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How President Trump could gut America's consumer watchdog

A shopper uses a credit card to pay for her items at a Wal-Mart Supercenter in Denver, Colorado.
Matthew Staver | Bloomberg | Getty Images
A shopper uses a credit card to pay for her items at a Wal-Mart Supercenter in Denver, Colorado.

America's consumer watchdog agency is sitting in the crosshairs of the White House.

A D.C. court is expected to rule soon on whether the structure of the Consumer Financial Protection Bureau is constitutional. But no matter the outcome, critics of the agency have begun laying the groundwork for the Trumpadministration to make dramatic changes to the institution at the heart of President Barack Obama's overhaul of the financial system.

"The CFPB's structure is based on the idea that government is unlimited and rights are dependent on the special dispensation of the experts who know better than the American people," Republican Sens. Ben Sasseof Nebraska and Mike Leeof Utah wrote in a recent letter to the White House.

"I'm just focused on doing my job, which is protecting consumers.  The rest of it is above my pay grade." -Richard Cordray, director, CFPB

The debate is centered on the agency's director, Richard Cordray, who is serving a five-year term that ends in 2018.The CFPB is an independent government agency that is funded through the Federal Reserve. Though Cordray is a presidential appointee, the White House has limited power to remove him. Under the Dodd-Frank Act, the law that established the agency, the head of the CFPB can be dismissed only for "inefficiency, neglect of duty or malfeasance in office."

Cordray's protected status is now being challenged by PHH, a New Jersey mortgage servicer that the CFPB had fined $109 million. In November, a panel of judges in the D.C. Circuit Court ruled that the agency lacked critical checks on the director's power. But any changes to the CFPB's structure are on hold while the court decides whether a broader set of judges should weigh in.

Industry experts say the answer could arrive any day. If the court denies the CFPB's request, Trump could dismiss Cordray almost immediately — and the agency would have little recourse to appeal to the Supreme Court under a Republican administration.

"I'm just focused on doing my job, which is protecting consumers," Cordray told CNBC on Wednesday on his way to Capitol Hill. "The rest of it is above my pay grade."

White House already lining up a new boss

Even if the court grants a broader review and the case remains in limbo, opponents of the CFPB have begun building the case for removing Cordray anyway. The White House has already begun meeting with potential replacements, such as former Rep. Randy Neugebauer, R-Texas, who had proposed legislation that would gut the agency.

"Dodd-Frank was a piece of massive government overreach," a senior administration official said. "Some of the rules may have even been unconstitutional in creating new agencies that don't actually protect consumers. They might have just created more additional work. We're looking to deal with those."

Critics point to a laundry list of CFPB actions that they say could warrant removal under existing Dodd-Frank standards: Republicans have excoriated the agency for the cost of renovating its building, for example, and for an alleged lack of diversity among its employees.

"I think the president has at least a credible claim for removal." -Brian Knight, senior fellow, Mercatus Center

They also argue the agency overstepped its authority in issuing rules intended to address discrimination in auto lending that also affect car dealers — an industry that was specifically carved out from the CFPB's purview.

"I think the president has at least a credible claim for removal," said Brian Knight, as senior fellow at the libertarian Mercatus Center at George Mason University. "They've been extremely aggressive, and the courts have been pushing back on them pretty consistently."

Still, dismissing Cordray would be virtually unprecedented, even for a White House that prides itself on jettisoning tradition. No one has been fired by a president since the Supreme Court in 1935 set those standards of inefficiency, negligence or malfeasance for removal, according to an analysis by the left-leaning Americans for Financial Reform.

"The slipshod rationalizations thinly disguising an underlying desire to remove a strong enforcer surely do not justify making him the first official ever to be removed by a president for cause," wrote Brian Simmonds Marshall and Veronica Meffe.

Meanwhile, House Financial Services Chairman Jeb Hensarling, R-Texas, is about to introduce a new version of his bill to undo Dodd-Frank that is also expected to take aim at the CFPB. In an interview on CNBC on Tuesday, he said he planned to work closely with the White House on that effort.

"Dodd-Frank broke all its promises," he said. "I certainly hope to do my part on Capitol Hill to return us to a healthy economy and unclog the arteries of lending."

Taking on the CFPB could prove politically precarious, however. Trump's campaign was fueled by populist anger against Wall Street — the same anger that helped lead to the creation of the agency in the aftermath of the financial crisis. The CFPB is the brainchild of Democratic Sen. Elizabeth Warren of Massachusetts, an outspoken critic of the banking industry who enjoys a 61 percent approval rating in her home state, according to Morning Consult.

'Consumers deserve to have him serve'

Consumer advocacy groups have also vowed to fight any attempts in the courts or on Capitol Hill to dismantle the agency.

"Director Richard Cordray has proven to be a tireless and effective leader, and consumers deserve to have him serve out the rest of his term working on their behalf," said Debbie Goldstein, executive vice president at the Center for Responsible Lending.

It remains unclear how quickly and aggressively the White House may move. Oliver Ireland, a partner at the law firm Morrison Foerster, said the Trump administration may wait until after the court weighs in on whether to review the PHH case again. In addition, Trump's nominee to lead the Treasury Department, Steven Mnuchin, has yet to be confirmed, and several other key Cabinet posts remain unfilled.

Those positions could take precedence, Ireland said. But he said it was likely that the president's attention would eventually land on the consumer watchdog.

"It seems to me there are a lot of moving parts here," Ireland said. "I think it's very hard to handicap that from a distance."