Forcing Bank Deposits to Subsidize Stablecoins: the GENIUS Act

The Senate is set to take up a vote on this Thursday on the GENIUS Act, the legislation to create a regulatory framework for stablecoins. Whatever else one might think about stablecoins or the GENIUS Act, its insolvency provisions are an absolute mess, both conceptually and in drafting. If the GENIUS Act becomes the law, we're in for a FUBAR situation when a stablecoin issuer ends up insolvent. Even more concerning, if a bank custodian for a stablecoin issuer's reserves ends up insolvent, the claims of the stablecoin investors will come ahead of the bank depositors. That's right. Crypto comes ahead of ma-and-pa. 

The effect: stablecoins are being subsidized by bank deposits. Now that's GENIUS.

Pete Rose and Investment Markets

Hopefully readers will indulge me in a bit of a tangent for this post, which is about Pete Rose and his gambling, which often seems to be just another word for investing, particularly when investing in tokens that have no underlying fundamentals.

Rose, the all-time baseball hit leader and one of the most fun players to watch, was famously banned from the Baseball Hall of Fame for gambling on baseball, including on games in which he played or managed. There's now a push to posthumously rehabilitate him, with the President of the United States serving as one of his chief advocates. The President's argument is that Rose didn't do anything so bad because he never bet against his team. 

That's just incorrect. Rose claimed that he never bet against his team. We don't know if he did; he wasn’t the most credible character, given that he initially denied gambling on baseball at all. But let’s assume that he told the truth. Even if Rose never placed a bet directly against his team, he was absolutely betting against them because he wasn't placing one-off bets. He was a serial gambler with repeat relationships with a number of bookies. In that situation, gambling only on the Reds to win on certain days translates into gambling on the Reds to lose on other days.

The Form Knows Best (Does it Really?)

A few weeks ago, I got to give a talk at the University of Miami.  The focus: six myths about contracts, as many of us teach contract law (or at least as I teach it).  The talk was a blast -- the faculty at Miami were wonderful and generous, but poked all sorts of big holes in my claims.  The broader topic, in a little essay titled "The Form Knows Best" with two superb students (Tara Chowdhury and Faith Chudkowski), was the gravitational pull of the standard form on contract drafting practices. Our abstract:

Law students learn that contracts are carefully negotiated, precisely drafted, and shaped by doctrine. But lawyers tell a different story. This article compares six pillars of contract law with what we heard in over 170 interviews with senior transactional lawyers across M&A, sovereign bonds, and leveraged loans. The result is a gap between the Official Story taught in classrooms and the Unofficial Story told by practitioners—where boilerplate dominates, case law is rarely consulted, and market custom often prevails over rational design. We suggest that many contracts are better understood as historical artifacts—products of inherited forms and production pressure. Or, as one lawyer put it, more Mars Bar than masterpiece. That gap may matter—especially when courts often interpret form as if it reflects intent.

Deliberately Polluting the Death Master File Violates the Fair Credit Reporting Act

The Trump administration seems to be walking straight into a pair of Fair Credit Reporting Act violations by placing immigrants whom it knows to be alive on the Social Security Administration’s Death Master File. The Death Master File is a list compiled by the Social Security Administration of people Social Security believes to be dead (generally based on the filing of death benefit claims with Social Security, so it is not at all a complete list of who is actually dead). Creditors and other users of consumer reports regularly use the Death Master File, either directly or through a consumer reporting agency, as part of credit granting, employment, or insurance decisions—you don't want to be doing business with someone who is dead (and that might indicate that the living person with whom you are dealing isn't who they say they are). So, Death Master File issues end up being consumer reporting issues and fall under the Fair Credit Reporting Act, violations of which can not only create substantial private civil liability, but they can also be enjoined in a suit by a state attorney general.  

