District Court Refuses To Modify Preliminary Injunction Against CFPB While Clarifying That CFPB Is Not Precluded From Requesting Operating Funds From Fed Because Of Fed's Losses

In a case of first impression, in clarifying her injunction issued in the lawsuit brought by the National Treasury Employees Union and others challenging the planned reductions in force and other efforts to reduce functions at the CFPB, Judge Amy Berman Jackson of the DC Federal District Court vigorously rejected the opinion of the Office of Legal Counsel of the Department of Justice ("OLC") that the CFPB may not be funded by the Fed because (1) the Dodd-Frank Act provides that the CFPB may only be funded by the Fed out of "combined earnings of the Federal Reserve System", (2) the term "combined earnings" means combined profits and not combined revenues and (3) the Federal Reserve System has incurred losses since September 2022. Instead, Judge Jackson held that "combined earnings" means simply combined revenues.

As a result of reaching this opinion, Judge Jackson concluded that the preliminary injunction issued by her earlier this year, as slightly modified by the DC Circuit Court of Appeals, remains in full force and effect and that the CFPB may not refuse to request additional funds from the Fed in order to perform statutorily required functions. Judge Jackson also concluded that the preliminary injunction provision precluding the CFPB from instituting an agency-wide mass reduction-in-force ("RIF") remains in full force and effect.

In reaching her opinion about the funding issue, it is noteworthy that Judge Jackson based her opinion on the assumption that the Federal Reserve Banks are still losing money even though the plaintiffs argued that they are now turning a profit on a combined basis and that, even if OLC's interpretation of "combined earnings" is correct, that argument would be moot under existing circumstances. As a result, the Court avoided having to conduct a hearing to determine whether the Federal Reserve Banks now are profitable on a combined basis and, if so, whether the Fed would be required to honor certain funding requests from the CFPB.

Judge Jackson addresses in her opinion among other things, prior CFPB and Fed statements regarding interpretations of the funding language in Dodd Frank.

As recently as 2024, the CFPB took the position in CFPB enforcement litigation that the "plain meaning" of "combined earnings."

refers to the System's income." Chair Jerome Powell reiterated this position interpretation in testimony before Congress; he explained that the Fed "looked at th[is] question very carefully" and determined that "it's very clear on the law and legislative history" that the Fed is "required to make those payments" even when the Fed is operating at a loss.

Judge Jackson further relied on dictionary definitions of "earnings" which defined the word as revenues. Judge Jackson noted that the Federal Reserve Act used the term "net earnings" and (and not "earnings) to mean profits. Finally, Judge Jackson argued that Congress could not have intended to subject the CFPB's survival to the vagaries of the Fed's financial situation from time to time.

We have previously argued that "combined earnings" means combined profits and won't belabor our argument in this blog. Suffice it to say, we would expect the CFPB to take an immediate appeal of Judge Jackson's opinion to the DC Circuit Court of Appeals. There is already pending before the that Court en banc an appeal from Judge Jackson's issuance of the preliminary injunction (A three-judge panel of the Circuit Court had reversed Judge Jackson's earlier decision, but that decision was vacated when the Circuit Court granted a petition for rehearing en banc.) In order to shorten the review time for any appeal of Judge Jackson's new opinion dealing with the funding issue, it would make sense for that appeal to be combined by the en banc Circuit Court with the already pending appeal without the new appeal first being heard by a three-judge panel. It seems likely that the funding issue is headed to the Supreme Court. `

Things are further complicated by two other recently filed lawsuits filed by Public Citizen in the Federal District Court for the Northern District of California (see here) and another by 21 state attorneys general in the Federal District Court for the District of Oregon, which raise the same funding questions (see here ).

In the meantime, unless the CFPB is able to obtain a stay of Judge Jackson's clarification, Acting Director Vought may need to request funds from the Fed since, according to the Acting Director, the CFPB is on the verge of running out of money and would be in violation of the preliminary injunction if he still refuses to request funds from the Fed. Judge Jackson's opinion may also affect the CFPB's Regulatory Agenda, which the industry largely supports. That agenda includes, among other things, proposed rules regarding the Equal Credit Opportunity Act, Section 1033 of Dodd Frank (open banking), and Section 1071(small business loans data collection). Since Vought announced that the CFPB would soon be running out of funds and that he felt legally unable to request funds from the Fed, the industry has been deeply concerned about how the CFPB would be able to accomplish its ambitious regulatory agenda.

There had been rumors, and in some court cases' status reports filed by the CFPB, indicating that the bureau would issue one or more Interim Final Rules before it ran out of funds.

In light of Judge Jackson's opinion, perhaps it will be unnecessary to use interim final rules as its path for accomplishing the bureau's Regulatory Agenda. Using interim final rules would have significantly increased the risk those rules would not survive a legal challenge.

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