Wall Street Lobby Surfaces New Nonsensical Legal Claim Over CFPB Funding

Last month the Supreme Court delivered a crushing defeat to Wall Street’s challenge to funding of the Consumer Financial Protection Bureau. Undeterred, Wall Street is now trying to distort the Supreme Court’s decision to conjure up a new and utterly nonsensical argument about the legality of the CFPB’s funding.

The trial balloon for this argument was launched in an op-ed in The Wall Street Journal by Hal Scott, a retired Harvard Law professor and longtime industry shill whose specialty is neither consumer nor constitutional issues but international finance. Scott’s notion has already been swatted down by several credentialed legal experts of various political stripes.

“Wall Street and predatory lenders will never give up trying to stop the CFPB.  An agency devoted to fighting such powerful interests will never be home free,” said Christine Zinner, senior consumer policy counsel at Americans for Financial Reform. “But with these sorts of legal arguments, the financial services industry is really scraping the bottom of the barrel.”

The CFPB is funded through a statutory formula and cap from the “earnings” of the Federal Reserve System. A secure, independent funding stream is typical for bank regulators and was upheld as constitutional this year by the Supreme Court in CFPB vs. CFSA. 

A 7-2 majority held that the CFPB’s funding was an “appropriation” that is “drawn from the Treasury” and therefore constitutional under the Appropriations Clause. The opinion, written by Justice Clarence Thomas, noted that the Federal Reserve System remits its excess funds to the Treasury, so its payment to CFPB effectively “drawn from the Treasury.”

Scott argues that the Supreme Court’s ruling means the CFPB can only be legally funded in years when the Fed runs a profit, as otherwise it would not have “earnings,” and without excess funds to remit to the Treasury, the CFPB’s funding would not be constitutional as an appropriation.

Historically, the Fed, which has a large securities portfolio, operated at a profit and remitted money to the Treasury. In 2022, however, as interest rates rose and the Fed’s portfolio shrank, it began to operate at a loss. Scott argues that this means the Fed has no “earnings,” which he understands to mean “net profits.” Moreover, Scott argues, if the Fed isn’t remitting funds to the Treasury, then the CFPB’s funding cannot be considered an appropriation.

Both arguments are wrong. As Jeff Sovern, a law professor at the University of Maryland, wrote: “[t]he Dodd-Frank Act doesn’t provide that the earnings have to be from the year that the money is paid to the Bureau.” Statutorily, money has to be paid to the CFPB annually, but it doesn’t have to come from that year’s “earnings,” only from the Fed’s “combined earnings.” Furthermore, the Federal Reserve Act defines the Fed’s surplus as its “net earnings,” indicating that “earnings” alone are not net of profits, but just means total income, a reading that comports with common usage.

Scott’s claim that the CFPB’s funding is not an “appropriation” in years when the Fed does not operate at a profit is equally nonsensical. As Georgetown University Law Professor Adam Levitin notes, the actual remittance of funds back to the Treasury is not what determines that there is an appropriation. Instead, it is enough that funds will be remitted if they exist. Vikram Amar, a law professor at the University of California at Davis, stressed this point as well in a detailed blog post.

Second, Scott’s argument suffers the same weakness as did the payday lenders’ case in CFPB vs. CFSA: any conclusion that defunds the CFPB also defunds the Federal Reserve.

“[I]f Scott were right, his argument doesn’t just doom the CFPB,” Levitin wrote, “it dooms the funding for the Board of Governors as well, as that funding — which is also a necessary expense of the reserve banks — would also sit outside of appropriations under Scott’s reasoning. That dog don’t hunt. No Supreme Court is going to pull down the roof of the Federal Reserve Board just to satisfy those folks who would like to eliminate the CFPB.”

Vikram David, a law professor from UC-Davis agrees with Levitin’s point, noting Scott’s failure to explain why the Federal Reserve itself could operate and spend money from its revenues while federal statutes such as Dodd-Frank would require only the Fed’s surplus and not all Fed revenues.

As we approach the 14th anniversary of the creation of the CFPB, the industry that always opposed its existence is trying to get traction with another, particularly weak, argument that it can bring to court. But no legal nonsense can change the fact that the CFPB continues to draw these attacks because it does its job of protecting consumers – and a very powerful industry lobby wants to tear it down.