We have previously blogged about an enforcement action brought on July 12, 2022 by the CFPB against Populus Financial Group, Inc., d/b/a ACE Cash Express, Inc. in Federal District Court for the Northern District of Texas (Judge James E. Kinkeade). CFPB alleges in its lawsuit that Populus engaged in unfair, deceptive, and abusive acts or practices by concealing the option of a free repayment plan to consumers and making unauthorized debit-card withdrawals. ACE categorically denied the CFPB claims in a press release that it issued shortly after the CFPB filed its lawsuit: “ACE is disappointed that the CFPB decided to file a baseless lawsuit over a voluntary payment plan process that benefits, and has been long disclosed to, ACE customers, and the CFPB’s misinterpretation of a loan agreement provision that impacted a small number of borrowers. Unfortunately, the CFPB has left ACE with no choice but to litigate and defend itself against these unjustified claims.”

The case had been stayed by consent of the parties until the Supreme Court ruled in the CFSA v. CFPB case (the “CFSA Case”) that the funding structure of the CFPB established in Dodd-Frank under which the CFPB has been funded quarterly by the Federal Reserve Board up to an annual cap comports with the Appropriations Clause despite the CFPB not being required to seek and obtain an annual appropriation from Congress. The stay has now been lifted.

On July 31, 2024 Populus filed a motion to dismiss based on the language in Dodd-Frank which requires that funding for the CFPB’s operations must be made by the Federal Reserve Board out of “combined earnings of the Federal Reserve System.” 12 U.S.C. §5497(a)(1). Since the Federal Reserve System has had no “combined earnings” since September, 2022, the CFPB has been unconstitutionally funded since that date. As of July 31, 2024, the Federal Reserve System states that it will need to generate nearly $184.4 billion in future earnings (i.e., profits) before it can cover its costs of operations and resume payments to the Treasury. (Under the Federal Reserve Act, the Federal Reserve System must annually turn over its earnings (surplus) to the Treasury after meeting its requirement for funding the CFPB.). This is the second time within less than a week that this “new” Constitutional and statutory argument has been made in court.

Unlike the CFSA challenge to the constitutionality of the CFPB’s funding mechanism, which involved a complex issue of first impression requiring a deep dive into the creation of the Constitution, how various federal agencies were and are funded and even how the British monarchy was funded, this new challenge requires only a determination of what one word used in Dodd-Frank means — namely, “earnings.” In its motion to dismiss, Populus makes the following straightforward and common sense arguments, among others:

1. Although Dodd-Frank does not define “earnings”, the CFSA Case interpreted that term to mean “surplus funds in the Federal Reserve System [that] would otherwise be deposited into the general fund of the Treasury. CFSA, 601 U.S. at 435. It follows that Congress has appropriated no money for the payment of the Bureau funding outside those surplus funds, and the Constitution prohibits that any money be drawn from the Treasury to pay for expenditures drawn from sources, other than the surplus funds designated by Congress.”
2. The ordinary meaning of “earnings” at the time Congress enacted Dodd-Frank in 2010 was “the balance of revenue after deduction of costs and expenses.” Earnings, Merriam-Webster Online Dictionary (April 11. 2010). The Oxford Dictionary of Accounting similarly defines earnings as “the net income or profit of a business.” The Oxford Dictionary of Accounting has previously been relied on by the Fifth Circuit to define accounting terms, like “earnings.”
3. The CFPB will likely argue that the Court should interpret “earnings” as “revenue” and ignore the dictionary definition of “earnings” as “income or profit.” But the Bureau has no factual expertise or delegated authority for interpreting the definition of “earnings” in Dodd-Frank or “surplus funds” in the Federal Reserve Act. See Loper Bright Enterprises (overruling Chevron deference doctrine). Thus, the Bureau is entitled to no deference when it comes to interpreting the meaning of these statutes.
4. The broader statutory context also supports the Supreme Court in the CFSA Case equating of earnings with surplus funds. First, in negotiating Dodd-Frank, Congress rejected a previous iteration of the CFPB’s funding provision that would have drawn funds from the Federal Reserve’s “total system expenses” as opposed to “combined earnings.” See Wall Street Reform and Consumer Protection Act of 2009, H.R. 4173, 111th Cong. Section 4111(a)(2009). This alternative drafting would have allowed the Federal Reserve to transfer funds to the CFPB without any regard to whether it had “earnings.” But Congress consciously jettisoned the initial draft in favor of limiting the Bureau’s source of funding to “the combined earnings of the Federal Reserve System.” Second, Populus provides several examples of where the term “revenue” is used throughout Dodd-Frank without it meaning “earnings.”
5. In addition to creating the CFPB, Dodd-Frank also created another federal agency called the Office of Financial Research (OFR). Section 155 of Dodd-Frank, now codified at 12 U.S.C. §5345, established an interim funding mechanism for OFR in effect between July 2010 and July 2012. This interim funding, provided by Section 155(c) of the Dodd-Frank Act, states:

During the 2-year period following the date of enactment of this Act, the Board of Governors shall provide to the Office an amount sufficient to cover the expenses of the Office.

However, Congress did not specify a source within the Federal Reserve System from which amounts must be drawn for transfer to the OFR; it simply instructed the Board of Governors to transfer to the OFR whatever amount was “sufficient to cover the expenses of the Office.” If Congress had intended that the CFPB be funded regardless of whether there were any “combined earnings of the Federal Reserve System,” then it could have simply utilized the same funding mechanism that it provided for the OFR —namely, the Federal Reserve Board, regardless of whether there exist any “combined earnings of the Federal Reserve System.” The CFPB’s anticipated argument that “earnings” means revenues is the practical equivalent of not specifying any funding source from which the Federal Reserve Board should make payments to the CFPB, which is what Congress did with respect to OFR.

6. The CFPB will also argue that Congress never could have intended to likely allow the Bureau to be without a source of funding, but Congress explicitly envisioned the Bureau’s Director returning to Congress to request additional appropriations, if needed. During the first few years after the Bureau became operational, Dodd-Frank expressly authorized the CFPB to obtain additional funding from Congress if the expenses of the CFPB exceeded the cap on the amount it could obtain from the Fed. Yet, even if Congress never contemplated the possibility that the Federal Reserve might one day have no earnings and deprive the Bureau of its source of funding, it is never the court’s job to rewrite a constitutionally valid statutory text based upon speculation about what Congress might have done.
7. The Fifth Circuit in the CFSA case has previously ruled that any activities performed by the CFPB when it has not received lawful funding are invalid.

Going forward, we would expect to see most, if not all, defendants in CFPB enforcement actions raise this same defense. Until this issue gets resolved, a cloud of uncertainty will once again hang over the CFPB.

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