Chastened FTC May Foretell Future of CFPB

By Gregory Roberts

Congressional Republicans are pointing to the Federal Trade Commission as a potential model for how the Consumer Financial Protection Bureau might function if they successfully curtail its extensive authority and reach.

CFPB employees wondering what that might mean for their six-year-old agency could look to the experience of the FTC in the 1970s, a decade when the commission aggressively pursued consumer protection initiatives.

Congress reacted to that activism with the Federal Trade Commission Improvement Act of 1980, limiting FTC rulemaking and tightening congressional oversight. Amid uncertainty over the bill, the agency twice shut down briefly and its continued existence was in doubt, according to “Federal Trade Commission Privacy Law and Policy,” a 2016 book by Chris Jay Hoofnagle of the University of California at Berkeley.

That ‘70s experience and its lessons are “kind of internal FTC lore,” newly appointed FTC manager Tom Pahl told Bloomberg BNA; he spent more than 10 years at the FTC before a two-year turn at the CFPB in 2013-15. “Most of the people who work there have some familiarity with the story that the agency went too far, Congress almost shut the place down, and you have to be careful.

“It’s become part of the culture to recognize that as powerful as the (regulatory) tools can be, it’s also dangerous if you don’t use them carefully,” said Pahl, who is serving as the acting director of the FTC’s Bureau of Consumer Protection. “The CFPB as an agency doesn’t have that same culture and history.”

The FTC Model

House Financial Services Committee Chairman Jeb Hensarling (R-Texas) identified the FTC as the kind of agency he wants the CFPB to be in a memo circulated earlier this month to other Republican House members. The memo lays out Hensarling’s latest proposals to overhaul the Dodd-Frank Act, which created the CFPB.

Republicans criticize the CFPB as a rogue agency that stifles businesses and job creation with its regulatory overreach. Democrats defend the CFPB as a necessary response to the 2007-08 financial crisis and the abuses that contributed to it.

Hensarling’s memo goes further toward defanging the CFPB than his 2016 version of his Dodd-Frank overhaul, the Financial Choice Act, which the Financial Services Committee approved last Congress.

The memo proposes eliminating the bureau’s power to act based on unfair, deceptive or abusive practices altogether, limiting its rulemaking to statutes specified in Dodd-Frank and restricting its enforcement to cease-and-desist orders, subpoenas and investigative demands.

It would do away with the bureau’s consumer education and market monitoring functions and shut down its consumer complaints data base. And it would repeal the bureau’s supervisory authority.

“The CFPB currently has an extremely robust set of authorities compared to other agencies,” Quyen Truong, a partner at Stroock & Stroock & Lavan LLP, in Washington, told Bloomberg BNA; she worked from 2012 to 2016 at the CFPB as assistant director and deputy general counsel.

“In the financial regulatory area, it stands out for having very extensive rulemaking, enforcement, market monitoring, consumer education and consumer complaint authority, in contrast to most other agencies that tend to have a more focused bent,” she said.

The bureau almost certainly will ease up some when its current director, Democratic appointee Richard Cordray, leaves office. Cordray’s term ends in mid-2018, although congressional Republicans including Hensarling have urged Trump to fire him sooner.

Reagan Applies the Brakes

The FTC went through a similar transition when Ronald Reagan, a conservative Republican, was elected president in 1980; he appointed a chairman who put the brakes on the agency.

The more lasting effects on the FTC were imposed by the Federal Trade Commission Improvement Act and the hostility that produced that law.

Much of the late ‘70s opposition to the FTC, which included advertisers and some of the media they support, was sparked by the commission’s moves toward regulating the advertising of sugary cereals and other products on children’s TV shows.

“The FTC is still reeling from the 1980 act,” which “did much political and psychological damage to the agency,” Hoofnagle wrote. “The commissioners’ ambition got ahead of existing political support.”

The law placed procedural limitations on the FTC’s rulemaking authority, required advance notice of rulemaking proposals and gave Congress a veto over FTC actions.

Although the FTC imposes penalties on bad actors in business—recent targets include telemarketers, funeral homes, online high schools and debt collectors—the agency issues only rules that Congress directs it to via legislation, Pahl said. It also lacks the CFPB’s power to supervise and examine businesses, and it does not have access to the full range of monetary penalties available to the CFPB.

Republicans Take Aim

With control of House, Senate and White House, Republicans may be able to achieve some of their legislative goals for the CFPB.

Hesarling’s memo calls for a CFPB director serving at the will of the president. The 2016 Choice Act would have replaced the director with a bipartisan five-member commission, the structure that governs the FTC.

“When you have commissioners, they get a vote on things and they have an opportunity to write about them,” Pahl said. “The writing about things sort of adds to the marketplace of ideas about what’s going on, and so there’s much more transparency about things,” he said.

Jeff Sovern, a consumer law professor at St. John’s University in New York and a CFPB supporter, favors the decisiveness a single director can provide. “A commission structure like the FTC”—currently down to two commissioners in office—“increases the likelihood of gridlock,” he told Bloomberg BNA.

Both memo and earlier bill agree on a fundamental change to how the bureau is financed. Dodd-Frank put the bureau outside the normal budgeting process, with its money coming from the Federal Reserve Board. Hensarling would bring the agency under the regular congressional appropriations system.

“Congress really views that as important for oversight of the agencies,” Pahl said. “It does give the Hill much more ability to affect what the agency does and does not do.”

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