U.S. Supreme Court Holds Director at FHFA Removable At Will by POTUS

Relying on its recent decision in Seila Law, the Supreme Court of the United States held on June 23, 2021, in Collins, et al. v. Yellen, Secretary of the Treasury, et al., No. 19-422,  that the single Director at the Federal Housing Finance Agency (FHFA) is removable at will by the President of the United States. In reaching this decision, the Supreme Court held that the removal restriction in the Housing and Economic Recovery Act of 2008 (Recovery Act) for the Director of FHFA is unconstitutional, violating the separation of powers.

Synopsis

After the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) suffered significant losses from the national housing bubble burst in 2008, Congress enacted the Recovery Act (12 U. S. C. §4501 et seq.) which, among other things, created the FHFA. Pursuant to the Recovery Act, the FHFA was tasked with regulating Fannie Mae and Freddie Mac and, if necessary, stepping in as their conservator or receiver. Congress installed a single Director who serves a 5-year term, removeable by the President only “for cause.” 12 U.S.C. §§ 4512(a), (b)(2).

Soon after the FHFA was formed, the Director placed Fannie Mae and Freddie Mac into conservatorship and negotiated agreements for the companies with the Department of Treasury (Treasury). A group of shareholders in Fannie Mae and Freddie Mac challenged a third amendment to an agreement made between the FHFA and Treasury in 2016. The third amendment replaced the fixed-rate dividend formula with a variable one that required the companies to make quarterly payments consisting of their entire net worth minus a small, specified capital reserve, to the Treasury.

This group of shareholders challenged the third amendment on both statutory and constitutional grounds. The statutory challenge was based on the FHFA’s exceeding its authority, as conservator, by agreeing to the variable dividend formula. The constitutional challenge was grounded on the FHFA’s structure violating the separation of powers, because FHFA was led by a single Director, removable by the President only for cause.

The District Court dismissed the statutory claim and granted summary judgment in the FHFA’s favor on the constitutional claim. The Fifth Circuit reversed the District Court’s dismissal of the statutory claim, held that the FHFA’s structure violates the separation of powers, and concluded that the appropriate remedy for the constitutional violation was to sever the removal restriction from the rest of the Recovery Act, but not to vacate and set aside the third amendment. Both sides in this case then sought review by the Supreme Court.

The Supreme Court dismissed the statutory claim and held, after addressing a number of threshold issues, including the shareholders’ standing to bring the constitutional claim, that the Recovery Act’s restriction on the President’s power to remove the FHFA Director is unconstitutional. The Supreme Court then remanded to the lower court the issue of the shareholders’ retrospective relief after holding that the removal restriction violated the Constitution and recognizing the possibility that an unconstitutional provision in the Recovery Act could inflict compensable harm.

The Supreme Court opinion, delivered by Justice Alito, presented the reasoning for reaching the decision on the unconstitutionality of the removal restriction and indicated that “[A] straightforward application of our reasoning in Seila Law dictates the result [here].” Slip op. at 27. While attempts were made to distinguish the FHFA and CFPB, the Supreme Court did not find these distinctions material enough to justify a different result.

Implications

Promptly after the Supreme Court ruled that the removal restriction violated the separation of powers and is unconstitutional, the Biden administration ousted FHFA Director Mark Calabria and appointed Sandra L. Thompson as the Acting Director, paving the way for a Biden-appointed Director.

As the Director of the FHFA now serves at the will of the President, the President may remove a sitting Director without cause and appoint a Director who can assist a current presidential administration with the execution of its housing policies. This decision also means that privatizing Fannie Mae and Freddie Mac is farther away from materializing.

It is also worth noting that removal restrictions for the heads of the Social Security Administration, the Office of Special Counsel, the Civil Service, the Comptroller, and “multi-member agencies for which the chair is nominated by the President and confirmed by the Senate to a fixed term,” could one day be challenged on constitutional grounds. The Supreme Court indicated in a footnote that as these agencies were not before the Court, the Supreme Court declined any “comment on the constitutionality of any removal restriction that applies to their officers.” See Footnote 21 in Slip op. at 32.

On a broader scale, this signals to Congress that creation of a future governmental agency and installation of a singular director of that agency with a “for cause” removal restriction does not bode well. So, we may likely see the end of such restrictions on constitutional grounds.

If you have any questions about this case or have any other questions, please email me at melanie@garrishorn.com.