FIRM Act

— 837 — Financial Regulatory Agencies l Require the SEC and the CFTC to publish a detailed annual report on SRO supervision. AUTHOR’S NOTE: The preparation of this chapter was a collective enterprise of individuals involved in the 2025 Presidential Transition Project. All contributors to this chapter are listed at the front of this volume, but Paul Atkins, C. Wallace DeWitt, Christopher Iacovella, Brian Knight, Chelsea Pizzola, and Andrew Vollmer deserve special mention. The author alone assumes responsibility for the content of this chapter, and no views expressed herein should be attributed to any other individual. CONSUMER FINANCIAL PROTECTION BUREAU Robert Bowes The Consumer Financial Protection Bureau (CFPB) was authorized in 2010 by the Dodd–Frank Act.32 Since the Bureau’s inception, its status as an “inde- pendent” agency with no congressional oversight has been questioned in multiple court cases, and the agency has been assailed by critics33 as a shakedown mecha- nism to provide unaccountable funding to leftist nonprofits politically aligned with those who spearheaded its creation. In 2015, for example, Investor’s Business Daily accused the CFPB of “diverting potentially millions of dollars in settlement payments for alleged victims of lending bias to a slush fund for poverty groups tied to the Democratic Party” and plan- ning “to create a so-called Civil Penalty Fund from its own shakedown operations targeting financial institutions” that would use “ramped-up (and trumped-up) anti-discrimination lawsuits and investigations” to “bankroll some 60 liberal non- profits, many of whom are radical Acorn-style pressure groups.”34 The CFPB has a fiscal year (FY) 2023 budget of $653.2 million35 and 1,635 full- time equivalent (FTE) employees.36 From FY 2012 through FY 2020, it imposed approximately $1.25 billion in civil money penalties;37 in FY 2022, it imposed approximately $172.5 million in civil money penalties.38 These penalties are imposed by the CFPB Civil Penalty Fund, described as “a victims relief fund, into which the CFPB deposits civil penalties it collects in judicial and administrative actions under Federal consumer financial laws.”39 The CFPB is headed by a single Director who is appointed by the President to a five-year term.40 Its organizational structure includes five divisions: Operations; Consumer Education and External Affairs; Legal; Supervision, Enforcement and Fair Lending; and Research, Monitoring and Regulations.41 Each of these divisions reports to the Office of the Director, except for the Operations Division, which reports to the Deputy Director. Passage of Title X of Dodd–Frank was a bid to placate concern over a series of regulatory failures identified in the wake of the 2008 financial crisis. The law imported a new superstructure of federal regulation over consumer finance and — 838 — Mandate for Leadership: The Conservative Promise mortgage lending and servicing industries traditionally regulated by state bank- ing regulators. Consumer protection responsibilities previously handled by the Office of the Comptroller of the Currency, Office of Thrift Supervision, Federal Deposit Insurance Corporation, Federal Reserve, National Credit Union Admin- istration, and Federal Trade Commission were transferred to and consolidated in the CFPB, which issues rules, orders, and guidance to implement federal consumer financial law. The CFPB collects fines from the private sector that are put into the Civil Pen- alty Fund.42 The fund serves two ostensible purposes: to compensate the victims whom the CFPB perceives to be harmed and to underwrite “consumer education” and “financial literacy” programs.43 How the Civil Penalty Fund is spent is at the discretion of the CFPB Director. The CFPB has been unclear as to how it decides what “consumer education” or “financial literacy programs” to fund.44 As noted, critics have charged that money from the Civil Penalty Fund has ended up in the pockets of leftist activist organizations. In Seila Law LLC v. Consumer Financial Protection Bureau,45 the Supreme Court of the United States held that the CFPB’s leadership by a single individual remov- able only for inefficiency, neglect, or malfeasance violated constitutional separation of powers requirements because “[t]he Constitution requires that such officials remain dependent on the President, who in turn is accountable to the people.”46 The CFPB Director is thus subject to removal by the President. The CFPB is not subject to congressional oversight, and its funding is not determined by elected lawmakers in Congress as part of the typical congressional appropriations process. It receives its funding from the Federal Reserve, which is itself funded outside the appropriations process through bank assessments. CFPB funding represents 12 percent of the total operating expenses of the Fed- eral Reserve and is disbursed by the unelected Board of Governors of the Federal Reserve System.47 This is not the case with respect to any other federal agency. On October 19, 2022, in Community Financial Services Association of America v. Consumer Financial Protection Bureau, the U.S. Court of Appeals