With the Consumer Financial Protection Bureau facing a shutdown, we are joined by Priya Jaiswal, a leading authority in finance and legal affairs, to unravel this high-stakes conflict. At the heart of the matter is a lawsuit filed by 21 states against the White House, challenging its decision to cut off the agency’s funding. We’ll explore the legal battle over a single phrase in the Dodd-Frank Act, the economic mechanics that created this crisis, and the profound, real-world consequences for every American consumer if this financial watchdog is silenced.
The entire lawsuit seems to hinge on the interpretation of just two words, “combined earnings,” from the Dodd-Frank Act. Could you break down the White House’s very strict reading of this phrase versus the states’ argument, and perhaps give us a sense of what the original lawmakers were actually trying to achieve with this funding language?
Certainly. It’s a fascinating, and frankly, a very concerning, legal showdown. The White House is taking an incredibly literal, almost weaponized, interpretation. They argue that because the Federal Reserve has been running at a loss since 22, it has no “combined earnings,” and therefore, legally, there is no money to give the CFPB. It’s a simple, if rigid, A-to-B logic. However, the coalition of 21 attorneys general, and many of the policymakers who drafted Dodd-Frank, see this as a complete distortion of legislative intent. Their view is that the phrase was meant to create a durable, independent funding stream, insulated from the political pressures of annual congressional appropriations. The goal was to ensure the consumer’s watchdog would always have a budget, not to make its existence conditional on the Fed’s profitability in any given year.
The article mentions the Federal Reserve’s financial losses are a direct result of its fight against inflation. Can you walk us through the financial mechanics of why the Fed is losing money and how that specific situation provides the legal pretext for the administration to defund the CFPB?
It’s an unfortunate but direct consequence of monetary policy. During the pandemic, the Fed bought massive amounts of government bonds that pay very low interest rates to stimulate the economy. Now, to combat the inflation that followed, it has sharply raised interest rates. This means the Fed is paying out high interest to commercial banks on the reserves they hold with it, while still only earning low interest from that huge portfolio of bonds it owns. It’s a classic balance sheet mismatch, creating a net loss. This financial red ink is precisely the legal loophole the administration is using. They are pointing to these losses and claiming the “combined earnings” stipulated in the law are negative, therefore their hands are tied and they cannot lawfully transfer funds to the CFPB.
New York’s Attorney General, Letitia James, emphasized the CFPB’s role in stopping “predatory lenders” and “scammers.” Could you paint a picture of how the bureau’s work helps a state take action against a bad actor and what we stand to lose if it goes dark?
Absolutely. Imagine a new online lender starts targeting people in New York with deceptive loan terms. A few dozen people might complain to the state, but that’s not enough to see the bigger picture. The CFPB, however, operates as a national nerve center. It gathers thousands of consumer complaints from all 50 states and its data analytics can spot a nationwide pattern of predatory behavior almost in real-time. By law, the CFPB is required to share this crucial information with the states. So, suddenly, Attorney General James doesn’t just have a few local complaints; she has a mountain of evidence showing this is a systematic scheme affecting thousands. That data is the smoking gun that allows her to launch a major lawsuit. If the CFPB shuts down, states lose their eyes and ears; they’re left trying to fight national scams with only local information, which is a near-impossible task.
With a potential shutdown looming in January, the states are asking a court to compel the administration to release the funds. How common is it for the judiciary to order the executive branch to fund an agency like this, and what are the core constitutional arguments the states are relying on?
It’s a significant and constitutionally charged request. The states are building their case on the fundamental principle of the separation of powers. Their argument is that Congress lawfully established the CFPB and mandated its funding source through the Dodd-Frank Act. The executive branch’s constitutional duty is to “take Care that the Laws be faithfully executed.” By using a dubious interpretation to choke off the agency’s funds, the White House is essentially attempting to dismantle a congressionally created body through administrative fiat, which it cannot do. The lawsuit asks the judicial branch to step in and enforce the law as written by the legislative branch, compelling the executive to fulfill its non-discretionary duty. It’s a direct challenge to what the states see as an unconstitutional power grab.
What is your forecast for the future of the Consumer Financial Protection Bureau and the outcome of this legal battle?
In the immediate term, the situation is incredibly precarious. With the agency set to run out of money in January, the court will be under immense pressure to act quickly. The case’s outcome will likely turn on whether the judge views “combined earnings” as a rigid prerequisite for funding or as a broader directive establishing a funding mechanism. Win or lose, this battle exposes a critical vulnerability in the CFPB’s design. In the long run, I predict this will trigger a major political fight to change the agency’s funding structure. Either supporters will move to make it even more ironclad and independent, or opponents will succeed in bringing it under the direct, and more politically volatile, control of the annual congressional appropriations process. The very identity and independence of the nation’s top financial watchdog are what’s truly at stake here.
