A court decision has strengthened the CFPB’s footing as debates over its future continue

Guest:	Alan Kaplinsky
Title:	Senior Counsel at Ballard Spahr
Summary:	A recent court ruling requiring continued funding of CFPB gives the organization room to keep carrying out its mission despite ongoing pressure from the White House and Congress. We’ll examine how the decision affects the bureau’s day‑to‑day operations and longer‑term outlook.

The Federal Drive with Terry Gerton provides expert insights on current events in the federal community. Read more interviews to keep up with daily news and analysis that affect the federal workforce. Reach out to Terry and the Federal Drive producers with feedback and story ideas at FederalDrive@federalnewsnetwork.com.

Interview transcript

Terry Gerton You are one of the most knowledgeable people about the CFPB. It was one of Trump administration’s first targets last year. But a recent court decision may upend some of the reorganization that they’ve put in place. A federal judge has ruled that the CFB must continue to request funding through the Federal Reserve. So, many people may not know how CFP is funded. Walk us through that process and what the basis of the court decision was.

Alan Kaplinsky Sure. So, Terry, the CFPB was created as part of the Dodd-Frank Act of 2010. And you’ll recall that the Dodd-Frank Act was enacted in response to the economic meltdown that had occurred around 2008, roughly during that period. And it was a period when there was definitely a lot of anti-bank feeling throughout the country and particularly among the congress folks and the senators in Washington. And they enacted this huge bill, the Dodd-Frank Act, that contained a very important provision that created the Consumer Financial Protection Bureau. That was actually a brainchild of Elizabeth Warren. She had written, in effect, a law review article several years before that in the University of Pennsylvania laying out her ideas. It was created with, I would say, not a lot of input from the banks because there was a lot anti-bank feeling. And in order to purportedly insulate this new agency from being attacked by congressmen and Republicans every time that it needed to obtain funds for its operations, they created this pretty unique funding structure that said that they would be funded by the Federal Reserve Board. And then here’s the important language, out of the combined earnings of the 12 federal reserve banks in the country, okay? That’s how it got funded. The idea was they would not have to go hat in hand to Congress every year begging for money. The problem occurred when interest rates started to soar, after the enactment, the bill was enacted in 2010 and rates started going up about three or four years ago, roughly, and going up very, very rapidly. And all of a sudden, before anybody knew it, the Federal Reserve banks collectively were losing a lot of money. And the statute said that they could only be funded out of collective earnings. And so the question was, with all these losses that they were suffering, where was the earnings? Most people felt, including myself, that earnings meant profits. It didn’t mean revenues. Okay. And as I said, the Federal Reserve System was losing billions and billions of dollars. And there was, what I consider to be a pretty good argument that it could not be funded, that the CFPB essentially would have to be put on hold for a period of time until after the Federal Reserve’s bank started making money again as interest rates started declining. And so that was the lead up to this case. And this important decision by Judge Davila basically rejected the argument that had been made by acting Director Vought of the CFPB. He just didn’t buy the argument. He said there were multiple definitions of earnings and that earnings in this context really meant revenues because it didn’t make sense that Congress would have wanted to subject the CFPB to the great uncertainty of how much the Federal Reserve banks were going to actually earn or make in the way of profits during each year. And he directed the CFPB to start making requests for funding. So the leadership of the CFPB and the Trump administration gave up that argument. I mean, as a result, they have not taken an appeal of that case. I don’t think they will. There was an earlier decision in the District of Columbia in another lawsuit brought by the labor unions representing the CFPB employees. And the same issue came Before judge Amy Berman Jackson, and she also reached the same conclusion that the administration’s argument just didn’t hold any water and that they were obligated to seek funding and they couldn’t use that as an excuse for shutting down the CFPB. Because that was basically what the administration has wanted to do since the Trump administration began. And they came upon this argument, which honestly, if they had made it a lot earlier, and listened to some of the people like me and Professor Hal Scott, Professor Emeritus at Harvard Law School, maybe that, that argument would have succeeded, but they were very late to seize upon the argument. And I think although the courts didn’t say this, I think that that’s in large part why the administration has now lost that argument twice and they’ve now thrown in the towel there. That’s the important point. They’re no longer going to seek to have, or to shut down the agency.

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Terry Gerton I’m speaking with Alan Kaplinsky. He’s senior counsel at Ballard Spahr. So I wanna circle back to two points that you made. One, the fight isn’t just about money, it’s about independence here and how to keep the CFPB as an independent organization. And two, it allows them to request funding, but it doesn’t seem to place any obligation on the Federal Reserve to actually provide funding.

Alan Kaplinsky Oh, no, it actually requires the Federal Reserve to honor requests. It doesn’t give them any leeway. Just one of the arguments made by Judge Davila was, if the Fed thought that earnings meant profits and that they could only fund the CFPB out of profits, then maybe the Fed could have done something. He didn’t like the idea that the CFPB, which is a different agency, was doing accounting for the Federal Reserve System. Federal Reserve System, according to him, they could do their own accounting and they didn’t think that the earnings meant prophets that instead it meant revenues.

Terry Gerton Do you draw any conclusions from this ruling about the independence of other organizations who may be funded in different ways?

Alan Kaplinsky As I said, this is a rather unique, a very, very unique way of funding an agency. It had never really been done before in this manner. There are a number of agencies that are self-funded, like the U.S. Post Office. They get revenues from stamps, etc. And there are a lot of agencies that are self-funded that don’t have to go to Congress, but this is a unique situation and I don’t think it has any real importance in terms of how other agencies get funded.

Terry Gerton And what impact do you think it will have on the actual operations of CFPB going forward?

Alan Kaplinsky Well, yeah, and that’s a really important question, Terry, because the fight isn’t over yet. Although the CFPB has conceded that they have got to continue to request funding. The only thing that they have to do is to request funding for statutorily-required functions of the agency. They don’t have to what was done by the director under the Biden administration, who had a totally different view of how the agency would be run. And you had a much larger budget than the budget that Vought is trying to live within. And that is still being litigated. Vought has put together a workforce reduction plan, a revised one, where he is slashing the number of employees of the CFPB that used to be around 1,700 employees at the end of Biden’s term, he’s proposing it be reduced to a little over 500. And the consumers in the country are claiming that’s not enough money to perform the functions that need to be performed to protect consumers. And the industry is saying, that is enough money… The courts cannot micromanage how an agency gets run. And each administration can decide agency by agency, whether they feel that it’s overstaffed, there’s certain things that were discretionary functions that it no longer wants to do. Now, this litigation will continue. I would say it’s gonna take a while longer to come to an end, but at the end of the day, the Trump administration will be successful in drastically reducing the number of employees, drastically reducing the amount of consumer protection enforcement that goes on, and the supervision of regulated institutions. So they’ll achieve their objective. It’s just taking them a long time to get there, really, because they made a mistake at the beginning. And the mistake was coming out and saying, we’re going to shut down this agency. And there’s a little problem with that. The agency was created by Congress, and the executive doesn’t have the right. To just eliminate an agency.

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