Is the CFPB facing still another challenge?

Shortly after the Supreme Court upheld the CFPB’s constitutionality in the CFSA case, Harvard Emeritus Professor Hal Scott published an op-ed in WSJ, The CFPB’s Pyrrhic Supreme Court Victory (behind paywall) claiming that the CFPB has still another problem to deal with. Professor Scott’s essay, along with another piece posted on a Federalist Society website titled The Fed Has No Earnings to Send to the CFPB, prompted Alan Kaplinsky both to write about the issue at Ballard Spahr’s Consumer Finance Monitor blog and to devote last week’s episode of the Consumer Finance Monitor podcast to the matter.

Basically, the argument goes like this: The Dodd-Frank Act says that the CFPB is to be funded out of the Fed’s “earnings.” But the Fed has been losing money since September 2022 and is not projected to make money again until 2027. Therefore, the argument goes, the Fed doesn’t have any earnings to send the CFPB, and without money, the CFPB can’t operate, and in fact has been funded in violation of the Dodd-Frank Act for some time.

The argument assumes that “earnings” means something like profits. I think it is fair to say that when we speak about individuals, we use the word differently, For example, when we talk about a person’s earnings from their job, we are referring to their wages, rather than, say, the amount they have left over after paying for the food they need to eat so as to be able to work, the clothing they need to wear so as to go to work, and so on. I don’t know how Congress or government accountants define earnings. Mr. Kaplinsky said during the podcast that he had asked an associate to check quickly how the Dodd-Frank Act uses the word earnings and that the statute uses it in different ways.

Even assuming that “earnings’ means profits as opposed to income, I think the argument also has another problem. The Dodd-Frank Act doesn’t provide that the earnings have to be from the year that the money is paid to the Bureau. Here’s the relevant language (italics added):

§5497. Funding; penalties and fines

(a) Transfer of funds from Board Of Governors

(1) In general

Each year (or quarter of such year), beginning on the designated transfer date, and each quarter thereafter, the Board of Governors shall transfer to the Bureau from the combined earnings of the Federal Reserve System, the amount determined by the Director to be reasonably necessary to carry out the authorities of the Bureau under Federal consumer financial law, taking into account such other sums made available to the Bureau from the preceding year (or quarter of such year).

(2) Funding cap

(A) In general

Notwithstanding paragraph (1), and in accordance with this paragraph, the amount that shall be transferred to the Bureau in each fiscal year shall not exceed a fixed percentage of the total operating expenses of the Federal Reserve System, as reported in the Annual Report, 2009, of the Board of Governors, equal to-

(i) 10 percent of such expenses in fiscal year 2011;

(ii) 11 percent of such expenses in fiscal year 2012; and

(iii) 12 percent of such expenses in fiscal year 2013, and in each year thereafter.

* * *

The statute says “each year (or quarter of such year)” the money shall be transferred to the Bureau. “Each year (or quarter of such year)” clearly refers to when the money has to be paid. But the statute doesn’t say the money has to come from that year’s earnings; only that it has to come from the Fed’s “combined earnings.” Why couldn’t it come from a previous year? Or even a future year, which I gather is the way the Fed is covering its other expenses? Notice the contrast with the spending cap language in subsection (2)(A), where the statute specifically refers to the Fed’s expenses in particular years. Congress obviously knew how to say that the money for the Bureau had to come from a particular year’s earnings but it chose not to. Congress could, for example, have said “the Board of Governors shall transfer to the Bureau from the combined earnings of the Federal Reserve System for that fiscal year” but it chose not to. The implication is that the earnings need not come from a particular year. I also wonder what to make of the phrase “combined earnings.”

Congress obviously wanted the CFPB to be funded up to a particular amount without going through the annual process of seeking votes from the appropriations committees, just as other financial institutions are funded outside that process. But in years when the Fed has no net earnings, the CFPB would in fact have to go through that annual process. Thus, Professor Scott’s argument would also frustrate Congress’s intent. It’s a very imaginative argument, and I enjoyed listening to the podcast and reading the items I link to above, but ultimately, I don’t think it works.

UPDATE: For others professors coming to the same conclusion I do, see Adam Levitin at Credit Slips and Vik Amar’s post here.

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