President Obama’s Puzzling New Executive Order: Should the Consumer Financial Protection Bureau Really be Spending Its Precious Time and Resources Weakening Existing Regulations?

On Monday, the White House announced that President Obama had signed a new executive order on federal regulation to supplement January’s executive order to executive branch regulatory agencies. The new executive order is aimed at the “independent agencies,” so named because the heads of those agencies do not serve at the pleasure of the president. By statute, they serve for a term of years and can be removed from office only “for cause,” which usually means misbehavior unrelated to the exercise of the agency’s policymaking functions. 

The new executive order urges the independent agencies to use cost-benefit analysis in promulgating new regulations, to adopt “flexible” approaches to regulation, and to engage in retrospective analyses of existing regulations with an eye toward modifying or withdrawing regulations that are “outmoded, ineffective, insufficient, or excessively burdensome.”

As Professor Rena Steinzor argued in this blog in January, the original executive order was a very bad idea. The new executive order is not just a bad idea; it could delay the critical work of the banking agencies as they struggle to promulgate and implement regulations needed to head off the next financial meltdown.

Congress may decide to make an agency “independent” for many reasons, including a desire to insulate it from political interference, a desire to avoid regulatory capture, or a general desire to achieve policymaking stability across presidential administrations. But the one overriding purpose of creating an independent agency is to allow it to function independent of presidential control. 

The first thing that stands out in the new executive order is the fact that every injunction to the independent agencies employs the word “should.” This wording stands in stark contrast to Executive Order 13563’s use of the words “must” and “shall.” Thus, the new executive “order” is really an executive “recommendation.”

This is altogether good news for the American public, because it means that President Obama has not attempted to use the executive order as an occasion to invoke the controversial “unitary executive” theory of constitutional law to make its requirements binding on independent agencies. That assertion of presidential power would have precipitated a constitutional crisis that even President George W. Bush, the strongest recent proponent of the unitary executive theory, carefully avoided when it came to the independent agencies.

If the president did not issue this executive order as an assertion of presidential power, two obvious questions remain: Why did President Obama issue this toothless document, and why did he do it now?

The answer to the first question has more to do with politics than the Constitution. The president is in the midst of a great political gamble in which he has attempted to position himself as a “reasonable intermediator” between the Tea Party-driven Republican Party and the progressive left in order to win back the votes of independents that, according to his political advisors, his party lost in the 2010 midterm elections (or that stayed home). He also wants to attract more support from the business community (and especially Wall Street), which, as everyone knows, can fill the coffers of his re-election campaign. 

If the executive order is merely another in a continuing series of attempts by the White House to reach out to the Chamber of Commerce, the President is wasting his time. Businesspersons are smart enough to know a symbolic sop when they see one.

The timing of the new executive order, however, suggests another motivation. On February 2 of this year, Cass Sunstein, the administrator of the Office of Information and Regulatory Affairs sent a memo to the heads of the executive branch and independent agencies elaborating on Executive Order 13563. The memo made it clear that the executive order was not binding on independent agencies, but it “encouraged” them to comply anyway. If the White House has already encouraged the independent agencies to comply, why take this particular moment to encourage them to comply all over again?

It may not be a coincidence that the executive order has come out just days before the new Consumer Financial Protection Bureau (CFPB) is empowered to promulgate regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Congress created this new independent agency to look out for the interests of consumers when they interact with commercial banks, mortgage banks, mortgage brokers, and other entities who engaged in the rampage of predatory lending that created the subprime mortgages that Wall Street sliced and diced into toxic derivatives during the great housing boom of the early 2000s.  

At the same time, the other agencies that regulate the financial industry, all of which are independent, are just beginning to promulgate long-anticipated regulations required by the Dodd-Frank Act. Although few actual proposals have come to light, the financial industry has made it abundantly clear that it will strongly resist regulations that it regards as “overly burdensome,” and it will not hesitate to condemn regulations that it opposes as “job killers.”

The new executive order may represent a shot across the bow of the new CFPB and the (hopefully) rejuvenated banking agencies to warn them that the White House expects them to prepare detailed cost-benefit analyses to accompany new rules and to spend scarce agency resources re-evaluating and repealing existing regulations. In reality, independent agencies that do not comply with the request of the executive order could certainly be punished by the White House if it chose, through the budget process, among other things.

This is especially distressing in the case of the new CFPB. Before it has promulgated a single regulation under a statute that was enacted to prevent future economic waste and abuse, the White House is urging CFPB to re-examine hundreds of rules promulgated under the older consumer protection statutes, like the Truth in Lending Act and the Home Ownership and Equity Protection Act that it administers. The dubious object of this exercise is to identify regulations that are too burdensome for a banking industry that is once again highly profitable and is paying huge bonuses to its executives. In the context of a regulatory regime that proved insufficiently protective of consumers to prevent the worst financial crisis since the New Deal, the executive order’s look-back requirement is not just bad policy -- it is bizarre.

Professor Steinzor criticized the White House for adopting the business community’s framing of the role of protective federal regulations. In a conference call with reporters Monday, Mr. Sunstein once again adopted the industry’s talking points. He heralded the new executive order as “a positive step toward promoting economic growth and job creation.” It is time for President Obama to stop listening to advisors like Cass Sunstein and Timothy Geithner and begin listening to the people who are still suffering from the recession brought on by a financial meltdown caused by inadequate federal regulation.