En Banc 5th Circuit Declares FHFA Structure Unconstitutional

The U.S. Court of Appeals for the Fifth Circuit recently affirmed, in an en banc rehearing, that the Federal Housing Finance Agency (FHFA) structure violates constitutional separation of powers requirements and allowed “net worth sweep” claims brought by a group of Fannie Mae and Freddie Mac (GSEs) shareholders to proceed.

As previously covered by WBK, shareholders of the 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 (known as “net worth sweep”).  In the suit, the shareholders argued that (i) the FHFA director overstepped his authority by agreeing to revise the original agreement between the GSEs and the Treasury Department; and (ii) the structure of the FHFA is unconstitutional because it violates separation of powers principles.  The district court dismissed the shareholder’s statutory claims and concluded that the FHFA was lawfully established by Congress through the Housing and Economic Recovery Act of 2008 (HERA).  On appeal, the Fifth Circuit agreed with the lower court on the first argument, but reversed the lower court’s decision on the separation of powers claim, and 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.   

In two separate majority opinions, the en banc decision largely affirmed the three-judge panel decision by concluding that the net worth sweep exceeded the powers of the FHFA, and that the FHFA’s structure violates the Constitution’s separation of powers requirements, which provides the director with “for cause” removal protection.  In a different nine-member majority ruling, the court rejected the shareholder’s argument that the net worth sweep should be invalidated, and found that the appropriate remedy for the constitutional violation was to sever the for-cause removal provision from HERA. 

Because the FHFA’s single-director structure, including the for-cause provision, is substantially similar to the statutory structure of the CFPB, this case warrants close attention as it is binding upon the same court which will soon rule on the constitutionality of the CFPB’s structure.  The issue of the CFPB’s constitutionality is currently before the Fifth Circuit in the interlocutory appeal of a Mississippi check cashing and payday loan company from the district court’s ruling upholding the CFPB’s constitutionality.  Oral argument was held in March 2019 and no decision has yet been issued.  However, last week, the Fifth Circuit sent a letter to the parties directing them to file letter briefs addressing “[w]hat action this court should take in light of [the recent en banc decision.]”  Briefing on the case is due to be filed next month.