 

Fair Lending Deception by the CFPB

The Trump CFPB is seeking to vacate the consent order it entered into Townstone Mortgage for alleged violations of the Equal Credit Opportunity Act (ECOA). According to the Trump CFPB, CFPB staff engaged in misconduct by bamboozling former CFPB Director Kathy Kraninger about the legal strength of the case because they were woke warriors who took the position that “disparity automatically equaled discrimination,” and “wanted a de-facto mortgage quota, a policy aligned with the views of radical DEI proponents like Robin DiAngelo and Ibram X Kendi.” That view is hard to reconcile with the total number of discriminatory lending suits the CFPB has brought over the past eight years:  all of seven cases. Yup, that sure sounds like an out-of-control agency. 

 

If the Trump-controlled CFPB wants a consent order vacated "in the interests of justice," the district court should require it to prove both that there was in fact misconduct and that the misconduct harmed the defendant. The only "evidence" of this supposed misconduct is a self-serving, hearsay declaration by Dan Bishop, the Deputy Director of OMB (deputized to CFPB) reporting on his own alleged investigation. That's not "evidence." (And that's putting aside whether Bishop has been legally appointed to a CFPB position...)

 

But even if Bishop's story is credited entirely, there's still a problem. The supposed misconduct related to disparate impact liability and the reason the CFPB served a Civil Investigatory Demand on Townstone in the first place, but the defendant was sued for facial discrimination based discouragement of credit applications based on public statements its CEO made on a radio show named after the company. The Bureau could have brought the case without the information from the Civil Investigatory Demand. There’s no nexus between the supposed misconduct and the CFPB’s lawsuit, so there cannot be prejudice to the defendant. Accordingly, there's no reason to vacate the judgment in the interests of justice.

23andMe Bankruptcy

Quite a bankruptcy week. First there was Forever21's gone forever 22, and now we have 23andMe. Kudos to the Slips' own Melissa Jacoby and her co-authors Sara Gerke and Glenn Cohen for having the most timely publication ever regarding the 23andMe bankruptcy filing. But there are some weird things about this case, namely the debtor acquiescing in a massive stay violation and the St. Louis, Missouri, venue.

The Supreme Court Invites Bank Fraud Sophistry

The Supreme Court, in a decision that will surely be beloved of law professors, held that the bank fraud statute applicable to loan applications covers only actually false statements, not merely misleading statements. The Court got to flex its "oh look at how smart we are" muscle with clever illustrations of the difference between false and misleading statements:

If a tennis player says she “won the championship” when her opponent forfeited, her statement—even if true—might be misleading because it could lead people to think she had won a contested match. The Government also agreed at oral argument with another example: If a doctor tells a patient, “I’ve done a hundred of these surgeries,”
when 99 of those patients died, the statement—even if true—would be misleading because it might lead people to think those surgeries were successful.

And not to be outdone, Justice Alito adds in his own precocious observation in a concurrence:

After noticing that a plate of 12 fresh-baked cookies has only crumbs remaining, a mother asks her daughter, “Did you eat all the cookies?” If the child says “I ate three” when she actually had all 12, her words would be literally true in isolation but false in context. The child did eat three cookies (then nine more). In context, however, the child is implicitly saying that she ate only three cookies, and that is false.

Come on. Would common sense possibly suggest that Congress intended to allow misleading, but not literally false statements on bank loan applications? The result is absurd. Nothing in the legislative history would suggest that Congress wanted such a constrained view of the statute; indeed the legislative history isn't discussed, but there's lots of dictionary definition discussed. Apparently we are ruled by Merriam-Websters, rather than common sense. (And if that's the case, lets just have an AI judge and avoid all the SCOTUS nomination strum und drang). The Court's ruling is an invitation to the Holmesian bad man to go right up to the line of what is false. It all but invites Clintonian sophistry.

But given the Court's casuistry, let me pose my own:  if a bank's credit application included a question "Have you made any misleading statements on this application?" and the answer was false, would that trigger a violation of 18 U.S.C. § 1014?

I think the answer is yes. That suggests a simple regulatory fix to this bad decision: bank regulators should insist that bank loan applications include a declaration that the applicant has not made any misleading statements in connection with the application.

 

Is Greenpeace Heading for Bankruptcy?

[Updated 3/26/25:  I jumped the gun here; it's an occupational hazard of blogging.

