Power of the Purse?

T he U.S. Supreme Court heard oral arguments on October 5 to consider the constitutionality of the Consumer Financial Protection Bureau (CFPB).

Congress created the CFPB in 2010 as part of the Dodd-Frank Act, which was a regulatory-reform bill meant to prevent the financial disaster of 2007-2009 from repeating.

Dodd-Frank created the CFPB as an independent agency tasked with protecting the best interests of consumers in financial markets. But, unlike other agencies, Congress ceded the power of budget oversight to the Federal Reserve up to an inflation-adjusted capped amount. As such, Congress has limited oversight of the CFPB.

While CFPB has less congressional oversight than most agencies, it does not have less authority. CFPB can issue guidance and rules in a similar fashion to other agencies, which can have a major impact on the financial industry and consumers.

For example, CFPB recently issued guidance on the use of artificial intelligence and advanced algorithms in lending and has been investigating the impact of “chatbot” technology for a customer interface. This matter is complicated, controversial, and nationally significant.

The CFPB also issued a proposed rule which would cap late fees for credit-card payments at $8 (and up to 25 percent of the minimum payment for certain circumstances). This is a major departure from current policy that allows financial institutions to set “reasonable” late fees up to the full amount of a minimum payment.

Although the CFPB has no example of a financial institution charging more than $41 in late payment fees, the agency still felt compelled to intervene. While this policy is intended to protect consumers who accidentally miss a payment or need a little leeway, financial institutions from across the country say that the rule will cause credit to become scarcer for those with lesser means and what credit is available will have higher interest rates.

It is questionable whether CFPB should be given influence and regulatory authority over decisions of this magnitude, which could harm financial institutions and come at a significant cost to consumers.

As a former Member of Congress, I served on the Ways and Means and Budget Committees and now work closely with current members who oversee federal agencies. So I know that the structure and funding of CFPB have long been controversial within the halls of Congress. While many are concerned with the agency’s structure for the above reasons, others have remained vigilant in protecting its integrity against political action that might degrade the significant role it serves in protecting consumers.

Regardless of congressional sentiment, the issue now lies with the highest court of the land. The question before the Supreme Court is whether the lack of direct congressional oversight violates the U.S. Constitution’s separation of powers clause.

Based on the oral arguments, it is clear the Supreme Court Justices are trying to understand the issues surrounding the funding structure, appropriations, and spending practices of CFPB. What is not clear is how the justices will rule following full consideration of all information and briefings, including a prior federal circuit ruling that decided the funding structure was unconstitutional.

It has been my preference that the legislative body — the people’s branch of government — be given control over federal agencies and decisions related to the budget. That body is the United States Congress and, more specifically, the United States House of Representatives, where the Founding Fathers always intended for funding decisions to be primarily decided.