Banking and Finance Law Daily Court urged to review Net Worth Sweep to avoid uncertainty
Friday, November 15, 2019

Court urged to review Net Worth Sweep to avoid uncertainty

By Richard A. Roth, J.D.

In an effort to convince the Supreme Court to grant their request for review, Fannie Mae and Freddie Mac shareholders rely heavily on the possible interaction between their suit and two other pending appeals that address similar separation of powers arguments.

Fannie Mae and Freddie Mac shareholders who are challenging the validity of an agreement between the Federal Housing Finance Agency and the Treasury Department that has been diverting the GSEs’ net worth to the Treasury and, more broadly, the constitutionality of the FHFA itself, are pointing to the government’s petition for certiorari in the same suit and also the Supreme Court’s intent to address the constitutionality of the Consumer Financial Protection Bureau as principal reasons why the Court should grant their request for review. The petitioners’ reply brief filed in Collins v. Mnuchin argues that the Court should grant the petition for certiorari in order to avoid a "cloud of uncertainty" that would arise from deciding only some of the issues that are presented by the three review requests.

Collins v. Mnuchin (No. 19-422) arises from a suit by GSE shareholders who assert that the Net Worth Sweep, which essentially gives the Treasury the GSEs’ net worth on a periodic basis as compensation for capital infusions, is invalid because it exceeds the power of the FHFA and because the FHFA itself is unconstitutional. The petition for certiorari asks the Court to review a decision by the U.S. Court of Appeals for the Fifth Circuit that the FHFA’s organization—featuring a single director who can be removed by the president only for cause—violates the Constitution’s separation of powers requirements. The shareholders’ complaint is not with that ruling, with which they agree. Instead, they want the Court to reverse the Fifth Circuit’s remedy, which would fall well short of invalidating the entire agency.

Two other pending petitions bear on the Court’s decision to grant or deny certiorari, the shareholders claim:

  • Mnuchin v. Collins (No. 19-563), in which the government asks the Court to review the Fifth Circuit’s decision that the Housing and Economic Recovery Act allows the shareholders to sue over the validity of the Net Worth Sweep; and
  • Seila Law LLC v. CFPB (No. 19-7), in which the Court has agreed to consider whether the CFPB’s structure, which has significant similarities to that of the FHFA, is constitutional and, if not, what the proper remedy would be.

The government has recommended that the petition be denied because the separation of powers and remedy issues will be better addressed in Seila Law. The government also pointed out that the shareholders are asking to appeal before a final judgment has been entered in their case (see Banking and Finance Law Daily, Nov. 4, 2019).

Arguments for granting certiorari. According to the shareholders, the government concedes that the uncertainty about the Net Worth Sweep is an obstacle to reforming the nation’s housing finance system. Challenges to the validity of the CFPB are interfering with its ability to act and, should the Bureau be invalidated in Seila Law, doubt will be raised about the FHFA as well.

Deciding now whether the Net Worth Sweep can stand would allow the Court to resolve the uncertainty over two important government agencies, the brief says.

The arguments raised by the government in favor of granting the petition in Mnuchin v. Collins apply with equal force to the petition in Collins v. Mnuchin, the shareholders claim. Beyond that, they reassert their basic argument—that the FHFA’s structure violates the separation of powers requirements and the only meaningful remedy is the complete invalidation of the agency.

The petition is No. 19-422.

Attorneys: Charles Flores (Beck Redden LLP) and Charles J. Cooper (Cooper & Kirk PLLC) for Patrick J. Collins, Marcus J. Liotta, and William M. Hitchcock. Noel J. Francisco, U.S. Department of Justice, for Steven T. Mnuchin.

Companies: Fannie Mae; Freddie Mac

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