An appeals court has just thrown a bit of a spanner into the works at the Consumer Financial Protection Bureau, ruling that the entire control structure of the bureau is itself unconstitutional, and also that the agency erred in slapping a hefty fine on mortgage lender PHH. That first conclusion is getting big headlines and will hearten critics of the agency. But the more narrowly written part of the decision will ultimately matter more.
The bureau accused PHH of having given out a sort of kickback (involving an arcane mortgage reinsurance arrangement), and whacked them with a hefty fine. Their interpretation of the relevant regulations, said a three-judge panel of the D.C. Circuit on Tuesday, was retroactively applied to behavior engaged in before the rules were changed. The judges agreed with the mortgage lender on both of the main thrusts of its argument: that the bureau had misinterpreted the relevant law and also that, correct or not, the bureau had no right to apply its interpretation to actions taken before it changed the rules.
They also, however, said that as set up, the agency was itself unconstitutional, because of the way the head is appointed: The head can be removed only for cause, and only by the president. This is the most controversial part of the ruling and will therefore get the most press.
The constitutional objection is that the president cannot delegate substantial amounts of power unless the president is effectively controlling the person who exercises that power. To be sure, there are other independent agencies controlled by appointees who enjoy fixed terms, rather than serving at the pleasure of the president. They constitute, as the court wrote, "a headless fourth branch of the U.S. Government." The court argues that their lack of accountability is already a threat to liberty, but that their power has historically been checked by the fact that the independent agencies had board members, directors or commissioners who could at least check each other and the appointee.
The D.C. Circuit panel said that the Consumer Financial Protection Bureau's structure was unconstitutional because it vested too much power in a single individual. The judges said the bureau must cede some of its power. Specifically, the president must be able to fire the director at any time.
This may cause some agitation among folks who like the idea of rule by unaccountable technocrats. But ultimately, it probably isn't going to make all that much difference to the political economy of the U.S. Indeed, it's not clear to me why the bureau was set up like this in the first place.
There are valid arguments for insulating some agencies from political pressure. None of us would like to live in an economy where, for example, presidents could easily order the Federal Reserve to deliver them a nice burst of inflation right before every election. But the bureau is not handling this sort of important, election-sensitive question; it's supposed to be in the rather pedestrian business of making sure that our lenders don't cheat us.
I've heard arguments that this highly independent structure will keep the agency from getting in bed with the industries it regulates. This argument has always seemed to me to fundamentally misunderstand the reasons that regulators tend to end up reflecting the world view of the industries they regulate, none of which have much to do with the president's ability to fire the head of the agency.
