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Appeals Court Finds FHFA Structure Unconstitutional

FHFAThe Fifth Circuit U.S. Court of Appeals recently concluded that the leadership structure of the Federal Housing Finance Agency [1] (FHFA) was unconstitutional.

The three-member panel of judges led by Chief Judge Carl Stewart was hearing a case filed by three shareholders of the government-sponsored enterprises (GSEs) Fannie Mae [2] and Freddie Mac [3] against the FHFA, its Director as well as the Treasury [4] and its Secretary.

The shareholders contended that the Treasury and the FHFA exceeded their statutory authority under the Housing and Economic Recovery Act (HERA) of 2008 and challenged an agreement between the FHFA as conservator to Fannie and Freddie and the Treasury Department.

Under the agreement in question, the shareholders claimed that the Treasury provided billions of taxpayer dollars in capital. In exchange, the GSEs were required to pay the Treasury quarterly dividends equal to their entire net worth in an exchange known as the “net worth sweep.” The shareholders were unhappy with the bailout out terms of this agreement and filed a suit arguing that the agreement rendered their shares valueless.

They also contended that the agreement was arbitrary and capricious under the Administrative Procedure Act, 5 U.S.C. § 706(2)(A) (“APA”), while claiming that the FHFA was unconstitutionally structured because it was headed by a single Director, “removable only for cause, does not depend on congressional appropriations, and evades meaningful judicial review.”

After the hearing, the three-member bench dismissed the shareholders’ statutory claims and granted summary judgment in favor of the FHFA and Treasury on the constitutional claim. “Because we find that the FHFA acted within its statutory authority by adopting the net worth sweep, we hold that the Shareholders’ APA claims are barred by § 4617(f),” the judges ruled. “But we also find that the FHFA is unconstitutionally structured and violates the separation of powers. Accordingly, we affirm in part and reverse in part.”

A recent ruling [5] by a New York Judge had also upheld a previous ruling that said the Bureau of Financial Protection (BCFP) was unconstitutional for the same reason.

Read the detailed ruling and background of the case here [6].

Learn More about recent BCFP rulings:

CFPB vs. PHH Dismissed: RESPA Enforcement Implications [7]

CFPB vs. PHH—An Unexpected Conclusion [8]