The Consumer Financial Protection Bureau is under the microscope as the Supreme Court prepares to issue a major ruling, expected this week, on whether the agency’s single-director structure is constitutional.
The decision is seen as also impacting the Federal Housing Finance Agency, which is set up in a similar way and has a challenge pending in court related to its structure.
If the nation’s highest court rules in Seila Law v. the CFPB that the single-director structure is unconstitutional, it could impede the FHFA’s efforts to free Fannie Mae and Freddie Mac from government conservatorship, said Jaret Seiberg, managing director of Cowen Washington Research Group.
Combined, Fannie Mae and Freddie Mac guarantee more than half of the outstanding $11 trillion of U.S. home loans.
“This ruling will influence whether Fannie Mae and Freddie Mac are able to exit conservatorship,” Seiberg said in a note to clients. “If the single-director structure is constitutional, the path out of conservatorship is simpler.”
If the court rules against the current structure, it means the election will determine if Mark Calabria continues as FHFA director, Seiberg said. Former Vice President Joe Biden, the presumptive Democratic nominee to take on President Donald Trump in November, would be able to name his own director and may derail Calabria’s plans, Seiberg said.
Both the CFPB and the FHFA were set up during and after the financial crisis with one director nominated by the president to a five-year term and confirmed by the Senate. Currently, those directors can only be fired “for cause,” meaning someone would have to show proof of malfeasance in office.
“This CFPB dispute matters for the future of Fannie and Freddie as there is a similar case pending before the Supreme Court regarding the single-director structure of the Federal Housing Finance Agency,” Seiberg said.
In the FHFA case, a federal appeals court ruled the single-director structure is unconstitutional because there is not a proper check and balance on the director’s power. The solution the court came up with is to permit the sitting U.S. president to remove the director for any reason, rather than having to show cause.
If the Supreme Court concludes the current single-director structure is legal, it means FHFA Director Mark Calabria may remain in office through April 2024, Seiberg said.
“That provides him plenty of time to shepherd the enterprises through the steps needed to end the conservatorship,” he said.
If the Supreme Court rules the other way this week, all bets are off, Seiberg said. Polling data currently has Biden ahead of Trump, so there’s an “election risk” to the plan to free the GSEs from conservatorship, he said.
“The problem is that Calabria would have to finalize just about every detail on the exit before Jan. 20,” when Biden would be sworn in, Seiberg said.
“That could be difficult given the legal hurdles to quick actions at regulatory agencies,” he said. “If anything is left undone, that could become a way for the Biden administration to block the release from conservatorship.”