FHFA's challenge: Convincing Supreme Court it's not CFPB

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WASHINGTON — An upcoming Supreme Court case dealing with the Federal Housing Finance Agency could finally answer the question of whether the relatively new agency is in the same constitutional limbo as the Consumer Financial Protection Bureau.

Many observers saw the high court's recent ruling striking down the CFPB's single-director leadership structure as nearly decisive for the FHFA as well, since its structure appears to be identical.

But with the court deciding to hear the FHFA case on its own, the justices may want to provide an opportunity to the FHFA — which says its statutory setup is different than that of the CFPB — to state its case, experts say.

“What the Supreme Court is likely to do here is allow the litigants the opportunity in oral argument to explain why there’s something unique about HERA that would require them to rule differently,” said Richard Gottlieb, a partner at Manatt, Phelps & Phillips, referring to the Housing and Economic Recovery Act.

Meanwhile, the shareholders challenging the FHFA are hoping that the Supreme Court overturns an agreement between the agency and the Treasury Department that the investors have long opposed.

The Supreme Court granted "certiorari" to Collins v. Mnuchin last week, setting the high court up to hear the case brought by Fannie Mae and Freddie Mac shareholders that claims the structure of the FHFA runs afoul of the separation of powers doctrine.
The Supreme Court granted "certiorari" to Collins v. Mnuchin last week, setting the high court up to hear the case brought by Fannie Mae and Freddie Mac shareholders that claims the structure of the FHFA runs afoul of the separation of powers doctrine.

The Supreme Court granted "certiorari" to Collins v. Mnuchin last week, setting the high court up to hear the case brought by Fannie Mae and Freddie Mac shareholders that claims the structure of the FHFA runs afoul of the separation of powers doctrine, and that a policy that sweeps profits of the government-sponsored enterprises into the U.S. Treasury is likewise unconstitutional.

The Dodd-Frank Act dictated a single-director structure for the CFPB, and the FHFA likewise is led by a single director — instead of a board or commission — nominated to a five-year term. Dodd-Frank's restriction on a president's ability to fire a CFPB director — which the high court threw out on June 29 — is similar to HERA's provision requiring a president to find cause before firing an FHFA chief. (Mark Calabria is the agency's current director.)

In the 5-4 decision in Seila Law v. CFPB, the court declined to make a substantial distinction between the CFPB and other similarly structured agencies, suggesting that the ruling could also apply to FHFA.

But an FHFA-specific decision could offer more clarity.

“There wasn't much clarity in the CFPB case as it relates to the FHFA, so I think the ruling [in Collins v. Mnuchin] is going to provide some needed detail,” said David Merkur, an attorney in Greenspoon Marder's Financial Services practice group.

Meanwhile, in the CFPB decision, the Supreme Court stopped short of invalidating the agency as a whole or its previous actions. But Fannie and Freddie investors likely want the court to go further in the FHFA case by throwing out the profit sweep policy. The investors have argued that the Treasury's hold on Fannie and Freddie's earnings is invalid.

The court may seek additional briefs from the parties in the FHFA case before oral arguments take place asking how the case is different from the decision the court reached for the CFPB, said Gottlieb.

“I think the court’s focus is going to be, ‘Why doesn't the CFPB analysis resolve this for you? Tell us why this is different,’ ” he said.

Ultimately, if neither side can answer that question, the justices could release a quick decision, Gottlieb said.

"If the plaintiffs can't come up with something compelling, the court is going to issue a short, and likely per curiam, opinion,” he said.

Per curiam decisions are unsigned opinions issued by the court rather than individual justices, and are often concise and non-controversial.

The Supreme Court’s ruling in the Seila Law case eliminated the so-called “for cause” provision in Dodd-Frank to allow the president to be able to fire the CFPB director at will, but had no impact on the agency’s past nine years of rulemakings, decisions and enforcement actions.

Bose George, a managing director at Keefe, Bruyette & Woods, said he expects the court to rule the same way in Collins v. Mnuchin, and won’t touch the so-called net worth sweep.

“The remedy they did at the CFPB was to just change the structure, and the rest of it would be fine, and so it seems like here, I would think they would end up with the same result,” he said. “If they do deem this unconstitutional but just change the structure, it doesn't seem to really impact the bigger picture here for the shareholders.”

Still, the net worth sweep question may have been the driving factor for the Supreme Court in deciding whether to take up Collins v. Mnuchin, especially since the constitutionality issue appears so similar to the CFPB case.

Gottlieb said whether GSE investors get any relief is "the only unresolved issue."

“That may be the one justification for providing a full hearing for this case,” he said.

Jaret Seiberg, an analyst with Cowen Washington Research Group, called the extensive litigation around the net worth sweep the type of case that “never seems to end,” and said it would still be unlikely to end even with a ruling from the high court.

For example, regardless of a court decision, officials could still weigh potential alternatives to the net worth sweep, including having the GSEs pay a commitment fee to Treasury or reimburse the government for the outstanding costs from the 2008 bailout.

“There are many unresolved issues such as whether the government has the right to a commitment fee and whether Fannie and Freddie have the ability to pay down the amount they owe,” Seiberg said in a research note. “It is why a ruling for investors would be helpful, but we don't think it would be dispositive.”

After the CFPB decision, Calabria disagreed that the Supreme Court’s ruling would have an impact on the housing agency, 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.”

The FHFA said in a statement after the Supreme Court granted cert to Collins v. Mnuchin that it “looks forward to the U.S. Supreme Court taking up the Collins case and clarifying these important issues.”

Some observers note that the high court's agreeing to hear the FHFA case could provide Calabria with an extra layer of job security, albeit momentary.

If the justices had declined the case, and the CFPB decision alone had bearing on the FHFA, Calabria could be standing on even shakier ground. Just as Democratic presidential candidate Joe Biden would be in position to fire CFPB Director Kathy Kraninger, should he win the November election, the same fate could await Calabria.

But now that the Supreme Court will be considering the legality of the FHFA on its own, Biden would likely hold off on firing Calabria at least until the court provides more legal certainty, observers said. That could give Calabria more time to carry out his agenda, which includes freeing Fannie and Freddie from conservatorship.

George said the court would likely hear oral arguments in Collins v. Mnuchin in October, while Seiberg posited that it would be October or November and that the court wouldn’t issue a ruling until at least January or February.

“Accepting certiorari could actually benefit Calabria in the sense that his removability is being decided by the Supreme Court,” said Gottlieb. “Given the political considerations more than the legal ones, a future President Biden probably holds off on appointing a new FHFA head until the Supreme Court decides.”

But if the Supreme Court rules on the FHFA case similar to the CFPB case as expected, Calabria would have less job security, said Merkur.

“If there's a change in presidency and Biden is looking to go the other direction, obviously, the ability to replace an agency head without cause would give him a lot more power or a lot more leverage to put his policies into place,” he said.

Although GSE reform may not be a high priority for Biden, installing his own FHFA director could enable his administration to focus on issues in housing that Democrats have been more attuned to, such as affordability, George of Keefe Bruyette said.

“It’s not clear that Biden needs to do anything immediately, but it does give him more leverage,” he said. “Calabria can’t take a stance against the administration, because then presumably he would be removed.”

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FHFA CFPB GSEs GSE reform SCOTUS Fannie Mae Freddie Mac Mark Calabria Joe Biden