Supreme Court: Structure of Federal Housing Finance Agency Violates Constitution

Supreme Court: Structure of Federal Housing Finance Agency Violates Constitution

Legal Sidebari

Supreme Court: Structure of Federal Housing
Finance Agency Violates Constitution
June 28, 2021
On June 23, the Supreme Court in Collins v. Yellen ruled 7-2 that the structure of the Federal Housing
Finance Agency (FHFA) violates the Constitution’s separation of powers. The FHFA is headed by a single
Director who, under the statute establishing the agency, can only be removed by the President for cause,
rather than at will. The single-headed structure of the FHFA contrasts with the multimember structure of
most other agencies headed by officials that are similarly insulated from presidential control through for-
cause removal protections. The Court’s ruling, which comes on the heels of a decision last year
invalidating the similarly structured Consumer Financial Protection Bureau (CFPB), will have important
implications for Congress’s ability to configure agencies in the executive branch with relative
independence from the President. The decision also appears to have had immediate practical effect, as
President Biden removed the FHFA Director from office the next day.
Background
The dispute in Collins arose from a financing arrangement the FHFA, acting as a conservator for the
Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac), reached with the Treasury Department. Fannie Mae and Freddie Mac are government-
sponsored enterprises (GSEs) that provide liquidity to banks and credit unions to help support the home
mortgage market. The Housing and Economic Recovery Act of 2008 (Recovery Act), among other things,
established the FHFA to oversee Fannie Mae and Freddie Mac and authorized the FHFA to act as a
conservator for them in certain situations. Not long after the FHFA was established, the agency did so and
negotiated agreements for Fannie Mae and Freddie Mac with the Treasury Department. Subsequently, the
agencies agreed to a series of amendments, the third of which (Third Amendment) led to this litigation. A
group of shareholders challenged the Third Amendment on statutory and constitutional grounds. Because
the government agreed that the statutory provision restricting the President’s removal power was
unconstitutional, the Court appointed an amicus curiae to defend the statute.
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For Cause Protection
In an opinion by Justice Alito, the Supreme Court ultimately held that the statutory restriction on the
President’s power to remove the FHFA Director was unconstitutional, although it rejected the statutory
challenge to the FHFA’s action. The Court explained that application of its reasoning from last year’s
decision in Seila Law LLC v. CFPB essentially decided the constitutional question.
Seila Law LLC v. CFPB
In Seila Law, the Court ruled that a statutory provision insulating the Director of the CFPB from removal
by the President except for “inefficiency, neglect of duty, or malfeasance” was unconstitutional. The
Court explained in that case that, while it had on occasion upheld legislative restrictions on the
President’s power to remove executive officers under Article II of the Constitution, those restrictions were
permissible only because they fell within two narrow exceptions to the President’s otherwise “unrestricted
removal power”: “one for multimember expert agencies that do not wield substantial executive power,”
and the other for inferior officers—nonprincipal officers who are not constitutionally required to be
Senate-confirmed—“with limited duties and no policymaking or administrative authority.” The Court
characterized these exceptions as constituting the “outermost constitutional limits” on Congress’s
authority to restrict the President’s removal power. Seila Law declined to “extend these precedents” to the
context of the CFPB, an independent agency led by a single director with “significant executive power.”
The Court in that case concluded that the CFPB’s novel structure “lacks a foundation in historical practice
and clashes with constitutional structure by concentrating power in a unilateral actor insulated from
Presidential control.”
Arguments to Distinguish the CFPB from the FHFA
The majority opinion in Collins ruled that application of Seila Law’s reasoning compels the conclusion
that the structure of the FHFA is also unconstitutional. The FHFA, like the CFPB, is an agency with a
single Director, and the statute establishing the FHFA, like the law establishing the CFPB, restricts the
President’s removal power. The Court rejected various arguments raised by the amicus to distinguish the
two agencies.
First, Justice Alito’s majority opinion rejected the argument that Congress should have more flexibility to
insulate the FHFA Director from the President because the agency exercises less authority than the CFPB
Director. The majority opinion explained that the “nature and breadth” of an agency’s power is not
determinative in assessing whether Congress may restrict the President’s removal power. That authority is
essential for the President to exercise some control over the executive branch in accordance with the
policies the President was elected to advance. As the people elect the President, but not agency officials,
the removal power maintains electoral accountability for executive branch actions. In addition, the
majority opinion noted the “severe practical problems” attendant to establishing a workable standard to
distinguish those agency heads whose authority is substantial enough to require presidential control from
those whose power is not; while the CFPB might wield more authority than the FHFA in some ways, the
situation might be reversed in others. For instance, while the CFPB has regulatory authority over various
private interests, the FHFA oversees entities that “dominate the secondary mortgage market and have the
power to reshape the housing sector.”
The amicus also argued that when the FHFA steps into the shoes of an entity as a conservator, it assumes
the status of a private entity and does not wield executive power. The Court disagreed, explaining that the
FHFA does not always act in that capacity, and even when it does so, its authority stems from a specific
federal statute, the Recovery Act, not the background laws that govern conservatorships. The majority

