CFPB Bitter-Enderism

Retired Harvard Law Professor Hal Scott has a curious op-ed in the Wall Street Journal suggesting that despite (or because) of the Supreme Court's recent ruling in CFPB v. CFSA that the CFPB's funding is both unauthorized by statute and unconstitutional on account of the Federal Reserve System running a deficit currently (and projected through 2027).

It's a bizarre and incorrect argument, and were it coming from anyone other than Scott it could be dismissed as harmless and uninformed flibflab, but Scott is a personage with serious financial regulatory credentials, who is very tied in to the upper crust of anti-financial regulatory circles, such that one has to wonder if this is a trial balloon for a U.S. Chamber of Commerce or Bank Policy Institute-supported challenge. 

In any event, let me quickly explain why Scott is wrong on both the statutory and constitutional arguments.

Scott's statutory argument is that the CFPB is funded out of the "combined earnings of the Federal Reserve System." Scott understands "earnings" to mean profit, that is income net expenses, so he reasons that if the Federal Reserve System has no earnings that the CFPB has no statutory right to its funding. But he's got a wee problem. The Federal Reserve Act itself uses the term "net earnings," when referring to the calculation of the surplus that the Federal Reserve Banks must remit to the Board of Governors for transfer to the Treasury's general fund. That the Federal Reserve Act refers to "net earnings" suggests that "earnings" standing alone means something different, such as gross earnings.

As for the constitutional argument, Scott notes that Justice Thomas's opinion in CFPB v. CFSA held that the CFPB's funding were appropriations because "surplus funds in the Federal Reserve System would otherwise be deposited into the general fund of the Treasury," so these funds count as having been "drawn from the Treasury." Scott argues that because the Treasury isn't receiving any surplus from the Fed that payments from the Fed to the CFPB can no longer be considered "drawn from the Treasury," and thus within the ambit of the Appropriations clause.  

Once again he's got it wrong. First, Scott seems to have the view that the Appropriations clause works on some sort of annual accounting basis. It does not, except for funding the Army. The open-ended nature of appropriations means that surpluses in one year and deficits in another just cancel each other out. The fact that the Fed is running a deficit in any given year is just irrelevant because any time it has a surplus, those funds will go to Treasury.

Consider if Congress said that an agency was to be funded with all taxes of a certain type collected. It would still be an appropriation even if no taxes were collected in a given year. An appropriation is a designation of a source of funds, not a promise that the funds will exist. As Justice Thomas wrote in CFPB v. CFSA, "we conclude that appropriations need only identify a source of public funds and authorize the expenditure of those funds for designated purposes to satisfy the Appropriations Clause." There is no requirement that the funds actually exist at any particular point in time.

Second, the whole point of Justice Thomas's observation is in the subjunctive:  surplus funds would otherwise does not require that there be surplus funds, and the statutory definition of the Federal Reserve banks' surplus is the "net earnings" after (1) all necessary expenses (which would include the CFPB's assessment as well as the Federal Reserve Board's assessment) and (2) permitted dividends.

Third, if Scott were right, his argument doesn't just doom the CFPB:  it dooms the funding for the Board of Governors as well, as that funding—which is also a necessary expense of the reserve banks—would also sit outside of appropriations under Scott's reasoning. That dog don't hunt.  No Supreme Court is going to pull down the roof of the Federal Reserve Board just to satisfy those folks who would like to eliminate the CFPB.

My take is that CFPB constitutionality fights are over and done. It concerning to see Scott signalling a bitter-ender fight, but I just don't see this argument gaining traction, even in the 5th Circuit. There will be plenty of fights about specific CFPB rules and enforcement actions. But as much as it might gall Hal, the issue of the CFPB's constitutionality is closed. 

Comments

[Bob Lawless]

A similar conclusion over at Justia from my colleague, Vik Amar: https://verdict.justia.com/2024/05/23/could-the-consumer-protection-finance-bureau-cfpbs-victory-in-the-supreme-court-last-week-boomerang-to-disempower-the-bureau-and-invalidate-its-regulations-not-if-the-case-is-read-carefull.