Democratic-led states sue to block US consumer watchdog's defunding under Trump

By Nate Raymond

Dec 22 (Reuters) - A coalition of Democratic-led states filed a lawsuit on Monday seeking to prevent President Donald Trump's administration from defunding the U.S. Consumer Financial Protection Bureau by refusing to request money from the Federal Reserve.

Democratic attorneys general from 21 states and the District of Columbia filed the lawsuit ?in federal court in Oregon, arguing that the administration's decision not to seek additional funding for the U.S. consumer watchdog ?is unlawful and undermines Congress' authority under the U.S. Constitution.

"The administration's actions are a handout ?to those who drive up costs by cheating hardworking Americans, and ?I will keep ?fighting to ensure they follow the law and our Constitution," New York Attorney General Letitia James, a Democrat, said in ?a statement.

The CFPB did not immediately respond to ?a request for comment.

Trump, a Republican, has sought to dismantle the CFPB since returning to office in January and has installed Russell Vought, his budget ?director, as the acting head of the ?agency. While efforts ?to fire most of its employees are tied up in litigation, Vought has effectively halted most CFPB activities.

The agency, which is tasked with protecting consumers in the ?financial sector, began operations in 2011 under Democratic President Obama following the 2008 financial crisis. It has since returned more than $21 billion improperly taken from consumers, its supporters say.

It receives its funding directly from the Fed, unlike federal agencies for which Congress appropriates money annually.

Last month, the CFPB under Vought's leadership said it could not request more money from ?the Fed ?because the Dodd-Frank Act of 2010 requires that funding come from the central bank's "combined earnings."?

Since the Fed had been operating at a loss since 2022, the Trump ?administration said no earnings were available. The CFPB in a November 10 court filing said it expected its funds would run out in early 2026.

States led by California, Colorado, New Jersey, New York and Oregon said in Monday's lawsuit that denying funding would prevent the CFPB from meeting a legal obligation to provide them with consumer complaints.

They said the administration's actions also violate the Constitution's principle of ?separation of powers, since Congress created the agency and the process by which it is funded.

A federal employees' union and several nonprofits are seeking in two separate lawsuits in Washington, D.C., and California to similarly force the CFPB ?to resume requesting funding.

(Reporting by Nate Raymond in Boston; editing by David Bario and Nia Williams)