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FHFA Structure Declared Unconstitutional by SCOTUS

In an action initiated by certain shareholders of Fannie Mae and Freddie Mac, the United States Supreme Court issued its Opinion holding that the single-director, terminable only-for-cause structure, violated the separation of powers clause of the United States Constitution.

The Federal Housing Finance Agency (FHFA) was created in 2008 and instilled with authority to oversee Fannie Mae and Freddie Mac under the 2008 Housing and Economy Recovery Act. The underlying action relates to a Purchasing Agreement wherein the Treasury provided billions of dollars in capital in exchange for shares of Fannie and Freddie, following the 2008 housing and financial crisis. The lawsuit originated in the United States District Court for the District of Texas, where certain shareholders of Fannie and Freddie brought an action seeking relief following recent action by the FHFA Director that the shareholders alleged exceeded the Director’s authority and caused them financial injury. Two of the shareholder claims were analyzed by the Supreme Court in its recent holding.

First, the Supreme Court dismissed the shareholders’ statutory claim seeking to reverse the FHFA Director’s third amendment to the Purchasing Agreement. The shareholders claimed the FHFA Director exceeded his authority in amending the Purchase Agreement, but the Supreme Court held this statutory claim must be dismissed, noting that the Recovery Act (12 U.S.C. § 4617(f)) prohibited any court from restraining or affecting the powers or functions of the FHFA as a conservator or receiver.

Second, with respect to the shareholders’ constitutional claim, the Supreme Court first addressed the issue of standing, finding that the Fannie and Freddie shareholders had standing because they had suffered an injury in fact where their property rights in Fannie and Freddie were transferred by the FHFA Director to the Treasury. Moving on to the merits, the Supreme Court cited to its year-old opinion in Seila Law concerning the unconstitutional structure of the CFPB in holding that the FHFA was likewise unconstitutional in its current form, particularly because the Recovery Act restricted the President’s removal powers as to the Director. More information regarding the Seila Law holding may be found in our July 2020 blog post.

In its Opinion, the Supreme Court rejected an argument that the CFPB was somehow distinguishable from the FHFA due to the relative breadth of each agency’s authority. The Court also soundly rejected the argument that the “for cause” removal restriction gave the President more removal authority than some other provisions reviewed by the Court; for instance, the CFPB director had been removable only for “inefficiency, neglect of duty, or malfeasance in office.” This distinction did not matter to the Supreme Court, which noted that it had already held that even “modest restrictions” on the President’s power to remove a single-director were unconstitutional. The case was affirmed in part, reversed in part, and remanded to the lower court to address whether the unconstitutional structure of the FHFA caused the shareholders’ alleged injury.

Just hours after the ink was dry on the Supreme Court’s Opinion, President Biden fired previous FHFA Director Calabria and named the new acting director, Sandra Thompson. Ms. Thompson has previously served as the FHFA deputy director of the Division of Housing and Mission Goals.