People’s Credit Union v. Trump

photo by Janine and Jim Eden

Twenty-one consumer finance regulation scholars (including yours truly) filed an amicus brief in Lower East Side People’s Federal Credit Union v. Trump, No. 1:17-cv-09536 (SDNY Dec. 14, 2017). The Summary of the Argument reads as follows:

The orderly succession of the leadership of regulatory agencies is a hallmark of American democracy. Regulated entities, such as Plaintiff Lower East Side People’s Federal Credit Union (LESPFCU) rely on there being absolute clarity regarding who is duly authorized to exercise regulatory authority over them. Without such clarity, regulated entities cannot be certain if agency actions, including the promulgation or repeal of rules and informal regulatory guidance, are actual agency policy or mere ultra vires actions.

This case involves a controversy over who lawfully serves as the Acting Director of the Consumer Financial Protection Bureau (CFPB or the Bureau) following the resignation of the Bureau’s first Senate-confirmed Director. The statute that created the CFPB, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), is clear: the Deputy Director of the CFPB “shall . . . serve as acting Director in the absence or unavailability of the Director.” 12 U.S.C. § 5491(b)(5)(B). Thus, upon the resignation of the Director, the CFPB’s Deputy Director, Leandra English, became Acting Director and may serve in that role until a new Director has either been confirmed by the Senate or been recess appointed.

Despite the Dodd-Frank Act’s clear statutory directive, Defendant Donald J. Trump declined to follow either of the routes constitutionally permitted to him for appointing a Director for the Bureau. Instead, Defendant Trump opted to illegally seize power at the CFPB by naming the current Director of Office of Management and Budget (OMB), Defendant John Michael Mulvaney, as Acting CFPB Director. Defendants claim this appointment is authorized by the Federal Vacancies Reform Act of 1998 (FVRA), 5 U.S.C. § 3345(a).

As scholars of financial regulation, we believe that Deputy Director English’s is the rightful Acting Director of the CPFB for a simple reason: the only applicable statute to the succession question is the Dodd-Frank Act. In the Dodd-Frank Act, Congress expressly provided for a mandatory line of succession for the position of CFPB Director, stating that the Deputy Director “shall” serve as the Acting Director in the event of a vacancy. Congress selected this provision after considering and rejecting the FVRA during the drafting of the Dodd-Frank Act, and Congress’s selection of this succession provision is an integral part of its design of the CFPB as an agency with unique independence and protection from policy control by the White House. The appointment of any White House official, but especially of the OMB Director as Acting CFPB Director is repugnant to the statutory design of the CFPB as an independent agency.

The FVRA has no application to the position of CFPB Director. By its own terms, the FVRA is inapplicable as it yields to subsequently enacted statutes with express mandatory provisions for filling vacancies at federal agencies. This is apparent from the text of the FVRA, from the FVRA’s legislative history, and from the need to comport with the basic constitutional principle that a law passed by an earlier Congress cannot bind a subsequent Congress. Moreover, the FVRA does not apply to “any member who is appointed by the President, by and with the advice and consent of the Senate to any” independent agencies with a multi-member board. 5 U.S.C. § 3349c(1). The CFPB Director is such a “member,” because the CFPB Director also serves as a member of a separate multi-member independent agency: the Board of Directors of the Federal Deposit Insurance Corporation (FDIC).

Plaintiff LESPFCU is seeking a preliminary injunction against acts by Defendants Mulvaney and Trump to illegally seize control of the CFPB, and it should be granted. As will be shown, LESPFCU has a high likelihood of success on the merits given the strength of its statutory arguments that the Dodd-Frank Act controls the CFPB Directorship succession. Unless the Court grants LESPFCU’s request for a preliminary injunction, LESPFCU will suffer irreparable harm because it will be subjected to regulation by a CFPB that would be under the direct political control by the White House that Congress took pains to forbid. Moreover, without a preliminary injunction, Defendant Mulvaney will continue to take actions that may place LESPFCU at a competitive disadvantage by creating an uneven regulatory playing field that favors certain types of institutions. See, e.g., Jessica Silver-Greenberg & Stacy Cowley, Consumer Bureau’s New Leader Steers a Sudden Reversal, N.Y.TIMES, Dec. 5, 2017. Nor will the President’s rights be in any way limited by such a preliminary injunction: the President remains able to seek Senate confirmation of a nominee for CFPB Director. All the President is being asked to do is fish or cut bait and proceed through normal constitutional order. The granting of a preliminary injunction is also very much in the public interest as it enables the controversy over the rightful claim to the CFPB Directorship to be resolved through an impartial court and not through a naked grab of power by the President.

Reforming the Fed

Peter Conti-Brown and Simon Johnson posted their policy brief, Governing the Federal Reserve System after the Dodd-Frank Act, on SSRN (also on the Peterson Institute for International Economics website). I have said before that the Fed is a “riddle, wrapped in a mystery inside an enigma” and I stand by that characterization. This policy brief is very helpful, however, in identifying the legal structure of the Federal Reserve System as well as the practical constraints and political forces that affect the workings of that legal structure.

The authors write that by statute, the chair of the Fed

decides almost nothing herself: The Federal Reserve System is supervised by a Board of seven presidentially appointed, Senate-confirmed governors, of whom the chair is but one. In practice, the chair has frequently had a disproportionate influence on the monetary policy agenda and also the potential to predominate on regulatory matters—working closely with the Fed Board’s senior staff. Even so, for the most significant decisions, the Board must vote, and the chair must rely on the votes of the other six governors (for Board matters) and in addition, on a rotating basis, the votes of five of the twelve Reserve Bank presidents (for monetary policy). On regulation and supervision issues, the chair can do little of consequence without the support of at least three other governors. (1)

The brief goes on to document other aspects of the Fed’s organizational structure and the practical politics of Fed decisionmaking. For those of us who have a hard time parsing how the Fed acts, this is a useful document.

The brief also argues for a new approach to Fed governance:

The Fed chair is arguably the most important economic appointment any president makes. After the crises, new statute, and bold decisions of recent years, this job has become even more important.

During its first 100 years of existence, the position of Fed chair has risen to exercise great potential power. By statute, an appointee can remain in office 20 years or more. A perceived “maestro” effect in which insiders and outsiders are discouraged from challenging the chair is no longer a model with broad appeal, if it ever was.

The Board of Governors could provide an effective counterweight to the chair. Indeed, such a counterweight is what Congress intended by requiring presidential appointment and Senate confirmation of the entire Board. In order to break the tradition of a chair-dominated board, governors need sufficient expertise and experience to engage with and in some instances counteract the chair and Fed staff.

A president’s choice for Fed chair matters enormously, but the choice for members of the Board also matters a great deal. Monetary policy remains a crucial criterion but not at the exclusion of regulatory policy. The Board is second to none—in the nation and indeed arguably in the world—in its responsibility for regulatory oversight over the financial system. The president, members of the Senate, and the general public ignore these considerations at significant peril to the financial system and the economy. (9)

The brief presents a powerful alternative to business as usual at the Fed.  Hopefully, it will gain some traction.