 

It turns out that the North Dakota Rules of Civil Procedure are not the only North Dakota law on supersedeas bond requirements. Tucked away among the Century Code's provisions about the technical mechanics of execution and levy by sheriffs is a provision in the North Dakota Century Code that places a dollar limit on the supersedeas bond requirement. It limit the aggregate supersedes bond requirement for all defendants in a case to $25 million. That seems like a much more achievable figure for Greenpeace. as far as I can tell, the bonding limit came out of tort reform efforts. Who would have expected it to benefit an environmental group?

 

Assuming that the North Dakota courts follow the $25 million bond limit, I would expect Greenpeace to be able to post the bond, in which case bankruptcy would not be needed.]

 

It appears that the terminus of the Dakota Access pipeline is...Chapter 11. That's where I believe Energy Transfer's $660 million trespass and defamation verdict against Greenpeace in North Dakota state court is going to end up. Although Greenpeace is vowing to appeal the verdict, that's just a brave face. Greenpeace won't be able to post the supersedeas bond, and its US entities, at least, will likely end up filing for bankruptcy.  

 

Where Have I Heard This Before?

James Nani posted a story at Bloomberg Law about Tara Twomey's dismissal as executive director of the U.S. Trustee Program. It's worth a read and not just because of the shout out to my earlier blog post here on Credit Slips. 

Nani notes Twomey "isn't without critics." Fair enough, although that could be said for any effective governmental official. The critic in the article was Lawrence A. Friedman, himself a former executive director of the program from twenty years ago. From the article: "'Tara Twomey had no business being appointed to that job,' Friedman said. 'It was a political appointment at the behest of Liz Warren and others in the bankruptcy system.'" By "Liz Warren," I am fairly confident he meant Senator Warren.

The idea that Twomey had "no business being appointed" is appalling. Twomey had years of experience in consumer cases and business cases. Notably, she served as special consumer counsel in the chapter 11 of Ditech Holdings, a bankrupt mortgage servicer. She authored amicus briefs in consumer bankruptcy cases on behalf of the National Bankruptcy Rights Center. I am told her amicus briefs were cited more frequently in Supreme Court cases than any party except the solicitor general. She has taught courses at Stanford, Harvard, and Boston College. She was a member of the American Bankruptcy Institute's Commission on Consumer Bankruptcy, which has a full bio as of 2019 detailing her many accomplishments. At the time of her appointment, Twomey was a member of both the American College of Bankruptcy and the National Bankruptcy Conference. (Friedman is a member of neither.) These are prestigious, invitation-only organizations of bankruptcy professionals, although she had to resign from the NBC upon her appointment given that it takes substantive positions on bankruptcy policy issues.

Despite this record, Twomey had "no business being appointed?" Where have I heard that before?

Virtual Access to Event in Memory of Juliet Moringiello March 20 2025

Widener University Commonwealth Law School will hold an event honoring Professor Juliet Moringiello on March 20, 2025 at 1pm ET. Friends and fans of Juliet are welcome and encouraged to join virtually. The Zoom link is embedded in the image accompanying this post as well as accessible here. I will repeat what Widener says in the bottom of the image about Juliet: "Professor Moringiello was a beloved scholar, professor, mentor, author, administrator, colleague, and friend whose impact on our students and institution was profound and will never be forgotten. We gather to celebrate her contributions to the legal field, share memories, and find comfort in one another."

Making the Bankruptcy System Less Great

News reports this morning are confirming the rumors that went around the bankruptcy community last night. The Trump Administration has fired Tara Twomey as executive director of the Office of U.S. Trustees. This is a short-sighted and likely illegal decision.

The executive directorship of the US Trustee Program is a nonpolitical position. Twomey's predecessor served under both Republican and Democratic administrations. One report said the termination notice for another DOJ official cited Article II of the Constitution, meaning the Trump Administration must be relying on the wacky and ahistorical "unitary executive theory" where the president has unchecked power. That some judges and law professors have signed up for this idea does not make it any less wacky and ahistorical. The action against Twomey demonstrates that the only thing that matters now is loyalty to the president. Ability does not count. Twomey was a most able leader of the UST Program.

