Texas 5th Cir. Federal court says FHFA structure unconstitutional

July 23, 2018 – A federal appeals court in Texas ruled that the leadership structure of the Federal Housing Finance Agency (FHFA) – the caretakers of Fannie Mae and Freddie Mac – is unconstitutional.

The U.S. Court of Appeals for the Fifth Circuit in Texas agreed with shareholders that the FHFA was “unconstitutionally insulated from executive control” with its single-director structure. The director cannot be removed by the president except for cause. If the court’s decision is upheld, the FHFA’s actions could be rendered void, American Banker reports.

“We hold that Congress insulated the FHFA to the point where the executive branch cannot control the FHFA or hold it accountable,” appeals court judges wrote in the opinion.

Unlike other federal agencies, the FHFA does not have a bipartisan commission, which helps to insulate it from executive oversight, the judges said. The court called for a change in the law to allow for the president to remove the director at will.

The lawsuit was brought by Fannie and Freddie shareholders, who also raised concerns that the U.S. Treasury took 100 percent of the profits from the two government-sponsored entities rather than a 10 percent dividend. The court, however, rejected that complaint and validated the agreement that requires Fannie and Freddie to continue to deliver nearly all of their profits to the Treasury Department.

The FHFA has yet to comment publicly on the case.

Courts across the country continue to focus on appropriate checks on independent regulators. In less than a year, a federal court has ruled twice that the Consumer Financial Protection Bureau (CFPB) isn’t constitutionally structured, also citing its single-director format.

Source: “FHFA Leadership Structure Is Unconstitutional: Judges,” American Banker (July 17, 2018) and “Government Caretaker of Fannie and Freddie Is Unconstitutional, Federal Court Rules,” Washington Examiner (July 17, 2018)

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