New Attack On CFPB Runs Into Early Trouble In Texas

In the wake of the Supreme Court’s ruling earlier this year upholding the constitutionality of the Consumer Financial Protection Bureau, some conservatives elevated a new line of attack on how the agency is funded by the Federal Reserve.

But their legal theory — that the CFPB must draw its budget from Fed “earnings” that the central bank hasn’t generated for years — is off to a slow start in Texas. Even state Attorney General Ken Paxton — one of the agency’s most powerful critics — says it doesn’t pass the smell test.

Two federal judges in the Lone Star State over the past week rejected efforts to dismiss lawsuits in which companies raised the argument about the CFPB’s funding through the Fed as a reason to toss the case.

In one of those cases, Paxton — who has repeatedly urged the Supreme Court to kill the agency — trashed the legal strategy in a June court filing. He labeled the argument “strange” and unpersuasive because the Supreme Court already ruled that the “CFPB is constitutionally funded.”

The theory “rests on the flawed premise that the CFPB can draw funds only from a Federal Reserve ‘surplus,’” Paxton’s office wrote, adding that “even if for some reason the Federal Reserve could not fund the Bureau one year, the Bureau would nevertheless have alternative and legitimate sources of funding.”

GOP policymakers have sought to defang, defund or legally dismantle the consumer watchdog agency for years, arguing that it’s an out-of-control regulator that’s created impediments for lenders and other businesses. Paxton’s outright dismissal of the latest legal theory is indicative of the uphill challenge Republicans could face in those attempts, particularly now that a conservative Supreme Court has sided with the bureau in cases that challenged its constitutionality.

Paxton was responding to an effort by Houston-area housing development Colony Ridge to toss his federal consumer protection lawsuit that accuses the company of deceptive practices and fraud. Colony Ridge argued that the CFPB—which receives notices of states filing such lawsuits—was invalidly funded and therefore the case should be dismissed. (The Biden DOJ and CFPB have a parallel case against Colony Ridge that’s ongoing).

A federal magistrate judge, Peter Bray, last week agreed with Paxton, ruling that the “Supreme Court found that the CFPB is constitutionally funded” and rejecting the company’s effort to throw out the case.

In the other case, Judge Amos Mazzant of the Eastern District of Texas, a conservative Obama appointee, rejected online registration company Active Network’s motion to dismiss a CFPB complaint on the grounds that the CFPB’s “current funding is illegal.” The CFPB is accusing the company of illegally charging fees and deceiving customers.

In its bid to toss the case, Active Network argued that the Supreme Court ruled that the bureau’s funding mechanism “is constitutional only so long as the Federal Reserve recognizes a surplus to fund the CFPB” and the Fed has been operating a deficit since 2022.

To be sure, the legal fights over the CFPB are far from over. Other companies are continuing to raise the funding argument against the bureau elsewhere. And other judges who contend with the issue could reach a different conclusion and side with the conservative legal scholars against the CFPB.

A spokesperson for Paxton did not respond to a request for comment. The CFPB declined to comment.

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