The Trump Organization’s Shake Down of Capital One

The Trump Organization is trying to shake down Capital One. And they’ll probably succeed. The Trump Organization has sued Capital One for closing its accounts in January 2021, allegedly because of Donald Trump’s political views. (Or, put differently, Capital One decided that it was not good business to continue being associated with an entity connected to the January 6 insurrection.)

As a legal matter, the Trump Organization's complaint is risible; Capital One should be able to easily get the case dismissed. But that might not matter because the Trump Organization has them over a barrel: if Capital One doesn’t pay up, the implicit threat is that the Trump administration will move to block the Capital One-Discover merger and generally make life unpleasant for Capital One. (Of course, if the Trump administration were really clever, they wouldn’t have dropped the CFPB suit so fast, but that’s probably just that the right hand didn’t talk to the left.) That’s gangster capitalism and underscores the incredible conflicts of interest that continue to exist for Trump.

Juliet Moringiello - One of the Greats

Juliet Moringiello was an amazing person. Her alchemy of brain and spirit and energy and heart and common sense made a positive difference for so many people, across disparate places and professions. She could teach you how to navigate a commercial law and to downhill ski.

Testaments from Widener University Commonwealth Law School and professional organizations illustrate how Juliet served academic and legal communities with distinction. Examples include the Uniform Law Commission (including an instrumental role in the development of the 2022 amendments to the Uniform Commercial Code), American Law Institute projects, and as a scholar-in-residence for the American Bankruptcy Institute. Juliet did these things while also serving in critical leadership roles at Widener and offering engaged and committed classroom teaching, including first-year property law and an array of upper level classes and seminars. 

Chris Odinet's memorial captures beautifully Juliet's commitment to helping others and building communities. As reflected in the mentoring award she recently received from the Commercial and Consumer Law Section of the Association of American Law Schools, Juliet did so much behind the scenes to lift up others and to help them improve their research and analysis. 

Juliet was ideally positioned for mentoring because her own scholarship was creative and wide-ranging and yet reflected care and attention to detail. She offered important insights on municipal bankruptcy and related state law procedures. Whereas scholars and jurists long have referred to the "Butner principle" in the abstract, Juliet closely studied the case for which the principle is named, which turned out not to match how it was remembered. She explored poorly drafted statutory language that since 2005 has affected the treatment of car loans in Chapter 13 repayment plans for individuals and proposed an analytical framework accordingly. These are just a few of the examples of her writings in which a reader can find careful and sustained attention to the relationship between state and federal law. 

With respect to state secured transactions law, Juliet comfortably traversed the border between real property and personal property. The problems dwelling from the tangible-intangible divide of personal property particularly attracted her attention. She explored puzzles that arise, for example, when one tries to apply fundamental concepts such as possession to remotely controlled activities.

And those projects dovetailed with Juliet's longstanding interest in understanding emerging technologies, and her ability to demystify how foundational commercial law concepts can be squared with innovation - from software licensing agreements and electronic contracting, to cyberspace and domain names and Second Life, to non-fungible tokens. As popular subjects for scholarship, writings on hot tech topics risk ephemerality. Juliet's work is built to last. She made these issues accessible while demonstrating how they could and should be situated in broader legal frameworks.

Of course, these professional interests were part of a rich multi-faceted life of family and friends, of appreciating the sights and nature in Pennsylvania, in Quebec, and anywhere and everywhere she traveled. When there wasn't enough snow for skiis, you might find her on a hike. Or on a bike. Or a paddleboard. 

Juliet Moringiello offers inspiration to do impactful work, to help others, and to spend time on the the things you love. Deepest condolences to her family. 

Predatory Financial Inclusion and the NCUA Ostrich

Shame on the National Credit Union Administration (NCUA). The NCUA announced that it would stop publishing data on overdraft and NSF fee income for individual credit unions. It did so in the name of…financial inclusion! 🤯 What really makes my head spin here is that NCUA still has a Democratic majority on its board. wtaf.

