The CFPB’s Pyrrhic Supreme Court Victory

from The Wall Street Journal,

The Constitution allows the Federal Reserve’s profits to fund the bureau. But the Fed has no profits.

Sen. Elizabeth Warren took a victory lap last week after the Supreme Court struck down a challenge to the funding scheme for her brainchild, the Consumer Financial Protection Bureau. “When you’re as good as @CFPB is at doing its job to protect consumers, you can expect that giant banks, payday lenders, and Republican politicians will come after it and try to shut it down,” she tweeted on Friday. “But yesterday, the Supreme Court followed the law, and the @CFPB is here to stay!” Not so fast. It’s true that CFPB v. Community Financial Services Association of America, a 7-2 decision written by Justice Clarence Thomas, upheld the bureau’s 2017 Payday Lending Rule. The justices held that the Constitution’s Appropriations Clause authorizes Congress to fund the bureau with profits from the Federal Reserve. But for nearly two years the Fed has been losing money because of rising interest rates. That calls into question the legitimacy of the CFPB’s funding since September 2022—and all regulations issued during that period. The CFPB’s dramatic victory may turn out to be a stunning defeat. Ms. Warren, then a Harvard Law School professor, proposed the CFPB in 2007. Congress established the bureau as part of the Dodd-Frank Act of 2010. It is charged with protecting consumers of financial products from unfair or deceptive practices.

Dodd-Frank devised a unique funding mechanism for the bureau—a standing source of funding outside the ordinary annual appropriations process.

The court held that this funding mechanism passed constitutional muster. The Appropriations Clause requires that any money “drawn from the Treasury” be pursuant to “appropriations made by law.” Justice Thomas observes that under the Federal Reserve Act, “surplus funds in the Federal Reserve System would otherwise be deposited into the general fund of the Treasury.” Since the money would otherwise have gone to the Treasury, it counts as having been “drawn from the Treasury” and therefore the law redirecting it complies with the Appropriations Clause. In 2017, the year the CFPB promulgated the Payday Lending Rule, the Fed had a surplus of $80.6 billion, far in excess of the $602 million it provided to the CFPB. The Fed continued to run surpluses in excess of CFPB for another five years. From January through August 2022, the Fed made regular remittances to the Treasury totaling $77.2 billion, again far in excess of the $642 million it provided to the CFPB that year.

But as the central bank raised rates to fight inflation, the earnings on its assets shrank relative to the cost of servicing its liabilities. In September 2022 the Fed’s costs began to exceed its income, and remittances of surplus to the Treasury stopped.

Even if the Fed can justify its payment based on the Dodd-Frank statute, the constitutional problem remains. Since the Treasury no longer receives any surplus from the Fed, central-bank funding can no longer be considered “drawn from the Treasury.” This means the agency can’t rely on the Appropriations Clause—or last week’s decision by the high court—to justify the legality of its continued operations. Its general operations may now be illegal, including current enforcement of all its rules.

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