by Jeff Sovern
Last Friday, President Trump announced an Executive Order on Core Principles for Regulating the United States Financial System. Here is the list:
(a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;
(b) prevent taxpayer-funded bailouts;
(c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;
(d) enable American companies to be competitive with foreign firms in domestic and foreign markets;
(e) advance American interests in international financial regulatory negotiations and meetings;
(f) make regulation efficient, effective, and appropriately tailored; and
(g) restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.
Some of these are relevant to consumer protection, most notably (a), (c), (f), and (g), as Peter Cubita pointed out at the CFPB Monitor blog, and I want to say something about them, but first I wanted to call attention to what is not included on the list. I learned in my first semester of law school that in our system, Congress, not the president, is the principal policy-maker in the US. That flows from the Constitution's grant of "[a]ll legislative powers" to Congress in Article I. So the starting point in regulating our financial system should be what Congress has identified as key principles. The president's job is to "take Care that the Laws be faithfully executed . . . ." which includes the laws that Congress has enacted, and so in turn includes Congress's core principles. The EO states that it is "the policy of my Administration to regulate the United States financial system in a manner consistent with" the stated core principles. Shouldn't the core principles include acting consistently with what Congress wanted?
What are Congress' core principles in consumer law? We can find them in two places. One is the principles that are consistently expressed in consumer law, like prohibitions on fraud and deception, as enacted in the Federal Trade Commission Act, the Fair Debt Collection Practices Act, and elsewhere. Perhaps this is embodied in the first of the president's core principles, when he speaks of empowering Americans to make informed choices, but if so, it's a rather elliptical reference. Shouldn't the core principles for regulating our financial system explicitly include the prevention of fraud?
A second place we can find Congress's core principles is in the declarations of purpose and the like at the beginning of many statutes. For example, the Fair Credit Reporting Act says in section 1681(a)(4), that “There is a need to insure that consumer reporting agencies exercise their responsibilities with fairness, impartiality, and a respect for the consumer’s right to privacy.” Where is that reflected in Trump's core principles? Or the purpose of the FDCPA, specified in section 1692(e) as including “to eliminate abusive debt collection practices . . . .” I've deliberately chosen as examples statutes that were enacted decades ago, because the principles reflected in those laws have worked their way into the tissues of our laws and financial system and so are as "core" as anything we have in consumer law.
And now onto Trump's actual core principles. The first one reads: "empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth." That, in common with many of the core principles, is vague enough to have multiple meanings, but when put that way, it worries me because it makes me wonder whether the Trump administration wants to eliminate consumer protections that prevent consumers from entering into damaging agreements. For example, the proposed arbitration rule could be seen as preventing people from entering into contracts that waive class actions, which in that sense, is not empowering them. I would argue that blocking some terms, such as class action waivers, empowers consumers to enforce consumer law, which should enable them to "save for retirement, and build individual wealth." But the phrasing of the EO sounds to me like a free-market approach which is inconsistent with some consumer protection laws. I go back to Elizabeth Warren’s toaster argument: just as we don’t let people buy toasters that will burn down their homes, we shouldn’t let people enter into contracts that will cost them rights, just because they don’t fully understand the consequences of those decisions and can’t take the tine to master them. Just as we don’t allow sick people to get prescription drugs without a doctor’s approval, because we don’t trust sick people to have the expertise of physicians, we shouldn’t trust consumers to enter into certain contract terms that will ultimately harm their well-being.
Let's move to the third one: "foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry." Again, I'm not sure what some of that means, including "more rigorous regulatory impact." It sounds like cost-benefit analysis, as does the sixth core principle: "make regulation efficient, effective, and appropriately tailored." Most consumer protection agencies already take cost-benefit analysisinto account. For example, the Dodd-Frank Act obliges the CFPB to “consider” costs and benefits when promulgating a rule. Section 5512. So what more is wanted?
The reference to market failures sounds like a traditional economic analysis: that the only time regulation is justified is when there’s a market failure. That’s Econonism, because often the free market fails when there is no obvious market failure, which might have happened in the Wells Fargo situation. But notice the reference to information asymmetry. Financial institutions often know a lot more than consumers about transactions, which is another way of saying there’s an information asymmetry, so that suggests that in many financial transactions, there will be a market failure—which under the core principles would justify regulation.
Then there's the last core principle: "restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework." While that too is fairly vague, it could mean that he wants to undermine the CFPB’s independence, because lack of accountability is one of the arguments used to support the position that the Bureau’s structure should change. That's frequently discussed on this blog, so the only thing I will add is that I still don’t understand the argument that a commission is more accountable than a director. Can’t a commissioner shift blame to other commissioners? With a single director, you know who makes the ultimate decision.
Just to be clear, I have no problem with the president directing the Treasury Secretary, as the EO does, to report on the extent to which existing laws promote the core principles. There's nothing wrong with the president asking for information about whether the law adequately serves his goals. But when implementing the law, he should follow Congress's core principles.