28 January 2016

Thanks to Dodd-Frank, Cordray’s power trip costs consumers

By Mark Calabria

One of the most contentious provisions of 2010’s Dodd-Frank Act, which represented Washington’s response to the financial crisis, was the creation of the Consumer Financial Protection Bureau (CFPB). Now, litigation from the PHH Corporation, offers the public a front row seat to whether the controversy was justified.

The initial proposal for the CFPB, introduced by Democrat Senators Dick Durbin and the late Ted Kennedy, was that it be organized as a board subject to Congressional oversight via the budget process. Toward the end of legislative negotiations and without any hearings on the issue, however, the majority Democratic Congress decided to shift to an unusual model; a strong single director with vast discretionary powers and few mechanisms for either public or Congressional oversight.

The behavior of its current director, Richard Cordray, has repeatedly demonstrated that the shift was an error that needs correcting.

The PHH lawsuit deals with the interpretation of the Real Estate Settlement Procedures Act (RESPA). The Act covers both the disclosure of settlement costs, recall that large stack of papers you signed when you bought your house, as well as the relationships between different settlement service providers.  The PHH case deals revolves around its relationship with an affiliated company. In over-ruling an already misguided decision by the CFPB’s own in-house judges, Mr. Cordray simply declares he “rejects” long standing interpretations of the law.

Having led RESPA enforcement at the Department of Housing the Urban Development over a decade ago, I share the frustration with the statute. Its “anti-kickback” provisions, for example, deter and sometimes prohibit volume-discounting among service providers, which ultimately costs consumers more.  Instead of permitting service providers to purchase from others “in bulk” and pass along the discount to consumers as Wal-Mart has done in retail, such volume discounting is prohibited under RESPA (no wonder buying and selling a home continues to be so expensive).  The statue is fundamentally flawed and needs to be corrected by our elected representatives in Congress.  Our Constitution does not empower regulators to simply rewrite statutes, as Cordray has done.

Apologists for the CFPB confuse the nature of independence under our system of checks and balances. Representative democracy also requires accountability.  The CFPB offers neither.

It is sometimes claimed a single director is needed to protect the CFPB from “capture” – falling under the undue influence of industry, often because of the promises of future employment or campaign contributions.  But capturing an entire board or even a majority would be a lot harder than capturing one person. And open board deliberations would make any capture easier for the public to detect.

The sad truth is that the CFPB has already been captured.  It is captive to a narrow partisan agenda.  One that places rewarding trial lawyers above reducing costs to the consumer, witness its attack on arbitration.  The CFPB has repeatedly made it easier to assemble class action lawsuits that have predominately enriched the lawyers while offering little benefit to consumers.  Even worse, the cost of this litigation is ultimately passed along to the consumer via higher prices.

The CFPB has also been captive to a flawed mindset that its bureaucracy is better equipped to make choices for consumers than consumers themselves. In my many years in Washington I’ve rarely seen consumers made better off by having their choices limited or by being forced to subsidize other consumers or worse, trial lawyers.

The original plan for CFPB, a board structure, would force Cordray to defend and explain his decisions.  It is the ultimate in sunlight.  The repeated contempt Cordray has displayed for Congress, the Constitution and the law continues to illustrate the mistake of placing so much unaccountable power in the hands of one person.

Mark Calabria Ph.D. is director of financial studies regulation at the Cato Institute.