In its decision earlier this week in Collins v. Yellin (previously captioned Collins v. Mnuchin), the U.S. Supreme Court, relying on its decision in Seila Law, held that the Federal Housing Finance Agency’s structure is unconstitutional because the Housing and Economic Recovery Act of 2008 only allows the President to remove the FHFA’s Director “for cause.”  Despite ruling that the FHFA’s structure was unconstitutional, the Supreme Court also held that the proper remedy for the constitutional violation was not to invalidate the FHFA actions challenged by the plaintiffs.

The plaintiffs in Collins were shareholders of Fannie Mae and Freddie Mac 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 required the entities to pay quarterly dividends to the Treasury equal to their excess net worth after accounting for prescribed capital reserves.  The Third Amendment was adopted by an Acting FHFA Director and subsequent actions to implement the Third Amendment were taken by Senate-confirmed Directors.

According to the Supreme Court, its conclusion that the Acting Director who adopted the Third Amendment was removable by the President at will defeated the plaintiffs’ argument for setting aside the Third Amendment in its entirety.  The Supreme Court also concluded that “there is no reason to regard any of the actions taken by the FHFA [when headed by confirmed Directors] in relation to the third amendment as void.”  The Court stated that “all of the officers who headed the FHFA during the time in question were properly appointed.  Although the statute unconstitutionally limited the President’s authority to remove the confirmed Directors, there was no constitutional defect in the statutorily prescribed method of appointment to that office.” (emphasis included).  The Supreme Court found “no basis for concluding that any head of the FHFA lacked the authority to carry out the functions of the office.”  Citing Seila Law, the Court stated that “settled precedent also confirms that the unlawfulness of the removal provision does not strip the Director of the power to undertake the responsibilities of his office, including implementing the third amendment.”

The Supreme Court also commented that, in claiming to find implicit support for their position in Seila Law, the plaintiffs “read far too much” into that decision.  It stated that, contrary to the plaintiffs’ argument, its remand of Seila Law so the lower court could decide if the CFPB’s issuance of a CID “had been ratified by an Acting Director who was removable at will by the President” did not implicitly mean that the Director’s action would be void unless lawfully ratified.  According to the Court, “we said no such thing” and “the remand did not resolve any issue concerning ratification, including whether ratification was necessary.“

At the same time, the Supreme Court stated that the plaintiffs might nevertheless be entitled to retrospective relief if they could show that the unconstitutional removal provision caused harm.  The plaintiffs claimed that were it not for the provision, the President might have replaced one of the confirmed Directors who supervised the implementation of the Third Amendment, or a confirmed Director might have altered his behavior in a way that would have benefitted the shareholders.”  The Supreme Court remanded the case to the lower courts to resolve in the first instance whether the provision caused such harm.

The validity of actions taken by the CFPB before the Supreme Court’s Seila Law decision is currently being challenged in at least three cases: RD Legal Funding, Seila Law, and All American Check Cashing.  (RD Legal has filed a petition for certiorari in the Supreme Court and Seila Law is also expected to file a cert petition.)  All of the challenged CFPB actions in these cases were taken under former Director Cordray’s leadership after he was reappointed by President Obama and confirmed by the Senate.  The businesses challenging the actions have argued that any purported ratification by former Acting Director Mulvaney or former Director Kraninger was ineffective because, as agents of the CFPB, they could not ratify an act that the CFPB, as principal, could not take at the time such act was done due to its unconstitutional structure.  The Supreme Court’s decision in Collins would seem to undercut the argument that the CFPB’s unconstitutional structure made it unable to take such actions.  In addition, the ratification of these actions by former Acting Director Mulvaney or former Director Kraninger at a time when they were removable by the President at will might make it difficult for the businesses to show that they were harmed by the removal provision.