankers have been circulating documents around Congress, asking to codify CFPB rules that, in the absence of a constitutional funding source for the agency, would be effectively unenforceable. The fact that mortgage lenders are so concerned about the CFPB going away that it would undertake an emergency lobbying operation to get the agency’s rules enforced demonstrates the service the agency provides. It’s just one aspect of how financial regulation, by providing consistent rules and protecting market integrity, can actually help Wall Street.
The hearing coincided with the release from GOP members of numerous CFPB reform bills, including the Taking Account of Bureaucrats’ Spending (TABS) Act, which would eliminate CFPB’s funding model and put it under appropriations.
CFPB has returned over $16 billion to consumers in its history, to say nothing of the illegal practices it has discouraged. A supervisory report released this week highlighted a number of junk fees the agency has discovered. One such practice involved surprise overdraft fees incurred even when customers have a positive balance. “After the CFPB’s focus on surprise overdrafts,” the agency said in a press release, “at least 20 of the largest banks in the United States, which hold 62% of the volume of consumer deposit accounts subject to the CFPB’s supervisory authority, do not charge surprise overdraft fees.” No wonder conservatives hate it so much.