The concern apparently animating the NCUA’s decision to cease publishing institution-level data and only put out aggregate figures is that CUs with high overdraft fee income will be tagged as predatory institutions and suffer reputational consequences, discouraging them from offering for-fee overdraft services, which according to the NCUA Chair “can be the best option in a bad situation” … or which can also result in a $40 latte. To claim that “the previous data collection policy incentivized credit unions to avoid serving the needs of low-income and underserved communities” is sheer nonsense. Instead, it is just obfuscating the extent to which some credit unions are taking advantage of their members. What's worse, NCUA's move presages what might be a broader "going dark" move in bank regulation, in which the publicly available call report data will contain less and less granular information, masking the real financial condition of institutions and allowing regulators to sweep problems under the rug.

Several years ago, Aaron Klein at Brookings did a great study looking at how OD/NSF fees were a key revenue component for a small number of small banks. Klein observed that "It is disturbing that regulators tolerate banks that are mostly or entirely dependent on overdraft fees for profitability."The NCUA announcement spurred me to do the same for credit unions. The results are more troubling.

The GENIUS Act: Insolvency Risk with Stablecoins

In 2021 I posted a draft of an article about custodial risk in cryptocurrency that turned out to be quite prescient. At the time I wrote it, I got a lot of pushback from people in the crypto world that I was scaremongering and that crypto custodians were rock solid. I tried to explain to crypto investors that whatever they knew about crypto, they didn't know bupkes about bankruptcy, and that if and when things went south, the custodial situation was going to be a hot, hot mess.

And lo and behold, when Voyager and Celsius and BlockFi and FTX came along, a lot of crypto investors got slapped in the face by the workings of Chapter 11. Crypto investors found out that: (1) they were generally just unsecured creditors; (2) their claims were for dollars based on the value of the crypto holdings at the moment of the bankruptcy filing; and (3) it takes a long, long, long time to get paid in a bankruptcy case and you don’t get interest if you’re unsecured. Ouch.

Now we’re again at another peak crypto moment, and it appears that the industry has learned …. nothing (or perhaps everything, if you're cynical), as it is pushing federal stablecoin legislation, the so-called GENIUS Act, that is going to lull a lot of investors into thinking that stablecoins are safe assets, namely that a stablecoin is always redeemable for US dollars at a 1:1 ratio. It's not. A stablecoin will maintain a 1:1 peg ... until it doesn't, and once that happens, stablecoin investors are going to be taking serious haircut in the ensuing bankruptcy. None of the insolvency provisions in the GENIUS Act change that. There is no way to eliminate credit risk for free, but the GENIUS Act sets up expectations: I fear that this legislation is going to make unsophisticated investors wrongly believe that credit risk on stablecoins is not an issue. If that happens, the GENIUS Act is setting the stage for a federal bailout of disappointed cryptocurrency investors when a stablecoin issuer goes belly-up and investors discover that they don't have the protections they thought they had. 

In other words, the GENIUS Act is creating an implicit guaranty of stablecoins, which means it is creating an implicit subsidy of the whole DeFi world that operates outside the reach of anti-money laundering regulations. What genius thought this up?

Remembering Brady Williamson

Brady Williamson, a remarkable person, has died at the age of 79. Brady's engagement with the field of bankruptcy law is diverse and of long standing, from arguing before the United States Supreme Court to chairing the National Bankruptcy Review Commission, where I first met and worked for him as a staff attorney. More recently, Brady had a range of professional roles in big bankruptcies, such as those involving the Commonwealth of Puerto Rico, Purdue Pharma, and in cases that implicated air and water quality.  

Brady also had tremendous expertise in foundational constitutional law matters and a commitment to democracy, the rule of law, and fair elections at home and around the world. He recently worked with students on such matters from coast to coast, after teaching with some regularity over the years at the University of Wisconsin-Madison. The challenges and joys of university teaching was a topic of what turned out to be our last telephone conversation.

Brady's impact during his lifetime was broad and deep; it will be enduring. Deepest condolences to his loved ones.  

 

L'État, c'est moi

L'État, c'est moi is what came into my mind when I read the Executive Order on Ensuring Accountability for All Agencies issued by the President today. The executive order is not only the most complete and direct enshrinement of the unitary executive theory we've yet seen from the administration, but it also marks the end of independent regulatory agencies. And coming from a President with a distinct taste for Louis XIV gilt, well, you can understand why my mind wandered to the lord of Versailles. 

