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On December 15, at noon, we will be producing a webinar entitled, "The CFPB's Funding Crisis: Legal, Operational and Policy Implications." A registration link is embedded in the invitation, which is here.
Contending that the CFPB is relying on a "novel" definition of "combined earnings," the union representing CFPB employees is asking a federal court to rule that the Trump Administration is planning to violate an injunction barring the administration from shutting down the bureau.
"Under Section 1017 of Dodd Frank, the CFPB is funded from the 'combined earnings' of the Federal Reserve System," the National Treasury Employees Union stated in a motion to clarify an injunction issued by the U.S. District Court for the District of Columbia that, among other things, bars the firing of CFPB employees. "In the past, the bureau has requested funds for the agency and the Fed has provided those funds. However, in a November 7 opinion interpreting Section 1017, the DoJ Office of Legal Counsel concluded that since the Federal Reserve System is losing money because of the current interest rate environment, it has no combined earning; therefore, no funds are available for the bureau."
"The Court should clarify that the defendants may not justify violating the injunction by choosing not to request funding from the Fed," the union added.
We and others have made the point on many occasions in our blog (see here, here, here, and here) that the CFPB could not lawfully be funded after September 2022, as the Federal Reserve System has no combined earnings (which means profits under accounting principles and plain meaning) after that date, and has been running a deficit for quite some time. (Indeed, we believe that the CFPB under former Director Rohit Chopra requested and received from the Fed several unlawful payments totaling $1.9 billion beginning in the Fourth Quarter of 2022 and in 2023, 2024 and 2025.) The plaintiffs contend that "combined earnings" refers to revenue and not net profit.
Much earlier this year, and for reasons having nothing to do with lack of funding or a refusal by Vought to request additional funding from the Fed because of his belief that it would be unlawful to do so, the NTEU sued the Administration, contending that the Administration's plan to lay off 1,400 employees and take certain other actions amounted to an abolishment of the agency, something only Congress could do.
A divided three-judge panel of the D.C. Circuit had dissolved a lower court injunction blocking the firings, which it said the Trump Administration could resume. However, when it dissolved the injunction, the panel withheld the mandate in the case to give the plaintiffs the opportunity to file a petition for a rehearing en banc. The plaintiffs subsequently did so. The D.C. Circuit has not yet acted on the petition for rehearing en banc.
The bureau "anticipates exhausting its currently available funds in early 2026," the Justice Department told the district court.
The union contended that that notice is based on a "novel interpretation of Dodd-Frank that neither the CFPB, the Federal Reserve, nor any court has ever adopted."
The union said that, "[t]he plain meaning of the Dodd-Frank Act's text, its structure, and (until OLC's memo) the understanding of every government entity to have considered the issue all confirm that 'combined earnings' means the total amount the Fed earns, not the total amount it earns minus some expenses but not others."
It continued, "Because these earnings well exceed the amount needed to fund the CFPB, it follows that the Bureau can draw enough funds to comply with the Court's injunction; all it needs to do is request from the Fed the funds to which it is entitled—funds that the Fed has already determined it would be obligated to provide. The defendants' novel contrary interpretation depends on a definition of 'earnings'—as the total amount earned minus only interest expenses—that has no precedent, would decimate Congress's attempt to secure an independent source of funding for the Bureau, and is unworkable in practice."
The DoJ does not cite any sources that define earnings as total
money earned minus interest expenses, according to the union. That,
the union added, is enough to reject the Trump Administration's
interpretation of combined earnings.
"The defendants should not be permitted to shut down an agency
based on a novel interpretation of the Dodd-Frank Act that even the
Office of Legal Counsel could not find a single authority to
support," the union said.
On November 24, the District court ordered the parties to submit filings by November 26 identifying the provisions of the preliminary injunction that they believe remain in force and addressing the District Court's authority, given the D.C. Circuit's opinion and the pending petition for a hearing en banc.
A federal district court generally retains limited jurisdiction to clarify (but not modify in any substantive way) a preliminary injunction while an appeal of that injunction is pending, so long as the clarification does not materially alter the injunction or disturb the issues before the Court of Appeals.
