In three prior posts (here and here and here) I analyzed two Supreme Court cases that challenged the constitutional legitimacy of the Consumer Financial Protection Bureau (CFPB) and Federal Housing Finance Agency (FHFA). In Seila Law v CFPB[1] the Court held that the agency’s Director is an executive officer of United States and is, accordingly, removable at will by the President. In Collins v Yellen and its companion case Yellin v Collins (collectively, Collins),[2] the Court followed its decision in Seila Law, holding that the structure of the Federal Housing Finance Agency (FHFA) violates the separation of powers under Article II of the Constitution, and, accordingly, that the agency’s Director is also removable at will by the President.[3] Each of the cases were remanded for further proceedings; both will impact the Federal Government’s response to future financial crises. This post dissects Collins and offers a personal appraisal and summing up of the “Tale of Two Agencies.”
Collins involved two issues: (i) whether the FHFA’s execution of a financing agreement as conservator of Fannie Mae and Freddie Mac exceeded its statutory powers under the Housing and Economic Recovery Act of 2008 (Recovery Act); [4]and (ii) whether the Recovery Act’s provision establishing a single Director for FHFA, removable for cause, was a violation of Article II of the Constitution. The Court, in an opinion by Justice Alito, held:
that the shareholders’ statutory claim is barred by the Recovery Act, which prohibits courts from taking “any action to restrain or affect the exercise of [the] powers or functions of the Agency as a conservator.” [cite omitted] But we conclude that the FHFA’s structure violates the separation of powers, and we remand for further proceedings to determine what remedy, if any, the shareholders are entitled to receive on their constitutional claim.[5]
In its decision about the statutory claim, Collins essentially affirms what Justice Alito terms “a consensus” among Federal Circuit Courts, other than the Fifth Circuit, and finds that FHFA was within its statutory authority in entering into the financing agreement in question. The decision put a dent in the hopes and dreams of some deep value Fannie Mae and Freddie Mac investors and tanked the GSE’s share price.[6] While I have genuine sympathy for the individuals and firms (including banks) whose investments were essentially wiped out by the conservatorship and its financing by Treasury in 2008, I have much less for the current investors.
In its decision on the Constitutional issue, the Court did what was expected and what it had essentially telegraphed in Seila Law. Justices Sotomayor and Breyer argue in a concurring opinion that FHFA is not an executive agency and that, like other financial supervisory agencies, there is a policy ground for independence. This argument, with which I agree, would have been stronger on behalf of the Office of Federal Housing Enterprise Oversight (OFHEO), the ineffectual predecessor of FHFA that was done away with by the Recovery Act. FHFA, at its creation, inherited not only OFHEO’s supervisory authority, but much of the regulatory power over the Enterprises previously held by the Secretary of Housing and Urban Development. This latter addition was specifically cited in the Collins majority’s rationale for determining that FHFA is an “executive agency.” President Biden lost no time in exercising Article II prerogatives by removing the hold-over FHFA Director from the prior administration and appointing a highly-qualified Acting Director in his place.
The Court’s decision to remand for further proceedings is a head-scratcher. The case is being returned to the Fifth Circuit to determine whether there is any compensable remedy for plaintiffs arising from the unconstitutionality of tenure of FHFA’s director. This action is being taken in spite of the fact that the Fifth Circuit, in what the majority (charitably, in my view) calls a “deeply fractured opinion,” has previously decided that any remedy for the constitutional breech would be prospective only. Justice Kagan makes the same point more elegantly in a concurring opinion, expressing an expectation of a speedy conclusion to the case.
And so, the Tale of Two Agencies comes to an end. The Court has rewritten the enabling legislation for two Federal regulatory agencies formed to address the causes and consequences of the Global Financial Crisis. While these actions were regrettable and unnecessary, the good news is that the Court did not invalidate either Dodd-Frank or the Recovery Act, nor did it excise the independent funding provided for in those statutes that insulates the agencies from political interference and capture. As previously discussed, Seila Law has had little or no impact on the operations of the CFPB, other than authorizing a quick replacement of its hold-over Director. It is likely that the impact of Collins will be the same for FHFA.
Together with their predecessor case, Free Enterprise Fund v PCAOB,[7] Seila Law and Collins establish a judicially legislated Constitutional framework for the structure of agencies formed to address future crises: requiring that single agency heads be removable by the President at will and possibly allowing the creation of independent multi-member commissions. Whether this framework will serve the public interest remains to be seen.
Joseph A. Smith, Jr. is a senior fellow at the Global Financial Markets Center at Duke Law and the former North Carolina Commissioner of Banks.
[1] Seila Law v CFPB, 140 S. Ct. 2183 (2020).
[2] Collins Yellen, Yellen v. Collins, No. 19-422, 2021 WL 2557067, at *4 (U.S. June 23, 2021). These cases were previously heard as Collins v. Mnuchin and Mnuchin v Collins and were two of the bequests Janet Yellen inherited upon her confirmation as Secretary of the Treasury.
[3] Collins, op cit. note 1, 2021 WL 2557067, at *4.
[4] PL 110–289, July 30, 2008.
[5] Collins, op cit., note 1.
[6] Matt Levine, “Fannie and Freddie,” Bloomberg Opinion: Money Stuff, June 23, 2021.
[7] 561 U.S. 477 (2010).