Debanked by the Market

The crypto industry has been spreading a tale of federal bank regulators persecuting crypto and forcing banks to "debank" crypto companies. Like the grossly mischaracterized Operation Choke Point, the crypto debanking narrative is utter and self-serving bs. At best, the actual evidence shows the FDIC expressing very normal and reasonable risk management concerns—that is, the FDIC was just doing its job. There is zero evidence that the FDIC ever threatened or directed banks not to do business with crypto companies.

The simple truth is that crypto companies were debanked by the market, not regulators. Banking crypto poses a unique, correlated credit risk that should rightly concern any bank's risk committee. Crypto companies present a risk of correlated chargebacks that makes them all potential Fyre Festivals, so banks with prudent risk management practices determined that it was a value negative proposition to provide banking services to crypto companies. That's the invisible hand of the market at work, not the invisible hand of the Deep State.

Unintended Consequences of Standing Down the CFPB

The DOGE approach to "reforming" government agencies is a sledgehammer. That's because it doesn't have the knowledge or patience to use a scalpel. But there are real costs to using a sledgehammer in terms of unintended consequences that are going to blow up on all consumers, be they MAGA supporters, Democrats, or Whigs. Let me highlight just one.

The Dodd-Frank Act, enacted in response to the 2008 financial crisis, prohibits lenders from making mortgage loans without verifying the borrower's ability to repay. The CFPB has a regulatory safeharbor, however, known as the Qualified Mortgage Rule.  If a mortgage is a Qualified Mortgage, it is deemed to satisfy the ability-to-repay requirement. To be a Qualified Mortgage, a mortgage loan must have an interest rate that does not exceed the "Average Prime Offer Rate" by more than a specified level. Sounds go so far, right? Basically, if a mortgage isn't priced too much higher than the average mortgage rate, we're going to assume that it's not problematic.

But here's the catch:  the "Average Prime Offer Rate" is a number determined by the CFPB. It isn't self-executing. Instead, CFPB personnel need to collect and analyze data and then periodically publish the Average Prime Offer Rate. If CFPB personnel are not permitted to work, the Average Prime Offer Rate will not update. (You can thank the Trump 1.0 CFPB for adopting this methodology instead of a debt-to-income ratio...) In a falling interest rate environment, that won't matter much. But if rates rise, then the Average Prime Offer Rate will be stuck at too low of a level, so more mortgages will fall out of the Qualified Mortgage safe harbor, thereby exposing lenders to legal risk. What could cause rates to rise? Well, tariffs for one thing, particularly if the Fed is concerned about keeping inflation in check. Hmmmm.

No, The CFPB’s Not Dead. It’s Not Even Close to Dead.

A lot of coverage of the Trump-Musk takeover of the CFPB has been treated the matter as if the Trump-Musk blitz has destroyed the agency. It hasn’t. Not even close. The CFPB has been stood down for now, but it is fundamentally intact. It hasn't been "deleted."  

 

It is possible for a smart, determined, and patient administration to seriously unwind large parts of the regulatory state while playing be constitutional rules.  DOGE, however, lacks the knowledge, personnel, and time to actually accomplish this. You need a lot of lawyers who know how agencies work—both in terms of substantive law and in terms of federal government employment law. They don’t have that. All they have is a handful of under-25-year old engineers and a few non-specialist attorneys. These folks don’t know how to actually dismantle government agencies. That’s why DOGE has adopted the shock-and-awe approach to government that makes lots of headlines and can foul things up for a while and generally make life unpleasant, but it isn’t actually capable of making any lasting structural changes DOGE cannot kill off the CFPB. That’s because the CFPB requires two things to be effective:  its legal authorities and its personnel. Trump and Musk have not dismantled either.  

Russ Vought Breaks the Law on His First Day as CFPB Director

The CFPB's acting Director, Project 2025's Russell Vought notified the Board of Governors of the Federal Reserve Board that the CFPB would not be making its permitted annual draw on the Fed for funding this year. He also direct the CFPB to cease all examination and supervision activity. Both actions are illegal.

