5th Circuit Holds Structure of FHFA is Unconstitutional

The Fifth Circuit recently held that the structure of the Federal Housing Finance Agency (FHFA) was unconstitutional.  The court explained that the FHFA was insulated from meaningful oversight from the executive branch in violation of the Constitution’s separation of powers principle.

As background, the FHFA was created by the Housing and Economic Recovery Act of 2008 (HERA), following the financial crisis, to oversee two mortgage-finance companies, Fannie Mae and Freddie Mac.  Shareholders of Fannie Mae and Freddie Mac (GSEs) initially filed suit in a Texas district court seeking to invalidate an amendment to a preferred stock agreement between the Treasury Department and the FHFA, which acts as conservator for the GSEs.  The amendment required the GSEs to pay dividends to the Treasury equal to their entire net worth in repayment for a government bailout.  In the suit, the shareholders argued that the FHFA director overstepped his authority by agreeing to revise the original agreement between the GSEs and the Treasury Department.  The court, however, rejected this argument and determined that the FHFA was within its statutory authority when it entered into the revised agreement.

On the constitutional issue, however, the court found that the FHFA was unconstitutionally structured with a sole director who can only be removed from the position for cause, along with other features that insulated the FHFA from executive oversight.  The court explained that, while the for-cause removal provision alone was not sufficient to trigger a constitutional violation, the court considered the combined effect of: (1) the for-cause removal restriction; (2) the single-director leadership structure; (3) the lack of a bipartisan leadership composition requirement; (4) the funding stream outside the normal appropriations process; and (5) the Federal Housing Finance Oversight Board’s purely advisory oversight role.  The court concluded that such features insulated the FHFA to the point where the executive branch could not control the FHFA or hold it accountable.  Thus, the court determined that the appropriate remedy for the violation was to sever the for-cause removal provision from HERA, but to leave the remainder of HERA intact including the FHFA’s past actions.

Distinguishing the recent D.C. Circuit’s en banc opinion in PHH v. CFPB, which held that the CFPB’s single-director structure was constitutional, the Fifth Circuit found salient distinctions between the FHFA and the CFPB.  One such difference, the court noted, was that the Financial Stability Oversight Council has the ability to directly control the CFPB’s actions because it holds veto-power over the CFPB’s policies.  However, the court determined that the Federal Housing Finance Oversight Board, which oversees the FHFA, could not exercise any executive authority over the FHFA, and so, the two agencies were not similarly structured.  Thus, the Fifth Circuit reached a different conclusion to hold that the FHFA was unconstitutional.

The case is Collins v. Mnuchin and is available here.