Fifth Circuit Panel Concludes FHFA Single-Director Structure is Unconstitutional

On July 16, 2018, in Collins et al. v. Federal Housing Finance Agency et al. (No. 17-20364), a Fifth Circuit panel ruled that the single-director structure of the Federal Housing Finance Agency (FHFA) is unconstitutional.  The ruling comes on the heels of the Southern District of New York’s CFPB v. RD Legal Funding LLC decision (2018 WL 3094916 (S.D.N.Y. June 21, 2018)), in which the court reached a similar result with respect to the Consumer Financial Protection Bureau (CFPB), determining that its single-director structure was unconstitutional.  In reaching its decision, the Collins court examined the FHFA’s composition, and balanced Congress’s intent to create an independent agency against the constraints the structure imposed upon the President’s Article II powers.

In Collins, Fannie Mae’s and Freddie Mac’s public shareholders filed suit against the FHFA, challenging an agreement in which Fannie Mae and Freddie Mac—which were under the FHFA’s conservatorship in the wake of the financial crisis—agreed to sell preferred stock to the FHFA in return for a $200 billion funding commitment from the Treasury Department.  The shareholders argued that this action prejudiced their rights as minority shareholders and claimed, in part, that the FHFA’s single director structure was unconstitutional.

The court recognized that Congress has the power to create agencies that are independent from executive authority in order to “enable the agencies to pursue policies that (hopefully) yield long-term,” and that such independence may not be possible if its head was removable at will—as opposed to for cause—by the President.  Nevertheless, such agencies cannot be too insulated from executive control, because that would impinge upon the President’s Article II oversight powers, to ensure that the “Laws be faithfully executed.”  In balancing those competing interests the court compared the FHFA’s structure against some features that are more typical of independent agencies, and determined the FHFA’s single-director structure was unconstitutional.

First, the court determined that a single director structure insulates the director from Presidential oversight.  The court observed that most independent agencies are headed by multi-member bodies—who are often appointed at different times to ensure a bi-partisan balance—and are designed as non-partisan agencies that could act neutrally.  Under the single-director structure of the FHFA, there is no such balance, because the President may be “stuck” dealing with a single-director agency head who “vehemently opposes [his] agenda,” over whom he has no control to remove.  Second, the court considered the FHFA’s source of funding, which rests outside the appropriations process, and concluded that it also constrained the President’s oversight function.  Because the President could not decide how to allocate funds to the FHFA, his ability to oversee the agency was thereby impeded.  Finally, the court concluded that Congress did not separately empower the executive branch in any other way to exercise control over the FHFA.  The only part of the FHFA’s structure that comes close to providing the President with oversight authority is the Federal Housing Finance Oversight Board, on which two of the four board members are Cabinet officials.  However, the Board is purely advisory, and not empowered to exercise any oversight function whatsoever.  Viewed together, these features of the FHFA’s structure leaned too much toward independence at the expense of the President’s Article II oversight powers, leading the Court to conclude that the agency’s structure was unconstitutional.

As a Circuit Court decision that ruled a single-director independent agency structure unconstitutional, the Collins decision may lend credence to the RD Legal decision, in that other courts may be more inclined to agree with RD Legal that the CFPB’s single-director structure is also unconstitutional.  However, there are also elements of the Collins decision that cut against RD Legal’s reasoning.  First, contrary to RD Legal’s holding, the Collins Court determined that the FHFA’s unconstitutional lack of oversight could be “fixed” by “strik[ing] the language providing for good-cause removal,” thereby subjecting the FHFA to the President’s removal powers.  Second, the Collins Court compared the CFPB favorably to the FHFA, finding that, unlike the FHFA’s Board, the CFPB’s Financial Stability Oversight Council has a supermajority of board members appointed by the President and can exercise veto power over the CFPB’s policies.  Thus, following the Collins Court’s reasoning, a court could conclude that the CFPB’s single director structure is unconstitutional, but keep the CFPB intact by striking the for-cause removal provision.  Regardless of the outcome, LenderLaw Watch will continue to monitor developments in this area.

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