While the CFPB may not lawfully be able to request funds from the Fed this quarter, Bill Nelson, Executive Vice President, Chief Economist and Head of Research of the Bank Policy Institute posted the following message on November 26 on his LinkedIn page:
"Forward guidance:
Subject: Forward guidance: After losing $240 billion, the Fed is once again profitable
Here is something to be thankful for this Thanksgiving: The Federal Reserve System has returned to profitability. It appears to be on track for the combined profits of the 12 Reserve Banks to be over $2 billion in the current quarter. Warning: I had to piece this together from imperfect sources, so it's not exact, but it should be about right.
Returning to Fed profits, the Fed began losing money in September 2022 when the interest it pays commercial banks, thrifts, and credit unions on reserve balances plus the interest it pays money market mutual funds and foreign official institutions on reverse repurchase agreements rose above the sum of its operating expenses and the interest it earns on its portfolio of securities. It lost about $240 billion to date. These are real losses borne by taxpayers.
Rather than record negative equity, however, the Fed began booking what it calls the "deferred asset" but inside the Fed we used to call the "magic asset." The deferred asset equals both the cumulative losses the Fed has made and the future profits the Fed plans on retaining rather than remitting to Treasury until it fills up the hole in its balance sheet created by its losses. What I didn't realize until recently is that each Reserve Bank records its own deferred asset equal to its own individual cumulative losses and repaid with its own individual profits.
The second half of table 6 on the Fed's statistical release H.4.1 reports the Reserve Banks' deferred assets. They are reported as a negative liability "earnings remittances due to Treasury." Note that the Atlanta Fed appears to have never had a deferred asset and the St. Louis Fed never had a very large one. Atlanta is funded to a greater extent by currency than the other Reserve Banks (thank you Miami branch) which makes it extra profitable. Consequently, those two Reserve Banks are remitting their profits to Treasury. You can see the remittances in the Treasury's daily statement as a deposit from the Federal Reserve System each Wednesday.
In addition, returning to table 6, the Fed's total deferred asset has increased over the past two weeks (earnings remittances due has become less negative). That indicates that the other ten Banks are making profits in aggregate and so paying down the total deferred asset. Each of the ten Reserve Banks except Dallas appears to have been made money over the past two week, so the combined profits of those ten Banks has been positive.
Moreover, the Federal Reserve System has been profitable so far this quarter. Through this past Wednesday, the Fed has remitted $884 million to Treasury. These are the profits made by the Atlanta and St. Louis Feds, the two Reserve Banks that do not have a deferred asset. The other ten banks have lost money in aggregate for the quarter to date despite having made money over the past two weeks. The total deferred asset on table 6 of the H.4.1 has decreased (become more negative) in the fourth quarter by $483 million. Consequently, so far in the fourth quarter, the Fed in total has had combined profits of approximately $401 million.
There are six more weeks in the quarter. If Atlanta and St. Louis continue to have profits of about $110 million per week, and the deferred asset continues to increase (become less negative) as it has done over the past two weeks, by $203 million per week, then the Fed will have profits for the remainder of the quarter of $1.9 billion. If so, the Fed's profits for the entire quarter will be $2.3 billion.
If the Fed has turned the corner in terms of total combined profitability, profits will be considerably higher in the first quarter of next year, boosted further if the Board cuts the IORB rate again.
"Bill"
However, there is another school of thought that maintains that the Fed will not have sufficient "combined earnings" under Dodd-Frank until it eliminates past accumulated losses. According to this school of thought, Congress could not have intended that the CFPB could get funding while the Fed as a whole has negative capital as reflected in the deferred assets on the balance sheet on 10 of the 12 Federal Reserve Banks. While two Federal Reserve Banks do not have deferred assets, Dodd-Frank contemplates looking at the Fed on combined basis.
Since September 2022, several Federal Reserve Banks have been losing money. Instead of showing negative capital the way a private bank would, the Fed records those losses as "deferred assets."
A deferred asset is basically an IOU the Fed writes to itself. It tracks how much future profit the Fed must earn before it can resume sending surplus earnings to the U.S. Treasury. It's not something the Fed can sell or use—just a bookkeeping tool that reflects its unique ability to operate even while running losses.
Thus, under this school of thought, the Fed may not lawfully send funds to the CFPB until it has recouped all of its accumulated losses by wiping out its deferred assets. Put differently, the Fed may only pay the CFPB out of funds that would otherwise have been remitted to the Treasury and any new profits of an individual reserve bank must not be remitted to the Treasury while there is still a deferred asset on its books
The Federal District Court will need to resolve this issue if it concludes that "combined earnings" means profits and not revenues
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