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opinion stressed that the FHFA’s task—interpreting a law passed by Congress and implementing a
legislative mandate—is the essence of exercising executive power.
Justice Alito’s majority opinion also disposed of the argument that because of the nature of the entities the
FHFA regulates, there was no separation-of-powers violation. The Court-appointed amicus argued that
because the FHFA regulates GSEs, rather than private parties, the individual liberty interests protected by
separation-of-powers principles are not implicated. The majority opinion disagreed, contending that the
President’s removal power is crucial regardless of whether the relevant agency regulates the public
directly or takes actions that have important indirect effects.
Last, the Court dismissed the argument that the removal protection for the FHFA Director only offered a
modest tenure protection that did not create a constitutional problem. The amicus argued that the for-
cause standard would be satisfied, thereby permitting the President to remove the Director, if the Director
refused to follow an order from the President. This feature, contended amicus, preserved presidential
control over the Director. The majority opinion acknowledged that the Recovery Act’s for-cause provision
likely gave the President more discretion to remove the Director than other statutory provisions insulating
officials from removal, such as the standard of “inefficiency, neglect of duty, or malfeasance” that applied
to the CFPB Director. Even so, the Court ruled that “the Constitution prohibits even ‘modest restrictions’
on the President’s power to remove the head of an agency with a single top officer.”
Separate Opinions on the Constitutional Question
Justice Kagan wrote separately, joining the majority opinion in most aspects but concurring only in the
judgment on the constitutional question. (Justice Kagan had dissented from the majority opinion in Seila
Law, but concluded that principles of stare decisis compelled application of its reasoning here as the
FHFA was not legally distinguishable from the CFPB.) First, she disputed the majority’s assertion that
because at-will presidential removal is crucial to ensure that the executive branch is subject to a degree of
electoral accountability, “courts should grant the President that power in cases like this one.” Instead, she
argued, the correct method of achieving accountability is to let decisions about the government’s structure
rest with the branches that are accountable to the people, such as Congress. Second, she objected to what
she characterized as the majority’s extension of Seila Law’s holding. That case, Justice Kagan wrote,
emphasized that its rule was limited to barring a single-director agency that exercises “significant
executive power.” However, the majority opinion in Collins, she remarked, ignored that limitation on
Seila Law’s reasoning to conclude that the constitutionality of a removal restriction does not turn on “the
nature and breadth of an agency’s authority.”
Justice Sotomayor, in an opinion joined by Justice Breyer, dissented from the Court’s decision on this
constitutional question. Echoing the point raised by Justice Kagan, she argued that Seila Law limited its
holding to a single-director agency entrusted with “significant executive power.” For Justice Sotomayor,
the FHFA’s authority over GSEs does not rise to this level. In addition, one of the exceptions in which the
Court has approved removal protections—that of an independent counsel—was justified in Seila Law as
not violating separation-of-powers principles because the officer’s authority was “trained inward” to high-
level government officials identified by others. Likewise, Justice Sotomayor wrote, the FHFA’s power is
“trained inward” toward GSEs. Finally, she argued that independence for the FHFA was supported by
historical tradition, pointing to the examples of single-director agencies with limited executive power,
such as the Office of Special Counsel and Social Security Administration, as well as the independence
enjoyed by other federal financial regulators.

