FHFA leadership structure on shaky ground after CFPB ruling

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WASHINGTON — The Supreme Court's invalidation of the single-director structure at the Consumer Financial Protection Bureau spells trouble for the head of the Federal Housing Finance Agency, legal experts say.

Like the CFPB, the FHFA is led by a single director nominated to a five-year term. And the statutory restriction in the Dodd-Frank Act on a president's ability to fire a CFPB director — which the high court threw out on June 29 — is similar to the law that created the FHFA.

Some observers say the court's ruling in Seila Law v. CFPB suggests it could rule the same way for the FHFA, or that that ruling is enough of a basis for a Joe Biden administration, should the Democrat win the White House in November, to fire Trump-appointed FHFA Director Mark Calabria. Either development would further complicate the futures of Fannie Mae and Freddie, which the FHFA regulates.

“The opinion establishes why the [Housing and Economic Recovery Act] structure is just as unconstitutional as the CFPB's Dodd-Frank provisions, so if this were to come before the Supreme Court, they would rule precisely the same way,” said Richard Gottlieb, a partner at Manatt, Phelps & Phillips.

In both cases, Congress sought to require a president to find sufficient cause before firing either agency's director, in order to preserve their independence and prevent the regulators from becoming too politicized.

The legal questions over the FHFA's leadership structure complicate Director Mark Calabria's plans for Fannie Mae and Freddie Mac.
The legal questions over the FHFA's leadership structure complicate Director Mark Calabria's plans for Fannie Mae and Freddie Mac.

But in a 5-4 decision written by Chief Justice John Roberts, the high court found that the CFPB’s structure vests too much power in the hands of one person, who does not answer to a board or commission, and that the president has broad authority to appoint and remove agency heads.

The ruling gives a sitting president the ability to fire a CFPB director at will — eliminating the "for cause" provision in Dodd-Frank— but keeps the rest of the law and the agency intact.

While the for-cause provisions in HERA and Dodd-Frank use different wording, many experts believe that the outcome of the CFPB case would apply to the FHFA, putting Calabria on shaky ground should the Democrats win the White House. The legal uncertainty has significant implications for how the FHFA manages and seeks to end Fannie and Freddie's conservatorships.

“On the FHFA front, the Seila decision will weigh heavily on what the Supreme Court will do given the structural similarities between the CFPB and FHFA,” said Alan Kaplinsky, the co-practice leader at Ballard Spahr's consumer financial services group. “Both have a single director who can only be dismissed for cause, which is the core of the constitutionality question addressed by the Seila" decision.

The high court could accept an FHFA constitutionality case sooner rather than later. The justices are set to decide soon whether to hear arguments in Collins v. Mnuchin, a case that challenges the single-director leadership structure of the FHFA.

After the CFPB decision, Calabria disagreed that the Supreme Court’s ruling would affect the FHFA, saying in a statement that while he respected the decision in the Seila Law case, “this ruling does not directly affect the constitutionality of FHFA, including the for-cause removal provision.”

Yet many have countered that a future administration will look to apply the Seila Law ruling to the FHFA and other similarly structured agencies.

In the majority opinion, Roberts called the FHFA “essentially a companion” of CFPB, but pointed out that the agency regulates the government-sponsored entities whereas the CFPB governs “purely private actors.”

The court missed an opportunity to make a real distinction between the FHFA and the CFPB, said Gottlieb, making it likely that the result of the case will affect both agencies.

“Non-lawyers should understand that while the court’s FHFA commentary is not legally binding as [the FHFA's structure] was not before the court, the ruling plainly chose not to draw any technical distinctions in the relative enforcement authorities of the two directors, “ he said. “By not doing that, the court has telegraphed, strongly, that the FHFA structure under HERA would be unconstitutional for exactly the same reasons.”

Some even noted that a Biden administration could choose to rely on the Seila ruling to change the FHFA's leadership instead of waiting for a separate decision on the agency's structure.

“FHFA will be like most other executive agencies,” said Jeffrey Naimon, a partner at Buckley LLP. “If you are not aligned with the White House, it will look for alternatives.”

Another potential scenario is that lawmakers hoping to preserve the FHFA and CFPB's independence could mount a legislative effort to establish boards or commissions to govern the agencies, with their respective directors as chairs. That added layer of oversight could reinstate restrictions on a president's ability to fire agency heads.

Since assuming the role of FHFA director last year, Calabria has made clear his intentions to free Fannie and Freddie from conservatorship. He has boosted the amount of capital the mortgage giants can hold and rewritten a proposed capital plan for the GSEs that would go into effect in the event they return to the private market.

But his plans could be dashed if Biden wins.

“This ruling should ensure that the president can now remove the FHFA director at will,” Jaret Seiberg, an analyst with Cowen Washington Research Group, said in a note. “This means election risk is significant for efforts to end the conservatorship as Joe Biden could fire Mark Calabria as FHFA director on Jan. 20 if the Democrat wins the election.”

Biden has not made clear his stance on the GSEs and how he views government conservatorship of Fannie and Freddie, but he has published a $640 billion plan for housing that he would execute as president, which places an emphasis on investments in affordable housing.

Even if Calabria and the FHFA maintain that the Seila Law ruling does not affect the agency, he would be left with little choice if the president were to move to replace him, said Naimon.

“Calabria could try to resist being replaced by taking the position that he can only be fired for cause, but I think that is unlikely,” he said. “The Department of Justice would point to the Seila Law decision, but more importantly, any additional progress on his agenda would be impossible. Who would ever commit capital in that context? It has the effect of freezing everybody in place.”

Still, without knowing the results of the November election, the legal question about the FHFA's structure could remain in the background as the agency continues plotting Fannie and Freddie's exit from conservatorship.

“That's going to be a question for future administrations because it bears very little on the issue today, given that the current administration supports the exit,” said Gottlieb.

But if future presidents are more enabled to fire agency heads from an opposing party, it will mean that future FHFA and CFPB directors will have potentially less time to carry out their agendas, said Naimon.

“It’s going to mean if you take over, you need to decide what your regulatory agenda is in months one through four and get cracking, because it will almost always take two to three years to get through a meaningful rulemaking,” he said.

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