States push judge to require consumer watchdog funding request

EUGENE, Ore. (CN) — A group of state attorneys general urged a federal judge to order the director of a federal agency tasked with protecting consumers in the financial marketplace to request funding for the agency from the Federal Reserve.

“The question plaintiffs are asking the court to answer is whether the director of the Consumer Financial Protection Bureau, who is the officer of the United States charged by Congress with carrying out CFPB’s mission, has the discretion to undermine that mission by declining to request funding for the CFPB from the Federal Reserve,” said Stephen Thompson, attorney with the Office of the New York State Attorney General. “We believe the answer to that question is clearly no.”

In December, 22 states sued the bureau, its acting director Russell T. Vought and the Board of Governors of the Federal Reserve System.

The states accuse Vought of refusing to request necessary funding for the protection bureau from the Federal Reserve — a violation of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Created from the fallout of the 2008 financial crisis, the bureau enforces certain federal consumer protection laws and has an online complaint system and database for consumers to report issues with financial services and products, and in turn receive responses. The states say it’s returned over $20 billion to consumers since its inception.

Reversing a decade of precedent, Vought claims the Fed’s interest expenses exceed its interest income so he can’t legally request funding for the bureau.

The states on Thursday argued Vought’s decision to never seek funding for the agency when it is not deemed profitable constitutes a final agency action that is challengeable under the Administrative Procedure Act.

Under the Dodd-Frank Act, the director of the bureau must request the amount of funding necessary, and the Fed is instructed to transfer funding from the combined earnings of the Federal Reserve System.

“The cleanest and most sensible reading of the statute is that ‘combined earnings’ means all money earned by each of the 12 regional banks in the Federal Reserve System combined,” Thompson argued. “In contrast, Mr. Vought and the CFPB argue that combined earnings mean an ad hoc type of net profit that is found nowhere else in either the wider financial industry or the statutes governing the Fed."

The states argued that the word “earnings” is used consistently throughout the Dodd-Frank Act to refer to revenues, typically in connection with revenue from investments and securities.

“Why would Congress have meant money earned on investments in one place but money earned on investments minus unrelated expenses in another? Mr. Vought and CFPB do not say,” Thompson argued.

U.S. District Judge Ann Aiken, a Bill Clinton appointee, asked for clarification from the states about the government’s position.

“Funding the CFPB is an expense of the Federal Reserve, so I don’t understand why, under any theory, it wouldn’t come immediately with the necessary expenses as an obligation of the Federal Reserve and its place in a lineup that has the dividends paid ahead of it, which are not expenses,” Aiken said.

The states agreed it made sense for funding to come from the expense line.

The federal government argued that the entire lawsuit is moot, as U.S. District Judge Amy Jackson of the District of Columbia ruled in late December that the federal government could not lapse in its funding of the bureau.

Charles Roberts, attorney with the Department of Justice, told the court that Vought will make a request for third-quarter funding before March 31.

The bureau argued it has no statutory duty to submit its funding needs to the Federal Reserve, but rather that the Fed can find the information it needs through other means. Aiken pushed back on this argument.

“I’m really not buying this argument,” Aiken said. “I think it reveals, to use a probably more direct term, a sabotage of the intent of statute by not following what is expected and what has been traditional, and that is for the director to accumulate what budget is absolutely necessary to accomplish the goals of the statute and communicating that in a usable form to the Fed so they can make a decision.”

As to the dispute over the meaning of “combined earnings,” the agency argued it refers to the Fed’s profits and the Fed cannot transfer funds when it is operating at a loss.

“Profits are calculated by subtracting interest expenses from revenue,” Roberts said. “Plaintiffs say it’s all the money that the Fed takes in and that the Fed earns money by losing it, but that just doesn’t make sense.”

Roberts explained Vought must consider the funding source when making requests, but Aiken questioned why.

“Isn’t his statutory obligation to submit his request commensurate with what his need is to accomplish the stat goals of the agency he’s been hired to direct, and the funding of it is left to the funding source to do their analysis and calculations to meet the funding request?” Aiken asked.

Roberts argued it would implicate questions of Vought’s oath to uphold the law if he made a request for funds from a source that is unavailable.

“The transfer here by the Federal Reserve is not optional,” Roberts said.

Aiken said the bureau’s argument seemed inconsistent, noting it argued Vought had a duty to inquire about the Fed’s profitability, yet also resisted communicating its own funding needs to the Fed.

“It would not make sense for him, and create implications of his oath, to make such a request when everyone is of the opinion the combined earnings do not exist,” Roberts said.

Aiken indicated she would have a decision before the current funding runs out on March 31.