Conservatives appear to be gearing up for a new legal battle over the Consumer Financial Protection Bureau’s (CFPB) funding structure, just weeks after the watchdog agency survived a Supreme Court challenge.
Established after the 2008 financial crisis, the CFPB has faced numerous legal challenges during its short existence.
Last month, the Supreme Court ruled that the CFPB’s funding mechanism for drawing money from the Federal Reserve is constitutional, dismissing the agency’s largest lawsuit since its founding.
But within days, conservative lawyers began arguing that the decision created new vulnerabilities for the CFPB.
In a Wall Street Journal op-ed shortly after the ruling, Harvard Law School professor emeritus Hal Scott laid out a new argument: that the Fed doesn’t have the money to give to the Fed.
“The Court has held that the Constitution’s Appropriations Clause allows Congress to fund the Treasury with the Federal Reserve’s profits,” Justice Scott wrote, “but for nearly two years the Federal Reserve has been running deficits because of rising interest rates.”
“This calls into question the justification for the CFPB’s funding beyond September 2022, and all regulations issued during that period,” he continued. “What was a dramatic victory for the CFPB may turn out to be a stunning defeat.”
The central bank began raising interest rates in March 2022 after inflation spiked. Interest rates are currently hovering at a 20-year high of 5.25-5.5% and are set to remain at that level from July 2023 onwards as inflation remains persistent.
The Federal Reserve’s aggressive interest rate hike campaign caused net income to turn 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 Dodd-Frank would prevent a future Congress from “disciplining” the Fed with “fiscal powers” by giving the bank a cut of its revenues.
“But the inescapable logic is that it depends on whether there are benefits to be shared,” Pollock wrote in a blog run by the Federalist Society, a conservative legal group.
“Naturally, a majority in Congress assumed (and probably never thought about it) that the Fed would always be profitable,” Pollock continued. “And it always has been. But that turned out to be a completely wrong assumption.”
This means the CFPB’s actions “may now be deemed unlawful” and “any regulations issued after at least 2023 may be invalid,” Scott wrote in a Wall Street Journal op-ed.
He pointed to two recently proposed rules that have been widely opposed by the banking industry: the credit card late fee rule and the insufficient balance fee rule.
The latest theory questioning the CFPB’s legitimacy has made its way swiftly to Congress.
When CFPB Director Rohit Chopra appeared before the Senate Banking Committee on Wednesday, Sen. John Kennedy (R-Louisiana) accused the bureau of “operating illegally.”
“The Fed was making money for a long time, and then in September 2022 that stopped. Now they’re losing money,” Kennedy said. “Why would you? [to] “Do you have money right now? The Fed has no profits.”
But when Chopra appeared before the House Financial Services Committee on Thursday, Rep. Brad Sherman (D-Calif.) defended the agency’s funding structure.
“Congress certainly did not anticipate that the Fed’s operations would be suspended or resumed based on whether the Fed was profitable in a given year,” Sherman said.
Essentially, the discussion of the CFPB’s funding structure hinges on the definition of the word “revenue” in the Dodd-Frank Act.
The law states that the central bank “shall transfer to the Treasury Department from the gross receipts of the Federal Reserve System such amounts as the Director determines to be reasonably necessary.”
Consumer law expert Jeff Soburn said revenue could refer to either profits or earnings, but he argued that because the Federal Reserve Act uses the phrase “net revenue,” the argument that it refers to profits is unfounded.
“If the law says net income, then the word income without the word net must mean income,” Soburn told The Hill.
Even if revenue means profit, there is no law that dictates revenue for the fiscal year in which the CFPB receives funding, meaning the agency could receive funding from prior years, he noted.
Like Sherman, Soburn suggested that Congress likely did not intend for the CFPB to ask Congress for funding in a year when the Fed does not run a surplus.
“Congress was clearly trying to create a funding structure that would allow the bureau to avoid having to request funds from Congress or the Appropriations Committees every year,” Soburn added.
Christine Zinner, senior consumer policy adviser at the American Institute for Financial Reform, suggested the financial services industry is “really digging its bottom out” in recent discussions.
“Wall Street and predatory lenders will never give up trying to stop the CFPB,” she said in a statement. “An agency dedicated to taking on such powerful interests will never get away with it.”
Steven Hall, general counsel and securities expert at Better Markets, similarly dismissed the new theory as “thin,” but acknowledged that some courts may still hear cases based on the argument.
“Unfortunately, this attack, whether genuine or not, is likely to result in a sympathetic ruling, particularly from the Fifth Circuit, but that does not mean that it will or should ultimately prevail,” Hall said in a statement to The Hill.
“Unfortunately, what these allegations really signify is the intensity of the animosity that many in the financial services industry feel toward the CFPB,” he continued. “That has been evident for years, and the CFPB’s structure, rules and other actions have been the target of relentless challenges from payday lenders, large banks and others.”
