On May 16, Justice Thomas issued the majority opinion in which the Supreme Court held, by a 7-2 vote, that the CFPB’s funding mechanism comported with the Appropriations Clause of the Constitution which states, in relevant part, in Article I, Section 9, Clause 7:

“No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law…”

Specifically, Justice Thomas held:

“Under the Appropriations Clause, an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes. The statute that provides the Bureau’s funding meets these requirements.”

That resolves the constitutional challenge. Left untouched by the Supreme Court is the statutory question of whether the CFPB and the Federal Reserve Board complied with the requirements of Dodd-Frank in connection with the CFPB’s funding. The Dodd–Frank Act generally provides that the CFPB is funded through requested draws from the Board of Governors of the Federal Reserve System in an amount the agency’s director deems ”reasonably necessary to carry out” the agency’s duties, subject to a statutory cap tied to the Federal Reserve System’s operating expenses.

Significantly, the Act only authorizes such draws to be made from “earnings” of the Federal Reserve System. Specifically, the relevant text of the Dodd-Frank Act is clear:

“Each year (or quarter of such year) . . . the Board of Governors shall transfer to the [Consumer Financial Protection] Bureau from the combined earnings of the Federal Reserve System, the amount determined by the Director to be reasonably necessary . . . “

On May 20, Professor Emeritus Hal Scott from Harvard Law School, wrote an op-ed in the Wall Street Journal entitled: “The CFPB’s Pyrrhic Victory in the Supreme Court “ and on May 21, Alex J Pollock wrote an article which was published on The Federalist Society website entitled: “The Fed has no earnings to send to the CFPB,” Professor Scott and Mr. Pollock stated that Federal Reserve System started incurring losses in September, 2022, that such losses continue to the present day and that the Fed is projected to incur losses until 2027.

It would thus appear that any draws made by the CFPB after August, 2022 were ultra vires or just plain unlawful.

This conclusion, which seems correct to me, raises a host of questions like:

1. What is the remedy if it is determined that certain draws were made to the CFPB when the Federal Reserve System was losing money? Does it mean that all regs and proposed regs worked on or defended on or after that date in litigation challenging them are invalid?
2. Is it too late for CFSA to raise this claim with the Fifth Circuit upon remand from the Supreme Court? Will CFSA need to file a separate lawsuit to tee up this issue or has CFSA waived its right to assert this claim. Does it matter that the payday lending rule became final but not effective before September 2022? CFSA’s lawsuit was initiated well before that date
3. Can all pending enforcement actions challenging final regulations be dismissed?
4. How else can this issue be litigated? A direct lawsuit against the Fed and/or the CFPB? Who would have standing?
5. Would the CFPB need to stop all ongoing regulatory, supervisory and enforcement activity until the CFPA gets amended to provide an alternative source(s) of funding?
6. Why did the Federal Reserve System all of a sudden start losing money in Sept, 2022? Was it caused by mark-to-market accounting or simply a negative gap between its interest earning assets and interest bearing liabilities?
7. Might consent orders entered into after Sept 2022 be nullified?
8. Should the Fed seek disgorgement from the CFPB based on draws paid out to the CFPB after Sept 2022?
9. Must Rohit Chopra be required to resign from the FDIC Board?
10. Can the CFPB continue to pay its employees out of unlawful draws? Must the CFPB seek disgorgement from its employees of amounts that can be traced to unlawful draws?
11. When is it projected that the Fed will start earning money again?

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