for the Fifth Circuit held that the CFPB’s “perpetual insulation from Congress’s appropriations power, including the express exemption from congressional review of its funding, renders the Bureau ‘no longer dependent and, as a result, no longer accountable’ to Congress and, ultimately, to the people”48 and that “[b]y abandoning its ‘most complete and effectual’ check on ‘the overgrown prerogatives of the other branches of the government’—indeed, by enabling them in the Bureau’s case—Congress ran afoul of the separation of powers embodied in the Appropriations Clause.”49 The Court further remarked that the CFPB’s “capacious portfolio of authority acts ‘as a mini legislature, prosecutor, and court, responsible for creating substantive rules for a wide swath of industries, prosecuting violations, and levying knee-buckling penalties against private citizens.’”50

— 737 — Federal Reserve by ensuring that cash earns a positive (inflation-adjusted) rate of return, it can pre- vent households and businesses from holding inefficiently small money balances. Further benefits of free banking include dramatic reduction of economic cycles, an end to indirect financing of federal spending, removal of the “lender of last resort” permanent bailout function of central banks, and promotion of currency competition.26 This allows Americans many more ways to protect their savings. Because free banking implies that financial services and banking would be gov- erned by general business laws against, for example, fraud or misrepresentation, crony regulatory burdens that hurt customers would be dramatically eased, and innovation would be encouraged. Potential downsides of free banking stem from its greatest benefit: It has mas- sive political hurdles to clear. Economic theory predicts and economic history confirms that free banking is both stable and productive, but it is radically different from the system we have now. Transitioning to free banking would require polit- ical authorities, including Congress and the President, to coordinate on multiple reforms simultaneously. Getting any of them wrong could imbalance an otherwise functional system. Ironically, it is the very strength of a true free banking system that makes transitioning to one so difficult. Commodity-Backed Money. For most of U.S. history, the dollar was defined in terms of both gold and silver. The problem was that when the legal price differed from the market price, the artificially undervalued currency would disappear from circulation. There were times, for instance, when this mechanism put the U.S. on a de facto silver standard. However, as a result, inflation was limited. Given this track record, restoring a gold standard retains some appeal among monetary reformers who do not wish to go so far as abolishing the Federal Reserve. Both the 2012 and 2016 GOP platforms urged the establishment of a commis- sion to consider the feasibility of a return to the gold standard,27 and in October 2022, Representative Alexander Mooney (R–WV) introduced a bill to restore the gold standard.28 In economic effect, commodity-backing the dollar differs from free banking in that the government (via the Fed) maintains both regulatory and bailout functions. However, manipulation of money and credit is limited because new dollars are not costless to the federal government: They must be backed by some hard asset like gold. Compared to free banking, then, the benefits of commodity-backed money are reduced, but transition disruptions are also smaller. The process of commodity backing is very straightforward: Treasury could set the price of a dollar at today’s market price of $2,000 per ounce of gold. This means that each Federal Reserve note could be redeemed at the Federal Reserve and exchanged for 1/2000 ounce of gold—about $80, for example, for a gold coin the weight of a dime. Private bank liabilities would be redeemable upon their issuers. Banks could send those traded-in dollars to the Treasury for gold to replenish their — 738 — Mandate for Leadership: The Conservative Promise vaults. This creates a powerful self-policing mechanism: If the federal govern- ment creates dollars too quickly, more people will doubt the peg and turn in their gold to banks, which then will turn in their gold and drain the government’s gold. This forces governments to rein in spending and inflation lest their gold reserves become depleted. One concern raised against commodity backing is that there is not enough gold in the federal government for all the dollars in existence. This is solved by making sure that the initial peg on gold is correct. Also, in reality, a very small number of users trade for gold as long as they believe the government will stick to the price peg. The mere fact that people could exchange dollars for gold is what acts as the enforcer. After all, if one is confident that a dollar will still be worth 1/2000 ounce of gold in a year, it is much easier to walk about with paper dollars and use credit cards than it is to mail tiny $80 coins. People would redeem en masse only if they feared the government would not be able control itself, for which the only solution is for the