July 16, 2019

July 16, 2019

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July 15, 2019

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FHFA Reverses Position (Again) on its Constitutionality

In an interesting twist, the FHFA has informed the Fifth Circuit in Collins v. Mnuchin, that despite having previously advised the en banc court that it would not defend the FHFA’s constitutionality, it has reconsidered its position under the leadership of its new Director and will take the position going forward that the agency’s structure is constitutional.  The en banc court held oral argument in the case in January 2019.

The plaintiffs, shareholders of two of the housing government services enterprises (GSEs), are seeking to invalidate an amendment to a preferred stock agreement between the Treasury Department and the FHFA as conservator for the GSEs.  A Fifth Circuit panel found that the FHFA is unconstitutionally structured because it is excessively insulated from Executive Branch oversight but determined that the appropriate remedy for the constitutional violation was to sever the provision of the Housing and Economic Recovery Act of 2008 (HERA) that only allows the President to remove the FHFA Director “for cause” while “leav[ing] intact the remainder of HERA and the FHFA’s past actions.”  The plaintiffs sought a rehearing en banc to overturn the panel’s rulings that the FHFA acted within its statutory authority in entering into the amendment and that the FHFA’s unconstitutional structure did not impact the amendment’s validity.  The FHFA also sought a rehearing en banc, principally seeking to overturn the panel’s determination that the plaintiffs had Article III standing to bring a constitutional challenge but also arguing that the panel’s constitutionality ruling was incorrect.

Following the appointment of Joseph Otting as Acting Director, however, the FHFA announced that it would not defend its constitutionality to the en banc court.  In a supplemental brief filed before the oral argument, the FHFA stated that Mr. Otting had “reconsidered the issues presented in this case.”  While continuing to take the position that the plaintiffs’ lack of standing made it unnecessary for the en banc court to reach the constitutionality issue, the FHFA indicated that to the extent the court found it necessary to do so, it would not defend the constitutionality of the HERA’s for cause removal provision and agreed with the Treasury Department’s position that the provision was unconstitutional because it infringes on the President’s exercise of executive authority.

In its letter informing the Fifth Circuit of its latest change in position, the FHFA indicated that Mark Calabria had become FHFA Director in April 2019 and “respectfully requests that, to the extent the Court finds it necessary to reach the constitutional issue, the Court uphold FHFA’s structure and otherwise affirm the judgment below as to the Third Amendment.”

In March 2019, a Fifth Circuit panel heard oral argument in All American Check Cashing’s interlocutory appeal from the district court’s ruling upholding the CFPB’s constitutionality.  At the oral argument, both parties were asked whether the panel should hold its decision until the en banc court issued its decision in Collins v. Mnuchin.

The CFPB, which defended its constitutionality in All American Check Cashing, may be unable to do so in the U.S. Supreme Court should the court grant the petition for a writ of certiorari filed by Seila Law seeking review of the Ninth Circuit’s ruling that the CFPB’s structure is constitutional.  While the DOJ opposed the certiorari petition filed last year by State National Bank of Big Spring (SNB) that also asked the Supreme Court to decide whether the CFPB’s structure is constitutional, it did so despite agreeing with SNB that the CFPB’s structure is unconstitutional.  Its opposition was based on its view that the case was “a poor vehicle to consider the [constitutionality] question.”

Pursuant to Dodd-Frank Section 1054(e), the CFPB would need the DOJ’s consent to represent itself in the Supreme Court in Seila Law.  The DOJ’s position regarding SNB’s certiorari petition makes it seem unlikely that the DOJ will oppose Seila Law’s petition.  The more likely scenario would seem to be that the DOJ will agree with Seila Law that the Supreme Court should grant the petition and rule that the CFPB’s structure is unconstitutional.  As a result, should the Supreme Court grant Seila Law’s petition, it may be necessary for the Supreme Court to appoint an amicus curiae to defend the Ninth Circuit’s judgment, an action that is part of the Supreme Court’s usual practice when no party is defending the circuit court’s judgment.

Copyright © by Ballard Spahr LLP

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Kaplinksy, partner, New York, finance
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Alan S. Kaplinsky is Co-Practice Leader of the firm's Consumer Financial Services Group, which has more than 115 lawyers. Mr. Kaplinsky devotes his practice exclusively to counseling financial institutions on bank regulatory and transactional matters, particularly consumer financial services law, and defending financial institutions that have been sued by consumers in individual and class action lawsuits and by government enforcement agencies. Visit Mr. Kaplinsky's profile in Wikipedia.

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