On The Case

5th Circuit holds FHFA structure unconstitutional. Boost for Supreme Court challenge to CFPB?

(Reuters) - The en banc 5th U.S. Circuit Court of Appeals ruled Friday that the structure of the Federal Housing Finance Agency is unconstitutional under separation of powers doctrine because the agency’s lone director is insufficiently accountable to the president.

The 5th Circuit’s ruling arguably creates a split in the federal circuits over the constitutionality of independent agencies headed by directors who can’t be removed without good cause. Both the 9th and D.C. Circuits, as you may recall, have found the structure of the Consumer Financial Protection Bureau, which parallels the FHFA’s structure in most regards, to be constitutional.

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The CFPB’s constitutionality, as I’ve reported, is right now at issue in a petition for U.S. Supreme Court review by Seila Law, a California debt relief firm attempting to squelch a CFPB civil investigative demand. The government’s brief in response to Seila Law’s petition is due on Sept. 18. The 5th Circuit’s ruling in the FHFA case is going to give DOJ, FHFA and CFPB a lot to strategize about in the next nine days.

As a practical matter, the 5th Circuit’s constitutional holding will not, by itself, have much impact. Plaintiffs in the case, Collins v. Mnuchin, are Freddie Mac and Fannie Mae shareholders who allege that the Treasury Department and FHFA snatched shareholders’ money when they agreed in 2012 to sweep the housing entities’ profits to Treasury. Treasury and FHFA, which Congress created in 2008 to act as a conservator for Fannie Mae and Freddie Mac, have long argued that the mortgage crisis would have wiped out the government-sponsored housing entities if Treasury hadn’t bailed them out and that the 2012 amendment to the financing agreement between FHFA and Treasury merely changed the structure for Fannie and Freddie’s repayment of their debt to taxpayers.

In a holding separate from its ruling on FHFA’s constitutionality, the en banc 5th Circuit split with several other circuits to allow Fannie and Freddie shareholders to move forward with their claims that FHFA breached the Administrative Procedure Act in the 2012 amendment, known as the Treasury sweep.

But the 5th Circuit refused to invalidate the 2012 agreement as a remedy for the FHFA’s unconstitutional structure. Instead, the appeals court ruled that the proper cure for FHFA’s constitutional problem is simply to sever the provision that insulates FHFA’s director from being replaced without good cause. (The appeals court seems to have struggled with the issue of an appropriate remedy. Judge Don Willett, who wrote the majority opinion holding FHFA’s structure to be unconstitutional, led a dissent arguing that the 2012 amendment should be struck down, as Fannie and Freddie shareholders demanded. The majority opinion that instead calls just for the removal of statutory language protecting the FHFA director was written by Judge Catharina Haynes.)

Treasury and FHFA are themselves split on the constitutionality of the agency’s structure. The Treasury Department, represented by the Justice Department, actually agreed with Fannie and Freddie shareholders that FHFA’s director wields unconstitutional power. FHFA, which was under the leadership of a director appointed by President Obama when this case was before a three-judge panel at the 5th Circuit, originally argued that its structure was constitutional. During the en banc proceeding, President Trump appointed an acting FHFA director who instructed the agency’s lawyers not to defend the agency’s constitutionality. But after oral argument before the en banc 5th Circuit, the Senate confirmed a new FHFA director and the agency changed course again, advising the 5th Circuit in a July 9 letter that it now believes its structure is constitutional.

The intra-government split over the FHFA’s constitutionality mirrors a divide between the Justice Department and the CFPB over that agency’s constitutionality. The Justice Department told the Supreme Court last December that it believes the CFPB director is unconstitutionally insulated from the president’s authority. But the CFPB is meanwhile defending its constitutionality in cases before the 2nd and 5th Circuits.

I’ve been wondering what position the government will take in response to the Seila Law petition challenging the CFPB. By statute, the agency can represent itself at the Supreme Court if it notifies DOJ, but DOJ spoke for the agency last year, when the Supreme Court weighed a petition for review of D.C. Circuit ruling that the CFPB’s structure is constitutional. In that case, as I mentioned, Justice said it believes CFPB’s director is unconstitutionally appointed, but nevertheless urged the justices not to grant review, in part because Justice Brett Kavanaugh would have to step aside from hearing a case decided during his tenure on the D.C. Circuit. The Seila Law case, in contrast, comes from the 9th Circuit.

The Justice Department didn’t immediately respond to my request for comment on its plans for next steps in the CFPB or FHFA cases. But I’d say that if DOJ really believes the CFPB’s director is appointed in violation of separation of powers doctrine, the 5th Circuit’s decision Friday in the FHFA case should encourage DOJ to ask the justices to hear the Seila Law case.

The best argument against Supreme Court review of the CFPB setup, after all, was that the two circuits to have ruled on the agency's constitutionality have both concluded that the director’s appointment does not violate separation of powers doctrine. The 5th Circuit panel that first heard the FHFA case said in its 2018 opinion downplayed its split from the D.C. Circuit’s en banc holding in PHH v. CFPB that the CFPB, noting that the CFPB director is indirectly overseen by a board more powerful than the advisory board atop the FHFA. But that seems like a minor distinction between otherwise parallel structures at the CFPB and FHFA. It doesn't take much of a leap to argue that the 5th Circuit's FHFA ruling amounts to a split with the D.C. and 9th Circuits on the constitutionality of an agency headed by a single director who can't easily be fired by the president.

It seems unlikely to me that either DOJ or FHFA, which has independent litigating authority, will ask the Supreme Court to look at the 5th Circuit’s en banc ruling, even putting aside the appellate remand of shareholders’ APA claim to the trial court. The Justice Department, after all, prevailed on both of its constitutional arguments at the 5th Circuit, which ruled, as DOJ argued, both that the FHFA director is unconstitutionally insulated from accountability to the president but that the unconstitutional appointment doesn’t nullify Treasury’s 2012 agreement with the agency. FHFA may disagree (now) with the 5th Circuit’s holding on the constitutionality of its structure, but its biggest fear was that the 5th Circuit would strike down the 2012 deal as a remedy for any constitutional violation. That didn’t happen. (FHFA declined my request for comment on the 5th Circuit ruling and its potential next steps.)

It will be interesting to see if Fannie and Freddie shareholders go to the Supreme Court to ask for review of the 5th Circuit’s remedy for FHFA’s unconstitutional structure. (Their lawyer, Charles Cooper of Cooper & Kirk, did not respond to my email request for comment.) Would the justices decide to hear both CFPB and FHFA challenges? Would they hold the FHFA case and review the CFPB challenge? And what will DOJ and the agencies have to say?

We’ll begin to get some clarity on the future of these two critical federal agencies when the government files its response in the CFPB case next week. Stay tuned.