Acting CFPB Director Russell Vought alleged earlier this month that he cannot request funding from the Federal Reserve because the system is unprofitable. Vought anticipates the CFPB will run out of funding in early 2026.

The new argument over the CFPB's funding marks another major skirmish in the legal battle over whether the president can effectively eliminate an agency by firing federal employees en masse. The CFPB's union sued Vought in February, and the litigation shows no signs of an easy end. 

A federal judge ordered Vought and the National Treasury Employees Union to submit arguments to U.S. District Court Judge Amy Berman Jackson on whether a preliminary injunction that she issued in March — which bars Vought from firing employees — remains in effect.

The union asked the judge for clarification on the injunction, after Vought said the CFPB was running out of money and would knowingly be in violation of the preliminary injunction. Now both the CFPB and the union also must address the district court's authority to enforce the injunction given that the litigation is pending an appeal. 

In August, a panel of the U.S. Court of Appeals for the D.C. Circuit ruled in favor of the CFPB, finding that Vought could lawfully fire employees through a reduction-in-force. That opinion was appealed by the union, and the D.C. Circuit court is expected to rule any day now on whether they will rehear the case.

Alan Kaplinsky, senior counsel at Ballard Spahr and its longtime consumer financial services practice chair, said that, whatever the legal question is, the case is headed to the Supreme Court. 

"That issue is now on track to eventually make it to the Supreme Court," Kaplinsky said. "And I would expect the Supreme Court to grant review, because it's such an important issue.

Adam Levitin, the Carmack Waterhouse professor of law and finance at Georgetown University Law Center, said it isn't clear which court will hear the funding issue and when. 

"One possibility is the D.C. Circuit takes this up, but the problem is, this is a new issue that wasn't litigated in the district court," Levitin said. "It's not that it's outside the power of the courts, but a federal court telling a federal agency that it has to draw money from another agency can get very weird."

When Vought announced that the CFPB could not request funding from the Federal Reserve, he cited a new interpretive letter issued from the Department of Justice's Office of Legal Counsel, which claimed  the Fed lacks "combined earnings" from which to fund the CFPB.

At issue is the statutory text in the Dodd-Frank Act that states the CFPB will be funded from the Federal Reserve's "combined earnings," which is not further defined in the statute. The CFPB under Vought has argued that the Fed's earnings means all the money the Fed earns from bonds and securities, interest and fees minus interest expenses. The union claims just the opposite: that combined earnings means money earned before paying out interest.

As if the litigation isn't complicated enough, a new wrinkle has emerged, with some experts now predicting the Fed will return to profitability in the first quarter, after losing money since September 2022. 

"That certainly throws a wrench into the CFPB's argument," said Chris Willis, a partner at the law firm Troutman Pepper Locke. 

The theory that the CFPB cannot request funding from the Fed gained traction last year, almost immediately after the Supreme Court sided with the CFPB in May on a separate argument against the CFPB's funding. In that case, Justice Clarence Thomas wrote the 7-2 opinion affirming the constitutionality of the CFPB's funding structure and rejecting an argument that it violates the Constitution's Appropriations Clause. 

The novel theory that the Fed cannot fund the CFPB when it fails to turn a profit has not been decided by any court, but it gained renewed enthusiasm after Harvard Law School Professor Emeritus Hall Scott threw his weight behind the issue in an op-ed in the Wall Street Journal.

 "The CFPB added this as an argument at the last minute, but they haven't abandoned any of the other arguments — they are just saying that now they don't have any funding," Willis said.

Many legal experts are debating whether "combined earnings" in Dodd-Frank means net or gross. 

Jeff Sovern, the Michael Millemann Professor of Consumer Protection Law at the University of Maryland Francis King Carey School of Law, noted that Vought's stated goal was to put civil servants "in trauma," and to shut down the bureau. 

"I find the argument that the Fed can't fund the CFPB because it lacks profits unpersuasive, though a court eager to serve the president's goals might nevertheless seize upon it, just as the administration has," Sovern said. "The CFPB's funding doesn't depend on whether the Fed is profitable in a particular quarter or even a particular year."

Sovern and others said Congress would not have set up the CFPB's funding to lapse. Plus, the CFPB has accepted the funding since 2022, and it has done so this year under Vought, who waited nine months before raising the issue.

"It makes no sense that Congress would want consumers to be protected against abusive debt collectors, inaccurate credit reports, deceptive bank practices and the like, only when the Fed's revenues exceed its costs," Sovern said.

Kaplinsky said he found it peculiar that the CFPB announced this week that it would start supervising banks again and would subject examiners to a so-called "humility oath," at the same time the agency is warning that it has no funding. The bureau also is continuing investigations and plans to bring enforcement actions.

"What's surprising is, why didn't they make this argument long ago? It's not as if they didn't know about it," said Kaplinsky. "And what [Vought] is saying about doing more work seems inconsistent with an earlier statement that they are running out of money and he claims there is nothing they can do about it. Who is going to do all the work? How are they going to pay for it and where is the money coming from?"

The agency has filed no enforcement actions since February, when Vought took over, and has instead dismissed more than half of pending litigation from the Biden era.

In addition, the CFPB is rushing to complete a number of rules including the 1033 open banking rule and the 1071 small business data collection rule. The bureau also has statutory requirements such as publishing the Annual Percentage Offer Rate that provides stability to the mortgage industry. 

"It's very counterproductive for them to close the agency when they are doing a bunch of rulemakings that the industry would like to see completed," Willis said. 

Looking forward, many lawyers think Jackson will hold a hearing next week to sort out the immediate issues posed by the Office of Legal Counsel opinion, and the issue will likely wend its way through the court system from there. But in a broader sense, the Trump administration's goal of breaking the CFPB may be realized even if its goal of eliminating the agency is not.

"Even if the agency still exists at the end of the Trump administration, it will be a hollowed out shell," said Levitin.