Although neither the CFPB, the Federal Reserve Board, nor the Treasury has responded to Professor Emeritus Hal Scott’s op-ed on May 20 in the Wall Street Journal, my interview with Professor Scott on our Consumer Finance Monitor Podcast episode of June 6, Alex Pollock’s blog post on May 21 on The Federalist Society website, or my blog post published on this blog on May 22, a few consumer advocates have responded.  The purpose of this blog post is to reply to the blog post published yesterday on Consumer Law & Policy Blog by Professor Jeff Sovern of the University of Maryland Law School.

Jeff’s first argument is as follows:

The argument [made by Professor Scott and Messrs Pollock and Kaplinsky] assumes that “earnings” means something like profits.  I think it is fair to say that when we speak about individuals, we use the word differently.  For example, when we talk about a person’s earnings from their job, we are referring to their wages, rather than, say, the amount they have left over after paying for the food they need to eat so as to be able to work, the clothing they need to wear so as to go to work, and so on.  I don’t know how Congress or government accountants define earnings.

The answer, Jeff, is that Congress was not referring to employees’ earnings when it specified in Dodd-Frank that the CFPB may be funded only out of “the combined earnings of the Federal Reserve System….”  In this context, based on ordinary dictionary definitions and how the term is employed by the accounting profession, “earnings” clearly means profits.  It does not mean revenues.

Jeff’s second argument is as follows:

Even assuming that “earnings’ means profits as opposed to income, I think the argument also has another problem.  The Dodd-Frank Act doesn’t provide that the earnings have to be from the year that the money is paid to the Bureau.

Jeff suggests that the reference in Dodd-Frank to “combined earnings of the Federal Reserve System” might refer to earnings in prior or future fiscal years.  But that is not what Dodd-Frank says. Based once again on ordinary dictionary definitions and how the term is employed by the accounting profession, the reference to “combined” earnings clearly refers to the consolidated earnings of the 12 Federal Reserve Banks in the current year and does not include earnings from prior years.  In other words, earnings of one or more of the Federal Reserve Banks cannot be used to fund the CFPB if losses sustained by some Federal Reserve Banks in the current year exceed the earnings of the other Federal Reserve Banks that were profitable.  Also, to the extent Jeff is suggesting that past earnings of the Federal Reserve Banks can be used to fund the CFPB, past earnings would not have been retained by those banks and instead, pursuant to the Federal Reserve Act, would have been turned over to the Treasury after the payment of the Federal Reserve Board’s expenses and dividends to their shareholders (i.e., national banks and state banks that are members of the Federal Reserve System) and thus would no longer be available to the Fed to fund the CFPB.

Finally, it defies logic to suggest that the reference to “earnings” refers to future earnings since no one can determine what those future earnings, if any, will be.  And, it is not accurate to say, as Jeff does, that today the Fed covers its other expenses from future earnings.  It covers its other expenses today, as well as the funding for the CFPB, by borrowing more money or selling assets.

Jeff’s reading effectively means there would have been no purpose for Congress’s specification that the CFPB must be funded out of “combined earnings of the Federal Reserve System” because the Federal Reserve System has an unconditional obligation to fund the CFPB.  If that is really what Congress intended, it could have easily achieved that result by omitting the following language of Dodd-Frank: “from the combined earnings of the Federal Reserve System” and left the remaining language intact.  That text would have required the Federal Reserve Board to honor all CFPB funding requests, regardless of whether the Federal Reserve System was profitable.  But that is not what Congress chose to do.

Jeff’s final argument is as follows:

Congress obviously wanted the CFPB to be funded up to a particular amount without going through the annual process of seeking votes from the appropriations committees, just as other financial institutions are funded outside that process.  But in years when the Fed has no net earnings, the CFPB would in fact have to go through that annual process.  Thus, Professor Scott’s argument would also frustrate Congress’s intent.

Jeff ‘s argument ignores the fact that in 2010, when Dodd-Frank was enacted and, for that matter, in every preceding year other than 1915 when the Federal Reserve System was created, the Federal Reserve System was enormously profitable and would have had no problem in funding the CFPB out of its “combined earnings.”  Thus, given that until 2010 and consistently thereafter until September 2022, there was no question regarding the Federal Reserve System’s ability to fund the CFPB out of its “combined earnings,” it is extremely doubtful that Congress ever seriously worried about the possibility that the CFPB would have to go through  the annual appropriations process at some point.