Earlier today, I published a blog post highlighting the flaws in the arguments made by Professor Jeff Sovern in his recent article in the Consumer Law & Policy Blog for why the Fed, notwithstanding its losses, can still lawfully fund the CFPB.  Now, I want to turn to the flaws in Professor Adam Levitin’s blog post published on May 30 in Credit Slips that takes the same position as Jeff.

After insinuating that Professor Scott is a stalking horse for the U.S. Chamber of Commerce, Adam first argues: 

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.

It is true, as Adam states, that the “net earnings” of the Federal Reserve System is the amount that the System must pay over to the Treasury.  Under Section 7 of the Federal Reserve Act, the “net earnings” of each Federal Reserve Bank are the earnings of such bank (i.e., revenues minus expenses) less the dividends paid by such bank to its shareholders (i.e., national banks and state banks that are members of the Federal Reserve System).  So Adam is correct to say that “net earnings” has a different meaning than “earnings.”  However, that distinction is meaningless since even if “earnings” means “gross earnings” (i.e. “net earnings” plus dividends), “gross earnings” have been a negative number since September 2022.

Adam’s constitutional argument fares no better than his statutory argument. Adam argues as follows:

As for the constitutional argument, Scott notes that Justice Thomas’s opinion in CFPB v. CFSA held that the CFPB’s funding constituted 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.

Adam then argues that the amounts being paid to the CFPB after the Federal Reserve System started losing money in September 2022 are still amounts “drawn from the Treasury” because there will be future earnings or surpluses which will offset the deficits.  But that is sheer conjecture.  Nobody knows if and when the Federal Reserve System will once again generate a surplus that will be paid over to the Treasury.  Just as “earnings” in Dodd-Frank do not encompass future earnings, funds paid to the CFPB after September 2022 through the present are not amounts being “drawn from the Treasury.” 

Adam then makes the in terrorem “slippery slope” argument that if a court were to find that the CFPB is now being funded unconstitutionally, a court would need to reach the conclusion that the Fed is unconstitutionally funded as well.  But that ignores the fact that the Fed is self-funded and is not funded by Congress through payments from the Treasury.  The Fed can operate at a loss indefinitely because it prints money.

I hope that the CFPB conjures up stronger arguments than the ones put forth by Professors Sovern and Levitin.