Non-Bankruptcy Law in Bankruptcy Courts

This past year's American Bankruptcy Law Journal symposium at the National Conference of Bankruptcy Judges' Annual Meeting addressed the role of bankruptcy law in the larger U.S. legal system. The ABLJ recently published the related academic papers from that symposium. You can find them on the front page of the ABLJ site now. One of which I was honored to write.

My contribution, The Periphery of Bankruptcy Law: The Importance of Non-Bankruptcy Issues in Consumer Bankruptcy Cases, focuses on the range of state law exemption issues, UCC security interest issues, and federal and state consumer protection legal issues that appear in consumer bankruptcy filings to highlight how bankruptcy courts are one of the leading venues where people's non-bankruptcy legal problems may be litigated. In the piece, I write about how attorneys, trustees, and judges can provide people with a legal process to deal with their financial problems that they find meets their beliefs about what the bankruptcy process will offer them. Doing so will benefit individual debtors and the bankruptcy system, as a whole. As Slipster Bob Lawless has calculated, one in eleven Americans will file bankruptcy at some point during their lives. The chapter 11 cases of large companies and some non-profits make headline news. The public's perception of the bankruptcy system matters to the legal system's integrity.

Shutting Down CFPB Is Not Like Shutting Down USAID

Elon Musk seems to have CFPB on his hit list after having trashed USAID. Here's the thing: shutting down CFPB is actually very different in effect than shutting down USAID. USAID provides an important set of tools for American diplomacy and funds a lot of good works around the world. But it is not a regulatory agency. It doesn't administer statutes and promulgate regulations. CFPB does. Shutting down USAID harms development aid recipients and diminishes the US's foreign relations toolkit, but it doesn't cause problems with the operation of US law. Shutting down CFPB does.

Shutting down the CFPB does not void the Consumer Financial Protection Act or the enumerated consumer laws the CFPB administers like the Truth in Lending Act and the Electronic Fund Transfer Act. Those authorities can only be changed by an act of Congress, which will require 60 votes in the Senate. Nor would a work shutdown void the regulations the Bureau has promulgated under those laws. Those can only be repealed through notice and comment rulemaking. But it does mean that there would be no one with authority to update and adjust those regulations, which can all be enforced by state attorneys general, who are likely to pick up some of the slack from a non-functioning CFPB. (Remember that a violation of an enumerated consumer law is a violation of the Consumer Financial Protection Act, triggering CFPA remedies, not just the enumerated consumer law's remedies.) 

This might not matter to Musk in his move fast and break things mode, but a non-functional CFPB is going to cause real problems for regulated financial institutions.  Let's start small:  the Truth in Lending Act has exemptions for smaller transactions. The exemptions get inflation adjusted, but that requires a functional CFPB to promulgate the adjustments through rulemakings. Or suppose a firm wants to get a no-action letter. That's not going to be possible without the CFPB functioning. Or suppose there is another pandemic-like crisis that requires temporary suspension of certain rules. Not possible if the agency isn't up and running. Bottom line: there are real problems that will arise from having a zombie agency responsible for over a dozen major federal laws.  

Feb. 8. 2025 update:  Both USAID and CFPB have statutory duties to Congress. Like USAID, the Bureau is required to submit various annual or semi-annual reports to various Congressional committees (see e.g. or here or here or here or the last section here). These reports are a critical part of Congressional oversight over the Bureau. A Bureau that isn't operating can't exactly do that, which might be grounds for members of Congress to bring litigation against the administration. Whether a report that simply says "We didn't do anything because we didn't feel like it, nyah, nyah," makes muster is an open question—is there a good faith requirement implied? I could see courts saying, "It's up to Congress to discipline an insubordinate agency or a President who fails to take care that the laws are faithfully executed." But the reporting requirement might give members of Congress a hook for litigation over deactivating the agencies based on a concern that the agency will not report and that it will be impossible for Congress to undertake timely action. After all, there is a new Congress every two years, basically pressing a restart button, such that failure to transmit an annual report for 2025 would not even be on Congress's radar until 2026 and Congress might not have time to act before a new Congress is in place. Put another way, courts might need to take judicial notice of Congress's limited temporal bandwidth for governing a federal government that is vastly more complex than anything the Framers imagined.