Judge blocks White House attempt to defund CFPB, preserving employee pay

The fight over the Consumer Financial Protection Bureau’s funding sharpened Tuesday after a federal district court judge blocked the White House from using a new theory tied to Federal Reserve finances to prevent payments to the agency. Judge Amy Berman ruled the White House could not allow its funding channel for the CFPB to lapse, in a decision framed around how quickly the bureau would lose the money it needs to keep paying employees.

Berman said the CFPB should continue to receive funds from the Federal Reserve, even though the Fed has been operating at a paper loss. She also rejected the administration’s argument about how the CFPB gets its money, describing the theory as an improper attempt to reach an outcome the court had already prevented.

At the center of the dispute is Russell Vought, described as President Donald Trump’s budget director and the acting director of the CFPB. The litigation focuses on whether Vought could effectively shut down the agency and lay off the bureau’s employees, and the court record described how the CFPB has largely been inoperable since Trump took office nearly a year earlier.

The AP account said the CFPB’s employees have been mostly forbidden from doing any work, and much of the bureau’s activity since then has involved unwinding work carried out under President Biden and earlier under Trump’s first term. The filing and statements referenced in the case include Vought’s comments indicating an intent to effectively shut down the CFPB, and the White House issued what it described as a “reduction in force” that would have furloughed or laid off much of the bureau.

The National Treasury Employees Union, which represents the CFPB workers, had sought court intervention. The union sued Vought earlier this year and won a preliminary injunction stopping the mass layoffs and furloughs while the union’s case continued through the legal process.

In the weeks leading to Tuesday’s ruling, the White House pursued a different line of argument aimed at getting around the injunction. According to the AP, the administration argued that the Federal Reserve has no “combined earnings” available at the moment to fund the CFPB’s operations, with the CFPB’s support described as coming from expected quarterly payments.

The AP explained that the Federal Reserve has been recording a paper loss since 2022 as the central bank tried to combat inflation. It described how the Fed holds bonds on its balance sheet from a period of low interest rates during the COVID-19 pandemic, and how the Fed must pay out higher interest rates to banks that hold deposits at the central bank. The AP also described that the Fed records a “deferred asset” it expects will be paid down over the next few years as the lower-interest bonds mature off the balance sheet.

Because of that reported paper loss, the White House argued there are no “combined earnings” the CFPB could draw on. The AP said the CFPB has operated since 2011, including during Trump’s first term, drawing on the Federal Reserve’s operating budget. The White House’s new argument also pointed to timing: lawyers sent a notice to the court in early November saying the CFPB would run out of appropriations in early 2026 without additional appropriations from Congress.

Berman’s ruling addressed that argument as a legal tactic. The AP said the “combined earnings” theory was floated in conservative legal circles going back to when the Fed began operating at a loss, and that the Office of Legal Counsel adopted a similar theory in a memo on November 7, though it had not been tested in court. In Berman’s view, the OLC and Vought were using the theory to get around the injunction rather than allow the case to be decided on the merits.

In the opinion, Berman wrote: “It appears that defendants’ new understanding of ‘combined earnings’ is an unsupported and transparent attempt to starve the CPFB of funding and yet another attempt to achieve the very end the Court’s injunction was put in place to prevent.” She added that the administration could not justify abandoning the agency’s obligations or violating the court order “by manufacturing a lack of funding.”

Jennifer Bennett of Gupta Wessler LLP, representing the CFPB employees in the case, said the decision made clear that Vought could not justify bypassing the agency’s obligations or court order by arguing that funding was unavailable. Bennett said, “We’re very pleased that the court made clear what should have been obvious: Vought can’t justify abandoning the agency’s obligations or violating a court order by manufacturing a lack of funding,” according to the AP.

The AP reported that a trial on whether the union can sue Vought over the layoffs is scheduled for February 2026. A White House spokeswoman did not immediately respond to a request for comment on Berman’s opinion.