FOR IMMEDIATE RELEASE
Dec. 15, 2022
Senator Warns Court Ruling Threatens Federal Reserve Funding
Sen. Jack Reed of Rhode Island today warned that a recent court decision in the Fifth Circuit, though aimed at the Consumer Financial Protection Bureau, also threatens the funding stream of the Federal Reserve that underpins its independence from politics.
The Fifth Circuit Court of Appeals recently ruled that the CFPB’s funding, which is drawn from the Federal Reserve, is unconstitutional. That decision, which the Biden administration has asked the Supreme Court to review, calls into question the Fed’s funding, which occurs outside the annual appropriations process, Reed said.
“We should really start warning Wall Street right now and get their reaction to a Federal Reserve that is subject to congressional appropriation,” Reed said at a hearing of the Senate Banking, Housing and Urban Affairs Committee.
The Fifth Circuit declared the CFPB’s funding mechanism unconstitutional in response to a lawsuit brought by the Community Financial Services of Association of America, a lobby organization for payday lenders, a form of small-dollar, high-interest credit. It sought to overturn an anti-predatory lending rule the CFPB approved in 2017. Major bank lobby groups are making the same argument.
The core Fifth Circuit argument was that CFPB funding is unconstitutional because it does not derive from the annual appropriations process in Congress, and thus violates the Appropriations Clause of the U.S. Constitution.
Federal Reserve Vice Chair for Supervision Michael Barr recently pointed out to Congress that the central bank’s funding, independent of politics, works the same way as the CFPB. “That kind of certainty is quite important to doing our job effectively,” Barr said.
Under the 2010 Dodd-Frank Act, the CFPB draws funding from the Federal Reserve. It receives a maximum of 12% of the Fed’s 2009, inflation-adjusted operating budget. The Fed itself is funded independently of the annual appropriations process through money it collects from the regional reserve banks in the Fed system and interest on securities it owns.
“Wall Street and the predatory lenders who have always opposed the CFPB’s good work should think twice about the consequences of their actions,” said Elyse Hicks, consumer policy counsel at Americans for Financial Reform. “If they persuade the courts to pull the rug out from under the CFPB, they risk doing the same for the Fed.”
The FDIC, the Office of the Comptroller of the Currency, and the National Credit Union Administration all draw their funding outside the annual appropriations process. Other non-financial federal agencies are funded outside this annual process as well: Bureau of Engraving and Printing, The Federal Housing Finance Agency, Medicare, Social Security, and Farm Credit Administration.