We have previously blogged about how targets of CFPB enforcement actions have asserted that the actions must be dismissed because the investigations were conducted and the lawsuits were brought and are being prosecuted with funds unlawfully obtained from the Federal Reserve Board at a time when the Federal Reserve System had no combined earnings. The Dodd-Frank Act states and the Supreme Court has confirmed that the CFPB may only be funded by the Federal Reserve Board out of “combined earnings of the Federal Reserve System” or from direct Congressional appropriations. See here, here, here,and here.

Now, for the first time, this unlawful funding argument is being used to attack a final CFPB regulation rather than an enforcement action — namely, in the ongoing litigation brought by several trade associations against the CFPB arguing that the CFPB’s small business loan data collection rule promulgated under Section 1071 of Dodd-Frank is unlawful.

In order to better understand the context in which the unlawful funding argument has been made, it is necessary to review the status of the case. On July 31. 2023, the Federal District Court for the Southern District of Texas, McAllen Division (Randy Crane) granted a preliminary injunction in favor of the plaintiffs to preclude the CFPB from enforcing the 1071 rule against members of the three trade groups. The injunction was based on the Fifth Circuit opinion in the CFSA v. CFPB case which had held that the CFPB’s funding mechanism was unconstitutional as a violation of the Appropriations Clause. After the Supreme Court granted review of the Fifth Circuit CFSA case, the Federal District Court in the 1071 case stayed further proceedings pending the outcome of the CFSA case in the Supreme Court. After the Supreme Court reversed the CFSA case, the parties in the CFSA case filed cross-motions for summary judgment with respect to the remaining claims in the case, namely, that the CFPB exceeded its authority in adding many data points for collection that were not specified in Section 1071 of Dodd-Frank; the CFPB acted arbitrarily and capriciously: and the costs and benefits analysis was unreasonable.

Subsequent to the District Court granting a preliminary injunction in favor of the original plaintiffs in the case, other intervenor-plaintiffs filed their own motions for preliminary injunction to extend the motion to themselves and their members. Three of the plaintiff-intervenors are: the Farm Credit Council, Texas Farm Credit and Capital Farms Credit (collectively, the “Farm Credit Intervenors”).

On August 2, 2024, the Farm Credit Intervenors filed a motion to amend their Complaint in Intervention. On that same date, the Farm Credit Intervenors filed a motion for judgment on the pleadings. Both the Amended Complaint and the motion for judgment on the pleadings argue that the 1071 Rule is invalid because the development and promulgation of the Rule was funded from the Federal Reserve Board unlawfully because there was no “combined earnings of the Federal Reserve System “ and the CFPB must be funded out of such “combined earnings.” On August 16, 2024, the CFPB filed in the District Court a motion to extend the deadline for responding to the motion for judgment on the pleadings until after the Court adjudicates the Farm Credit Intervenors pending motion to amend their complaint and the CFPB has answered the docketed amended complaint.

The CFPB argues that a motion for judgment on the pleadings is premature since there is not yet an amended complaint on the docket and the CFPB has not yet responded to the Amended Complaint. While that may be procedurally the right way to go about things, it seems likely that the unlawful funding issue will eventually be ripe for adjudication by the Court.

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