CFPB Funding Issues Seem To Be Coming To A Head

As we have previously reported, a lawsuit was brought early this year by the unions representing CFPB employees against Acting CFPB Director Vought and the CFPB in the DC District Court.

The Court months ago enjoined the CFPB from terminating some 1,400 employees and taking certain other actions in pursuit of Vought's goal of minimizing the CFPB while the lawsuit is pending.

Vought recently filed a notice with the Court advising Judge Jackson that the CFPB is rapidly running out of funds and is unable to request additional funds because of a written legal opinion given to Vought by the Department of Justice's Office of Legal Counsel ("OLC") that he may not lawfully request any funds from the Federal Reserve Board while there is no "combined earnings of the Federal Reserve System."

Under the Dodd-Frank Act, the CFPB may be funded only out of such "combined earnings" and since September 2022, the Federal Reserve System, on a combined basis, has been incurring massive losses. Vought is seeking clarification from the District Court that it will not be in violation of the injunction if the CFPB needs to terminate employees and take certain other enjoined actions because of its lack of funds and its inability because of the OLC opinion, to request additional funds from the Fed.

The labor unions responded to the CFPB's notice by arguing that there is no legal impediment precluding Vought from seeking additional funds from the Fed because "combined earnings" in the Dodd-Frank Act means combined revenues and not combined profits. They further argue that the injunction should be "clarified" so as to require the CFPB to seek additional funding from the Fed.

The CFPB responded by making the following points, taken from the table of contents of its brief:

"I. Plaintiffs Are Functionally Seeking a New Order—or a Modification to the Preliminary Injunction—to Compel the Acting Director to Request Funding from the Federal Reserve.

II. Plaintiffs Have Not Established that the Court May Order the Acting Director to Seek Funding from the Federal Reserve.

1. The Court May Not Modify the Preliminary Injunction Because Defendants' Appeal of the Preliminary Injunction Order Remains Pending.
2. Plaintiffs Cannot Establish a Likelihood of Success on the Merits of Their Claims for Wholesale Supervision of CFPB Activities Pleaded in the Amended Complaint Because the D.C. Circuit's Opinion Is the Law of the Circuit and Law of the Case.
3. Plaintiffs Have Not Established Any of the Criteria for Obtaining the Mandatory Injunctive Relief That They, in Effect, Are Seeking.

III. Plaintiffs Are Incorrect that the "Combined Earnings of the Federal Reserve System" Refers to the Federal Reserve's Revenues Rather than Its Profits

1. Plain Meaning
2. Statutory Context and Structure.
3. Background Presumptions and Legislative Context.
4. Legislative History and Purpose.

IV. If the Court Grants Relief to Plaintiffs, It Should Identify with Specificity What It Is Ordering Defendants to Do.

V. Any Order that Explicitly or by Implication Compels the Acting Director to Seek Funding from the Federal Reserve Should Be Temporarily Stayed."

The latest development in the case is that a group of former Fed employees has filed a motion to submit an amicus brief in support of the plaintiffs.

The proposed amicus brief makes the following points, taken from the table of contents of the brief:

"1. The Federal Reserve continues to generate "combined earnings" even under OLC's definition of that term.

2. The OLC opinion's analysis of "combined earnings" is mistaken.

1. The opinion's interpretation of "combined earnings" is based on private-enterprise concepts that do not apply to the nation's central bank.
2. The opinion offers an implausible account of why Congress might have intended to limit the CFPB's funding to the Federal Reserve's "profits."

3. Congress could have foreseen that the Federal Reserve would at times lacks "profits."

4. Transferring money to the CFPB when the Federal Reserve lacks "profits" does not impede the Federal Reserve's independence or operations.

1. The opinion fails to consider the implications of its own interpretation on the operations and independence of the Federal Reserve."

The CFPB opposed the motion only on the basis that it was untimely filed. The District Court nonetheless granted the motion.

In deciding how much weight to give to this amicus brief, we think that Judge Jackson should consider the following factors:

None of the proposed amici were in the accounting department at the Fed and none of them purport to be experts with respect to generally accepted accounting principles ("GAAP") or with respect to Fed accounting principles to the extent that they differ from GAAP.

None of them were involved in drafting or advising the Fed or Congress about the language in Dodd-Frank which dealt with how the CFPB would be funded.

Most importantly, they all left the Fed before September 2022 when the Federal Reserve System started and continued to lose money on a combined basis and therefore, none of them were ever consulted about how that would impact funding for the CFPB.

Even if the Federal Reserve System has finally turned the corner and now has profits on a combined basis (which has not yet been established by any court or the Fed itself), the amici fail to explain how the CFPB can lawfully fund the CFPB when 10 of the 12 Federal Reserve Banks still have approximately $240 billion of accumulated losses incurred after September, 2022 which are reflected as deferred assets on the balance sheets of those Reserve Banks.

We will continue to monitor developments in this case.

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