Put ‘regulation by enforcement’ where it belongs: The trash

In a welcome announcement, Consumer Financial Protection Bureau (CFPB) Acting Director Mick Mulvaney declared an end to “regulation by enforcement.” For nearly a decade, the bureau has had free rein to enforce all sorts of consumer protection laws. It has wielded that power. 

In one example, then-CFPB Director Richard Cordray overruled a $6.4 million fine against a mortgage lender and slapped a fine of $109 million in its place.

{mosads}But the director’s unilateral decision to impose over $100 million in additional sanctions wasn’t the only disturbing thing about the bureau’s decision. The decision to go after the mortgage lender in the first place underscores the dangers of regulation by enforcement.

Most of us expect to have some notice of whether our actions are illegal. Police officers do not hand out traffic tickets based on whims about whether someone is driving too fast. Rather, motorists frequently see signs notifying them of the speed limit.

You’d think you’d see something similar when the penalties are a million times greater. But not so. In levying the fine, CFPB purported to enforce a housing law from the Nixon administration. But that law didn’t say that the lender’s reinsurance agreements were illegal. It instead prohibited lenders from accepting a “thing of value” in any real estate deal involving a mortgage loan.   

But what are things of value? Money? Publicity? Baseball cards? Under the guise of enforcing this vague provision, the CFPB fined the mortgage lender over $100 million for participating in an insurance program. 

Worse, the Department of Housing and Urban Development, which had enforced the housing law before Congress created the CFPB in 2010, had long stated that the insurance program at issue was legal. Lenders relied on those statements.

But the CFPB — eager to dish out massive fines — sought to renege on the department’s promise. Then-Judge Brett Kavanaugh observed that the bureau’s decision contradicted basic norms of due process.

He likened the CFPB’s actions to a policeman who told a pedestrian that it was legal to cross the street at a certain place before handing that pedestrian a $1,000 ticket for jaywalking when he arrived at the other side. 

All signs indicate that the CFPB will end “regulation by enforcement.” Yet, other agencies seem poised to continue the practice. Worse, their sights may be set not on corporations with teams of attorneys but on law-abiding individuals who may be coerced in acceding to the agency’s demand.

Take the example of the Sacketts. Mike and Chantell Sackett wanted to build a house on their land. The Environmental Protection Agency (EPA) wasn’t too happy about this and insisted that the Sacketts needed a permit to develop their own property.

The EPA claimed that this was mandated by the Clean Water Act, which the Supreme Court had called “hopelessly indeterminate” in scope. But that’s not all. When the Sacketts demanded their day in court, the EPA asserted that their actions were unreviewable until they sought to enforce the fine. Meanwhile, the Sackett accrued ruinous liability — to the tune of $75,000 per day! 

Pacific Legal Foundation, a nonprofit public interest organization that defends liberty for all, secured a unanimous victory for the Sacketts in the Supreme Court. The court stated that it is deeply unfair to force Americans to incur $75,000 liability each day while they waited for the EPA to drop the hammer.

Although the Sacketts were able to secure pro bono representation, agency threats leave countless other Americans with no choice but to dance to the agency’s tune.

Americans should applaud the CFPB’s assurance to halt regulation by enforcement. But other agencies continue to engage in these practices today. Courts have intervened to vindicate basic norms of due process in the past. Let’s hope we can continue to call on the judiciary to serve as a bulwark for individual liberty going forward. 

Wen Fa is an attorney with the Pacific Legal Foundation, established for the purpose of defending and promoting individual and economic freedom in the courts.