On June 23, the Supreme Court issued a decision in Collins v. Yellen, a case which concerned the Federal Housing Finance Agency (“FHFA”) and the two government sponsored enterprises (“GSEs”) which the FHFA regulates and currently holds in conservatorship—the Federal National Mortgage Association (“Fannie Mae” or “Fannie”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac” or “Freddie”).  The case presented a challenge by a group of Fannie and Freddie shareholders to a provision of the conservatorship which has effectively precluded the GSEs from paying dividends to shareholders.  Among other things, the plaintiffs targeted the constitutionality of the protection from removal enjoyed by the FHFA’s Director, which allowed the President to remove the Director only “for cause.”  This provision mirrored the removal protection provided to the Director of the Consumer Financial Protection Bureau (“CFPB”) and which the Court invalidated in Seila Law.

The Supreme Court declined to strike down the challenged provision of the conservatorship, but it did invalidate the FHFA Director’s “for cause” removal protection.  Not only does this decision have clear ramifications for the FHFA and GSEs, but it also may preview issues relating to the legal status of decisions rendered by CFPB Directors during the period in which they were unconstitutionally protected from removal from office.

This case has its roots in the 2008 global financial crisis.  The bursting of the housing bubble caused Fannie and Freddie to suffer massive losses, jeopardizing not only their future but the financial system as a whole.  In response, Congress enacted the Housing and Economic Recovery Act of 2008.  This legislation created the FHFA, with its Director only removable by the President “for cause.”

Shortly thereafter, the FHFA and the Treasury Department provided financial assistance to Fannie and Freddie.  Under the terms of the bailout agreement, the government committed $100 billion to Fannie and another $100 billion Freddie.  In exchange, the government took common stock warrants in each GSE amounting to ownership of 79.9%, preferred shares in the GSEs, and quarterly fixed-rate dividends to be paid by the GSEs.  In addition, the government placed the GSEs in conservatorships overseen by the FHFA.

In the years following the bailout, the GSEs struggled to meet the agreed-upon dividend payments to Treasury.  As a result, Treasury and the FHFA agreed to various amendments of the bailout agreement, including one which replaced the fixed-rate formula for dividends with a variable formula.  This new formula would not require the GSEs to pay dividends they could not afford, but essentially required the GSEs to pay “all of their profits forever” to the government.  See Matt Levine, Bloomberg, “Money Stuff: Supreme Court Won’t Help GSE Shareholders Much” (June 23, 2021).  This was the third amendment to the bailout agreement, and came to be called the “third amendment.”

Fannie and Freddie have since become substantially more profitable.  Subsequent amendments have permitted Fannie and Freddie to retain certain earnings to meet capital requirements.  But Fannie and Freddie are still unable to pay dividends to ordinary shareholders.  Some of those shareholders challenged the conservatorship, and the third amendment to it, in Collins.

The shareholders’ challenge targeted the statutory authority underlying the third amendment to the conservatorship as well as the FHFA Director’s authority to agree to it as the single head of an agency protected from “for cause” removal.  The Court unanimously rejected the first challenge, reasoning that the Housing and Economic Recovery Act prohibits courts from interfering in the conservatorship and empowers the FHFA to manage the conservatorship in whatever way it determines is best for the public.  See Op. at 13-15; Amy Howe, SCOTUSblog, “Despite constitutional violation, court rejects broad relief for shareholders of mortgage giants” (June 23, 2021).

The Court did agree with the shareholders that the for-cause removal protection enjoyed by the FHFA Director was unconstitutional, with Justices Sotomayor and Breyer dissenting and Justice Kagan concurring only in the judgment on this issue.  See Op. at 17-36; Op. of Justice Sotomayor; Op. of Justice Kagan.  The Court’s decision rested on its holding in Seila Law that the CFPB Director’s “for cause” removal protection was unconstitutional, which the Court characterized in Collins as “all but dispositive.”

However, the Court did not agree with the shareholders that the FHFA’s unconstitutional structure meant that the third amendment to the conservatorship should be invalidated.  Rather, the Court noted that the FHFA Director who agreed to the third amendment was an Acting Director who did not enjoy “for cause” removal protection, and thus the fact that the statute envisioned such protection for a Senate-confirmed Director did not bear upon this particular decision.  However, the Court remanded the case for lower courts to determine if the “for cause” removal protection somehow harmed the shareholders. See Op. at 35-36 (“The federal parties dispute the possibility that the unconstitutional removal restriction caused any such harm… The parties’ arguments should be resolved in the first instance by the lower courts.”)  And the Court provided examples of situations where a constitutional violation might give rise to compensable harm, including where “a President had attempted to remove a Director but was prevented from doing so by a lower court decision holding that he did not have ‘cause’ for removal” or where “the President had made a public statement expressing displeasure with actions taken by a Director and had asserted that he would remove the Director if the statute did not stand in the way.” Id.

This issue previews a larger issue created by the Court both here in Collins and in Seila Law.  Now that the Court has decided that the FHFA and CFPB Directors were unconstitutionally protected from removal, what becomes of the actions taken by those directors during the time they were unconstitutionally protected?  This question also has relevance for agencies like the Social Security Administration (“SSA”), whose Commissioner also enjoys “for cause” removal protection which may also prove unconstitutional.

While the Court has yet to directly address this question, its opinion in Collins contains clues about what its approach is likely to be.  In particular, the Court’s examples of redressable harm caused by an unconstitutional “for cause” removal provision suggest that plaintiffs will in most cases have difficulty meeting the standard.  Under those examples, it appears that unless a plaintiff can show that the President’s will was clearly thwarted—by showing that the President’s explicit, stated policy preference was ignored by the unconstitutionally protected officer or that the President was unconstitutionally blocked from removing that officer by a lower court—the plaintiff will not be able to recover.  However, these are just examples, and until the Court addresses this question directly, we will not know for certain.

A related but distinct issue is whether decisions by prior officers who were unconstitutionally protected from removal can be subsequently ratified by officers who are not unconstitutionally protected.  The CFPB has argued that such ratification can cure such a constitutional defect.  Some courts, including the Ninth Circuit, have agreed but others have disagreed.  At least one company has petitioned the Supreme Court to review this question. See Jon Hill, Law360Justices Asked to Fix ‘Hopeless Muddle’ on CFPB Ratification” (June 15, 2021).