Prof. Hal Scott Doubles Down on His Argument That CFPB is Unlawfully Funded Because of Combined Losses at Federal Reserve Banks

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On June 6 of last year, Prof. Hal Scott of Harvard Law School was our podcast guest. On that occasion he delved into the thought-provoking question of whether the Supreme Court’s decision on May 16 in the landmark case of CFSA v. CFPB really hands the CFPB a winning outcome, or does the Court’s validation of the agency’s statutory funding structure simply open up another question - namely, whether the CFPB is legally permitted under Dodd-Frank to receive funds from the Federal Reserve even though the Federal Reserve Banks have lost money on a combined basis since September 2022. Dodd-Frank provides that the CFPB is to receive its funding out of the Federal Reserve Banks “combined earnings.” The Wall Street Journal published an op-ed by Prof Scott on May 20 titled “The CFPB’s Pyrrhic Victory in the Supreme Court” in which he explains that even though the CFPB’s funding mechanism as written was upheld in CFSA v. CFPB, this will not help the agency now or at any time in the future when the Federal Reserve operates at a deficit.

A lot has happened since Prof. Scott’s last appearance on our podcast show. Several enforcement  lawsuits filed by the CFPB were faced with motions to dismiss filed by the defendants alleging that the lawsuits could not be financed by the CFPB with funds that were unlawfully procured The CFPB gave short shrift to this argument but never could adequately explain how “earnings” as used in Dodd-Frank really means “revenues” and not profits. While 3 courts rejected the motions to dismiss, those courts decided to do so without dealing with the core issue of whether “earnings” means profits or revenues.

President Trump became President on January 20 and, shortly thereafter, Rohit Chopra was terminated. The new Acting Director, Russell Vought, proceeded to shutter the CFPB by, among other things, terminating or putting on administrative leave with instructions to do no work  most of its employees and refusing to seek a quarterly funding from the Federal Reserve. Mr. Vought did not base this refusal on the premise that the receipt of such funding would be illegal. Two lawsuits have been filed against the Acting Director challenging the legality of the apparent dismantling of the CFPB. While the CFPB is defending these cases on the basis that the President and the Acting Director have the Constitutional right to downsize and alter the policies of the CFPB, they have surprisingly not made the argument that the CFPB’s funding is unlawful.

Prof. Scott on Feb, 1 published another op-Ed in the Wall Street Journal entitled “Rohit Chopra is out. Now Shutter the CFPB” and two articles on the website of the Committee on Capital Markets Regulation (of which Prof. Scott is the President and Director) entitled “Understanding the CFPB’s Funding Problem” and “The Fed’s Accounting Methodology Cannot Expand its Statutory Authority to Fund the CFPB.”  Our podcast show released today takes a very deep dive into those articles and explains Prof. Scott’s position that the Fed’s accounting for the massive losses of the Federal Reserve Banks (which creates a deferred asset account composed of anticipated future earnings of the Federal Reserve Banks which the Federal Reserve Banks will not need to remit to the treasury because the banks may recoup its accumulated losses since September 2022) has no bearing on whether the Fed has been lawfully funding the CFPB out of “combined earnings” of the Federal Reserve Banks. Prof Scott also rebuts several counterarguments made by those who claim that the CFPB has been lawfully funded throughout.

Prof. Scott also discusses why he believes that congress may use a budget appropriations bill whose passage requires only a majority, not 60, vote in the Senate in order to subject the CFPB to funding through the congressional appropriations process. 

Our blogs about the Supreme Court decision in CFSA v. CFPB can be found here and here. To read our blog about Professor Scott’s op-ed in the Wall Street Journal, which includes a link to the op-ed, click here.  To read his more recent op-ed in the Wall Street Journal, click here to read his two articles published on the website of the Committee on Capital Markets Regulation entitled, click here and here.

A transcript of the recording will be available soon.