States Sue Trump Administration to Halt CFPB Defunding Amid Operational Overhauls

A coalition of 21 U.S. states and the District of Columbia has launched a lawsuit against the Trump administration, aiming to prevent the defunding of the Consumer Financial Protection Bureau (CFPB). This legal challenge arises amidst significant operational shifts, staffing cuts, and policy reversals at the agency under Acting Director Russell Vought, actions that consumer advocates and some lawmakers estimate have led to billions of dollars in lost consumer relief.

The lawsuit argues that the Trump administration's interpretation of the CFPB's funding mechanism is "unreasonable and unlawful," potentially leading to a complete loss of the agency's operational funds.

Agency Background and Leadership Change

The Consumer Financial Protection Bureau (CFPB) was established in 2010 in the wake of the 2008 financial crisis. Its core mission included shielding consumers from predatory financial practices, consolidating various consumer protection duties, and acquiring new supervisory and rule-making authorities. Since its inception, the agency reported having returned a substantial $19.7 billion to consumers as of January 30, 2025. Despite its consumer protection efforts, the CFPB has faced criticism from some conservatives who contend its enforcement actions are overly aggressive and that it lacks adequate accountability to Congress.

In February 2025, following the resignation of Director Rohit Chopra, Russell Vought was appointed as the acting director of the CFPB by the Trump administration. Vought had previously been an outspoken critic of the agency, advocating for its abolition and accusing some CFPB staff of "weaponiz[ing] the tools of financial law against basically small mom-and-pop lenders."

Staffing Reductions and Judicial Intervention

Under the Trump administration's oversight, the CFPB began implementing major changes to its operations and staffing. In February, Vought issued an email instructing employees to cease work, followed by approximately 1,400 workers receiving layoff notices in April. This move would have drastically reduced the agency's staff from 1,689 to roughly 200 positions.

The National Treasury Employees Union, representing CFPB employees, swiftly filed a lawsuit to challenge these actions. A District Court judge subsequently issued a temporary injunction that successfully halted the layoffs and other related actions, including the deletion of records, preserving the agency's operational capacity in the short term.

Funding Dispute Ignites State Lawsuit

The CFPB's operational funding is typically sourced directly from the Federal Reserve, a unique mechanism designed to grant the agency a degree of autonomy from immediate political influence. In July, Congress reduced the agency's budget by nearly half through the "One Big Beautiful Bill Act." Later in the year, the Trump administration asserted that, with the Federal Reserve operating at a loss, no funds could be allocated to the CFPB.

This interpretation was strongly challenged by a coalition of state attorneys general and some Democratic lawmakers. They contend that the CFPB's establishing legislation defines "combined earnings" more broadly than just "profits," proposing it encompasses the Federal Reserve's total "revenues" or proceeds. In late December, a District Court judge ultimately rejected the administration's position on funding and ordered Vought to request the necessary funds.

In her scathing order, the judge stated that the administration was "actively and unabashedly trying to shut the agency down" and warned that the CFPB was "hanging by a thread."

On Monday, a coalition of 21 U.S. states and the District of Columbia initiated legal action in the U.S. District Court in Oregon. The lawsuit directly argues that Vought and the CFPB are applying an "unreasonable and unlawful interpretation of 'combined earnings.'" The states contend that the agency's current stance could lead to a complete loss of its funding as early as January 2026, which they argue would significantly harm their residents.

New York Attorney General Letitia James stated that defunding the agency would impair its legal obligation to collect and process consumer complaints and share that data with states, hindering efforts against "predatory lenders, scammers, and other bad actors."

Operational Shifts and Policy Reversals

Under Vought's leadership, a performance report to Congress indicated that while some agency duties, such as examining interstate land sales, continued, other crucial work had been scaled back or entirely halted. The report from Vought's office cited "remedial actions" including withdrawing certain regulations and dismissing cases, stating these were taken in response to what it characterized as the Biden administration's CFPB's "overreach of its statutory mandate" and "punishment of disfavored industries."

Consumer advocates and Democratic representatives estimate that these reduced enforcement and regulatory activities have led to at least $19 billion in foregone financial relief for Americans. Senator Elizabeth Warren's office reported that the CFPB ceased significant consumer protections, delayed investigations, and dismissed multiple lawsuits. The Trump administration and congressional Republicans have countered these assertions by stating the bureau required downsizing and stricter controls due to its previous scope.

Specific policy shifts and their estimated impacts include:

• Overdraft Fees: A 2024 agency rule, finalized by the Biden CFPB and designed to limit overdraft fees with an estimated annual consumer savings of $5 billion, was repealed by the Republican-led Congress in 2025.
• Credit Card Late Fees: A proposed cap on credit card late payment fees, estimated to save Americans approximately $10 billion, was blocked by a federal court. The CFPB under the Trump administration did not contest this crucial ruling.
• Dismissed Lawsuits: Approximately $4 billion in consumer relief was foregone due to dismissed lawsuits or settlements. Notable examples include a $2 billion lawsuit against Capital One in January 2025, alleging misrepresentation of interest rates on savings accounts, and an $870 million lawsuit against Early Warning Systems (operator of Zelle) in December 2024, alleging negligence in protecting consumers from fraud and scams.
• Buy-Now, Pay-Later Loans: The CFPB under the Trump administration announced it would not prioritize enforcing a ruling that extended credit card user rights to buy-now, pay-later loans, leaving consumers potentially more vulnerable in this growing market.

Consumer Impact and External Scrutiny

During this period of operational changes, consumer complaints submitted to the CFPB reportedly increased by 89% in December compared to the previous December. Disturbingly, the rate of consumer complaints resolved with relief also significantly decreased, reportedly falling from about half under the Biden CFPB to less than 5% under the Trump CFPB. Some critics of the agency have also raised concerns regarding a potential consumer protection gap.

Consequently, some state and local officials have reportedly increased their own enforcement efforts to fill the void. Chuck Bell, advocacy program director at Consumer Reports, characterized the CFPB as "essentially on life support."

Chuck Bell, advocacy program director at Consumer Reports, characterized the CFPB as "essentially on life support."

The independent Government Accountability Office (GAO) released a separate report detailing its efforts to track the Trump administration's reorganization of the CFPB. The GAO reported receiving no cooperation from the White House or the bureau, which the CFPB attributed to ongoing litigation between its employees and management. The GAO relied on public records, and its findings largely corroborated earlier news reports regarding the cancellation of numerous enforcement actions and the reversal of rules and regulations. Mark Paoletta, the bureau’s chief legal officer under Vought, called the GAO's report "biased and flawed," but did not specify issues with its conclusions, citing incomplete information.