Court Rules Investors Can Pursue Case Against Fannie, Freddie; Further Rules Structure of FHFA is Unconstitutional

NEW ORLEANS–The Fifth Circuit Court of Appeals here has ruled against the government’s 2012 decision to sweep all of the profits from Fannie Mae and Freddie Mac into the Treasury Department in a decision that could also have implications for the CFPB and its structure.

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Investors in Fannie and Freddie have for years pursued a lawsuit against the government’s decision following conservatorship of the two secondary market giants during the housing crisis of  more than a decade ago. Ultimately, the federal government poured $190-billion into the Fannie and Freddie. The government, in turn, received a special class of stock that paid a 10% dividend along with warrants to acquire nearly 80% of Fannie and Freddie’s common stock for a nominal price.

The investment has provided a good return for the government. Through 2018, Fannie Mae had paid $167.3 billion and Freddie Mac had paid $112.4 billion to Treasury, and they continue to do so.  The investors have argued they are entitled to portions of the profits the two companies have been making. The Fifth Circuit Court of Appeals in New Orleans agreed and said the investors can now pursue their claims at a trial court.

“The appellate court declined to invalidate the profit sweep altogether, but parts of its ruling suggested the judges viewed the sweep in a harsh light, finding it failed to keep the companies ‘in a sound and solvent condition,’” reported the Wall Street Journal.

Ruling on FHFA Structure

But another portion of the ruling will likely be of even greater interest to credit unions and especially companies that have challenged the constitutionality of the Consumer Financial Protection Bureau.

The Fifth Circuit also ruled the Federal Housing Finance Agency, which regulates Fannie and Freddie, is unconstitutional because its director can only be fired for cause by the president. The court said the remedy is to allow the director to be fired at will by the U.S. president, the Journal added. The constitutionality of the CFPB and its single director who cannot be fired has also been challenged in the courts.

Dr. Mark Calabria currently serves as director of the FHFA and is scheduled to speak to NAFCU’s Congressional Caucus in Washington on Wednesday.

The court last year arrived at a similar conclusion related to the CFPB. It cited an opinion from former Fifth Circuit Judge Kavanagh's dissent in PHH Corp v. CFPB, which stated "the CFPB's 'single-Director structure departs from settled historical practice, threatens individual liberty, and diminishes the President's Article II authority to exercise the executive power.'"

Support for Board Oversight

The credit union trade groups continue to advocate for a board to oversee the CFPB rather than a single director.

As reported earlier, the Treasury Department recently released a report that broadly outlines a plan for returning the two GSEs to private ownership.

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Copyright Year: 2019
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