On July 9, the U.S. Supreme Court granted the two petitions for certiorari in Collins v. Mnuchin, the en banc Fifth Circuit decision which held that the FHFA’s structure is unconstitutional because the Housing and Economic Recovery Act of 2008 (HERA) only allows the President to remove the FHFA’s Director “for cause.” In addition to the question of the FHFA’s constitutionality, the case could result in a decision by the Supreme Court on whether the proper remedy for a constitutional violation is to set aside action taken by an agency when it was operating unconstitutionally. Such a decision could have profound implications for the CFPB whose structure was held to be unconstitutional by the Supreme Court in Seila Law.
The FHFA was created by HERA to oversee Fannie Mae and Freddie Mac. Like the CFPB, the FHFA was established as an “independent agency” led by a single Director appointed by the President subject to Senate confirmation for a five-year term and who can only be removed by the President “for cause.” Also like the CFPB, the FHFA is not funded through the regular appropriations process. Instead, the FHFA is funded through assessments collected from Fannie Mae and Freddie Mac. HERA contains an anti-injunction clause that precludes courts from taking any action that would “restrain or affect the exercise of powers or functions of the [FHFA] as a conservator or a receiver.” It also contains a succession provision under which the FHFA, as conservator, inherits the shareholders’ rights to bring derivative actions on behalf of Fannie Mae and Freddie Mac.
The parties challenging the FHFA’s constitutionality are shareholders of Fannie Mae and Freddie Mac who are seeking to invalidate an amendment (Third Amendment) to a preferred stock agreement between the Treasury Department and the FHFA as conservator for Fannie Mae and Freddie Mac that requires the entities to pay quarterly dividends to the Treasury equal to their excess net worth after accounting for prescribed capital reserves. While ruling that the FHFA’s structure is unconstitutional, the en banc Fifth Circuit concluded that the appropriate remedy for the constitutional violation was to sever HERA’s for-cause removal provision but not to invalidate the Third Amendment. It also ruled that the shareholders could bring a direct claim against the FHFA challenging the Third Amendment.
The two questions presented by the certiorari petition filed by the shareholders are (1) whether the FHFA’s structure violates the U.S. Constitution’s separation of powers, and (2) whether the court must set aside a final action that the FHFA took when it was unconstitutionally structured and strike down the statutory provisions that make the FHFA independent.
The two questions presented by the certiorari petition filed by the Treasury Department and the FHFA are (1) whether HERA’s anti-injunction provision precludes a federal court from setting aside the Third Amendment, and (2) whether HERA’s succession provision precludes the shareholders from challenging the Third Amendment.
Although the FHFA defended its constitutionality in the Fifth Circuit, the Treasury Department agreed with the shareholders that the FHFA’s structure is unconstitutional. In opposing the shareholders’ certiorari petition, the Treasury Department and the FHFA did not address the merits of the shareholders’ constitutional challenge and instead argued that the Supreme Court’s grant of certiorari in Seila Law made it unnecessary to grant review of essentially the same question in Collins.
In ruling that the FHFA’s structure is unconstitutional, the en banc Fifth Circuit reinstated the portion of the Fifth Circuit panel’s decision that reached that conclusion. Among other features, the Fifth Circuit panel relied on the FHFA’s exercise of executive functions as a basis for its conclusion. As an example of such functions, the panel indicated that “the FHFA can enforce rules that it creates through cease-and-desist orders and monetary civil penalties.” In Seila Law, the Supreme Court also relied on the executive power exercised by the CFPB Director as a basis for its holding that the CFPB’s single director structure was unconstitutional. However, some observers have questioned whether the executive functions exercised by the FHFA Director are comparable to those of the CFPB Director highlighted by the Supreme Court in Seila Law. Accordingly, despite not having defended the FHFA’s constitutionality in the Fifth Circuit, it is unclear whether the Treasury Department will change its position in the Supreme Court and attempt to use Seila Law to distinguish the FHFA from the CFPB.
Assuming the Supreme Court reaches the constitutional question in Collins and rules that the FHFA’s structure is unconstitutional, it could have an opportunity to decide whether the Third Amendment should be set aside as a remedy for the FHFA’s structural defect. In their opposition to the shareholders’ certiorari petition, the Treasury Department and FHFA invoked the de facto officer doctrine as a basis for upholding the Third Amendment even if a constitutional violation exists. Together with ratification, that doctrine might be used by the CFPB to defend the validity of its pre-Seila Law actions. Thus, the grants of certiorari in Collins create the possibility of a Supreme Court decision on the ability of an unconstitutionally structured agency to preserve actions it took while operating unconstitutionally.