Conservatives appear to be setting the stage for yet another legal fight over the Consumer Financial Protection Bureau’s (CFPB) funding structure, just weeks after the watchdog agency survived a challenge before the Supreme Court.
The CFPB, established after the 2008 financial crisis, has faced numerous legal challenges in its brief existence.
Last month, the Supreme Court ruled that the CFPB’s funding mechanism, which draws from the Federal Reserve, is constitutional, defeating the most significant legal challenge to the agency since its inception.
However, within days, conservative legal minds began arguing that the decision had created a new vulnerability for the CFPB.
In an op-ed in The Wall Street Journal shortly after the ruling, Harvard Law emeritus professor Hal Scott laid out the new argument — essentially, that the Federal Reserve has no money to give the agency.
“The justices held that the Constitution’s Appropriations Clause authorizes Congress to fund the bureau with profits from the Federal Reserve,” Scott wrote. “But for nearly two years the Fed has been losing money because of rising interest rates.”
“That calls into question the legitimacy of the CFPB’s funding since September 2022 — and all regulations issued during that period,” he continued. “The CFPB’s dramatic victory may turn out to be a stunning defeat.”
The central bank began raising interest rates in March 2022, as inflation skyrocketed. Rates now sit at a two-decade high of 5.25 to 5.5 percent, where they have remained since July 2023 amid stubborn inflation.
The Fed’s aggressive rate hike campaign pushed its net income into the negative starting in September 2022. In 2023, the central bank posted a record loss of $114.3 billion.
Alex Pollock, a senior fellow at the right-leaning Mises Institute, suggested that the Dodd-Frank Act blocked a future Congress from “disciplining” the agency with “the power of the purse” by granting it a share of the Fed’s earnings.
“With inescapable logic, however, that depends on there being some earnings to share in,” Pollock wrote in a post on the blog run by the Federalist Society, a conservative legal group.
“Naturally the congressional majority assumed (probably without ever thinking about it) that the Fed would always be profitable,” Pollock continued. “It always had been. But that turned out to be a wildly wrong assumption.”
This would mean that the CFPB’s operations “may now be illegal” and "regulations promulgated since at least 2023 could also be invalid,” Scott said in the Journal op-ed.
He pointed to two recently proposed rules — the credit card late fee rule and the nonsufficient funds fee rule — that have been widely opposed by the banking industry.
The latest theory questioning the CFPB’s legality has quickly made its way into the halls of Congress.
During CFPB Director Rohit Chopra’s appearance before the Senate Banking Committee on Wednesday, Sen. John Kennedy (R-La.) accused the agency of “operating illegally.”
“For the longest time the Federal Reserve was earning money, but that stopped in ... September 2022. Now, they are losing money,” Kennedy said. “How are you entitled [to] any money right now? The Federal Reserve doesn't have any earnings.”
However, Rep. Brad Sherman (D-Calif.) defended the agency’s funding structure when Chopra appeared before the House Financial Services Committee on Thursday.
“Congress certainly did not expect that your operation would shut down or repopulate based on whether the Fed is making money in a particular year,” Sherman said.
At its core, the debate over the CFPB’s funding structure depends on the definition of the word “earnings” in the Dodd-Frank Act.
The law says that the central bank “shall transfer to the Bureau from the combined earnings of the Federal Reserve System, the amount determined by the Director to be reasonably necessary.”
Earnings can either refer to profits or revenues, said Jeff Sovern, a consumer law expert. However, the Federal Reserve Act’s use of the phrase “net earnings” undermines the claim that it refers to profit, he argued.
“If the statute says net earnings ... the implication is that the word earnings without the word net must mean revenue,” Sovern told The Hill.
Even if earnings were to mean profit, he noted that there is nothing in the statute that specifies which year’s earnings the CFPB may receive its funding from, meaning the agency could be funded by previous years.
Like Sherman, Sovern also suggested that Congress likely did not intend for the CFPB to have to turn to the legislature for money in the years the Fed does not produce a surplus.
“Congress was obviously trying to set up a funding mechanism that made it unnecessary for the bureau to go to Congress, to the Appropriations Committees every year to ask for money,” Sovern added.
Christine Zinner, senior consumer policy counsel at Americans for Financial Reform, suggested that the financial services industry is "really scraping the bottom of the barrel” with the latest arguments.
“Wall Street and predatory lenders will never give up trying to stop the CFPB,” she said in a statement. “An agency devoted to fighting such powerful interests will never be home free.”
Stephen Hall, the legal director and securities specialist at Better Markets, similarly dismissed the new theory as “thin gruel” but acknowledged that some courts may still take up a case based on this argument.
"It’s unfortunately true that regardless of merit, this latest assault could well find its way into a sympathetic court, especially in the 5th Circuit. But that doesn’t mean it will or should ultimately prevail,” Hall said in a statement to The Hill.
“Sadly, what these claims really signify is the sheer intensity of the hatred that many in the financial services industry harbor towards the CFPB,” he continued. “That’s been evident for years, as the agency’s structure, rules, and other actions have been the target of relentless challenges by payday lenders, large banks, and others.”