government to control itself. Beyond full backing, alternate paths to gold backing might involve gold-con- vertible Treasury instruments29 or allowing a parallel gold standard to operate temporarily alongside the current fiat dollar.30 These could ease adoption while minimizing disruption, but they should be temporary so that we can quickly enjoy the benefits of gold’s ability to police government spending. In addition, Congress could simply allow individuals to use commodity-backed money without fully replacing the current system. Among downsides to a commodity standard, there is no guarantee that the gov- ernment will stick to the price peg. Also, allowing a commodity standard to operate along with a fiat dollar opens both up for a speculative attack. Another downside is that even under a commodity standard, the Federal Reserve can still influence the economy via interest rate or other interventions. Therefore, at best, a commodity standard is not a full solution to returning to free banking. We have good reasons to worry that central banks and the gold standard are fundamentally incompati- ble—as the disastrous experience of the Western nations on their “managed gold standards” between World War I and World War II showed. K-Percent Rule. Under this rule, proposed by Milton Friedman in 1960,31 the Federal Reserve would create money at a fixed rate—say 3 percent per year. By offering the inflation benefits of gold without the potential disruption to the finan- cial system, a K-Percent Rule could be a more politically viable alternative to gold. The principal flaw is that unlike commodities, a K-Percent Rule is not fixed by physical costs: It could change according to political pressures or random economic fluctuations. Importantly, financial innovation could destabilize the market’s demand for liquidity, as happened with changes in consumer credit pat- terns in the 1970s. When this happens, a given K-Percent Rule that previously delivered stability could become destabilizing. In addition, monetary policy when

— 737 — Federal Reserve by ensuring that cash earns a positive (inflation-adjusted) rate of return, it can pre- vent households and businesses from holding inefficiently small money balances. Further benefits of free banking include dramatic reduction of economic cycles, an end to indirect financing of federal spending, removal of the “lender of last resort” permanent bailout function of central banks, and promotion of currency competition.26 This allows Americans many more ways to protect their savings. Because free banking implies that financial services and banking would be gov- erned by general business laws against, for example, fraud or misrepresentation, crony regulatory burdens that hurt customers would be dramatically eased, and innovation would be encouraged. Potential downsides of free banking stem from its greatest benefit: It has mas- sive political hurdles to clear. Economic theory predicts and economic history confirms that free banking is both stable and productive, but it is radically different from the system we have now. Transitioning to free banking would require polit- ical authorities, including Congress and the President, to coordinate on multiple reforms simultaneously. Getting any of them wrong could imbalance an otherwise functional system. Ironically, it is the very strength of a true free banking system that makes transitioning to one so difficult. Commodity-Backed Money. For most of U.S. history, the dollar was defined in terms of both gold and silver. The problem was that when the legal price differed from the market price, the artificially undervalued currency would disappear from circulation. There were times, for instance, when this mechanism put the U.S. on a de facto silver standard. However, as a result, inflation was limited. Given this track record, restoring a gold standard retains some appeal among monetary reformers who do not wish to go so far as abolishing the Federal Reserve. Both the 2012 and 2016 GOP platforms urged the establishment of a commis- sion to consider the feasibility of a return to the gold standard,27 and in October 2022, Representative Alexander Mooney (R–WV) introduced a bill to restore the gold standard.28 In economic effect, commodity-backing the dollar differs from free banking in that the government (via the Fed) maintains both regulatory and bailout functions. However, manipulation of money and credit is limited because new dollars are not costless to the federal government: They must be backed by some hard asset like gold. Compared to free banking, then, the benefits of commodity-backed money are reduced, but transition disruptions are also smaller. The process of commodity backing is very straightforward: Treasury could set the price of a dollar at today’s market price of $2,000 per ounce of gold. This means that each Federal Reserve note could be redeemed at the Federal Reserve and exchanged for 1/2000 ounce of gold—about $80, for example, for a gold coin the weight of a dime. Private bank liabilities would be redeemable upon their issuers. Banks could send those traded-in dollars to the Treasury for gold to replenish their