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Remedy
Majority Opinion
While the shareholders succeeded in their challenge to the removal restriction on the FHFA Director, the
Court took a different view for the remedy sought. The Court first observed that the Third Amendment
should not be undone in its entirety (which would result in funds being returned to Fannie and Freddie)
because an Acting Director of the FHFA—and not a Senate-confirmed Director—completed the
agreement. An Acting FHFA Director, the Court ruled, was not protected from removal as a Senate-
confirmed FHFA Director would be. Therefore, there was no constitutional violation that harmed
shareholders when the agreement was adopted. The Court thus ruled that it would only consider a remedy
for actions taken by subsequent Senate-confirmed FHFA Directors to implement the agreement.
The Court noted another wrinkle in the claim for relief—while the removal restriction protecting a FHFA
Director was unconstitutional, the FHFA Directors that followed the Acting Director and implemented the
Third Amendment were appointed consistent with the Constitution. Because there was no constitutional
defect with their manner of appointment, there was no reason to void automatically their actions simply
because the statute included an improper removal restriction. Instead, the shareholders needed to show
that the unconstitutional provision—the removal protection—itself inflicted a harm on them. For instance,
the Court offered, if the President stated publicly that he disagreed with a decision of the Director and
would have removed him were it not for the for-cause protection, that statement might show that the
unconstitutional provision caused harm. The Court decided that whether such a harm occurred here was
unclear and remanded the matter to the lower courts to resolve.
Separate Opinions on the Issue of Remedy
The majority’s remedy sparked three separate opinions by other Justices. Justice Kagan wrote separately
to reflect her agreement with the majority’s approach on this point, noting that it made sense to grant
injunctive relief “only when the President’s inability to fire an agency head affected” an agency’s
decision. She argued that this line of reasoning, if applied in future cases, could also prevent the
unnecessary upheaval of an agency’s past decisions by shielding various routine agency actions that
“would never have risen to the President’s notice.”
Justice Thomas, though joining the majority opinion in full, also wrote separately to address an issue he
thought was glossed over—that “[t]he government does not necessarily act unlawfully even if a removal
restriction is unlawful in the abstract.” Here, he wrote, for a court to grant relief, it must conclude that
either the implementation or adoption of the Third Amendment was unlawful. The parties here had
assumed that “the lawfulness of agency action turns on the lawfulness of the removal restriction.” In
future cases, Justice Thomas encouraged the Court to question that premise and “ensure not only that a
provision is unlawful but also that unlawful action was taken.” As the parties did not raise these issues,
Justice Thomas concluded that the majority opinion correctly resolved the questions presented, but he
expressed serious skepticism that, on remand, the shareholders could show an unlawful act by the FHFA
Director.
By contrast, Justice Gorsuch, who otherwise joined the rest of the majority opinion, was the only Justice
who departed from the remedy aspect of the Court’s decision. He argued that the task assigned on remand
to the lower courts was indeterminate, questioning “how … judges and lawyers [are] supposed to
construct the counterfactual history[.]”

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Takeaways
Collins represents yet another development in the Court’s separation-of-powers jurisprudence that
recently has tended to look with skepticism at statutory restrictions on the removal of agency officials.
Given the logic of Seila Law and Collins, Congress’s future ability to shield an executive branch agency
headed by a single Director from presidential control seems likely foreclosed, at least so long as those
entities wield “significant executive power.” Whether the few existing agencies—such as the Office of
Special Counsel and the Social Security Administration—with a single head protected by a for-cause
removal protection are acceptable to the Court remains to be seen. Also, how the principles of these cases
apply to other agency officials with removal protections will likely be the subject of future litigation. As
discussed above, Justice Kagan and Justice Sotomayor both criticized the majority opinion in Collins for
what they viewed as an improper expansion of Seila Law’s holding.
That said, while the Court’s recent decisions in cases challenging removal restrictions identify important
limits on Congress’s power to shape the executive branch, Congress still has a wide assortment of tools to
shape and influence executive branch activities. The Court’s approach to crafting a remedy for the
plaintiffs in Collins suggests that the immediate practical effects of litigation challenging the structure of
an agency may be somewhat tempered from what a potential challenger to a statute might otherwise
expect. As explained above, the Court remanded the case to the lower courts to determine whether the
shareholders suffered harm as a result of the unconstitutional removal restriction. Limiting the remedy in
this way, as Justice Kagan observed, will likely curb the potential impact of an adverse judicial decision
on an agency’s previous actions, at least for those that would not “capture a President’s attention.” As an
example, Justice Kagan indicated that even if in a future case the Court were to find the removal
protection for the head of the Social Security Administration to be unconstitutional, applying this
remedial approach would not necessitate overturning the “mass” of decisions that agency had made in the
past because most such decisions would have escaped the President’s notice.

Author Information

Jared P. Cole

Legislative Attorney

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