When Is a Bureaucracy So Independent That It’s Unconstitutional?

Alex J. Pollock

In a conceptually important opinion, the Fifth Circuit Court of Appeals has just ruled that the governance structure of the Federal Housing Finance Agency (FHFA) is unconstitutional.  This powerful agency is the conservator and regulator of the giant mortgage firms, Fannie Mae and Freddie Mac, which combined have over $5 trillion in assets, and also the regulator of the Federal Home Loan Banks, which have over $1 trillion, which gives it broad power over $6 trillion of mortgage financing.

To meet the fundamental Constitutional requirement, says the Court, all elements of the government must reflect the separation of powers, or checks and balances, among the three main governmental branches of legislative, executive and judicial. Without question, this principle is central to the Constitutional order.  Therefore, while agencies in the federal bureaucracy can be set up with varying degrees and modes of independence, the Court finds, they cannot be too independent!

When do they have too much independence?  The answer is when “independence” of an executive bureaucracy becomes “insulation” or “isolation” from Presidential control. Thus:

“If an independent agency is too insulated from Executive Branch oversight, the separation of powers suffers…excessive insulation impairs the President’s ability to fulfill his Article III [of the Constitution] oversight obligations.”

“For these reasons, agencies may be independent, but they may not be isolated.”

What pushes the FHFA over the Constitutional line is no one factor, but multiple factors in their combined effect.  These factors include:

  • There is a single Director of the FHFA
  • The Director cannot be removed by the President except “for cause,” that is for failure to perform the job, criminal behavior, or moral turpitude—the Director cannot be fired for normal reasons, including taking actions contrary to the policy of the President.
  • There is no bipartisan commission structure overseeing the agency.
  • Its funding escapes the Congressional appropriations and the power of the purse and is outside the federal budget process.
  • There is an Oversight Board but it has no authority, only an advisory role.

Putting all of this together:

“We hold that Congress insulated the FHFA to the point where the Executive Branch cannot control the FHFA or hold it accountable.”

That is presumably what Congress, in the midst of the growing financial crisis in 2008, was trying to do.  But under the Constitution, they are not allowed to do it.  So:

“We conclude that the FHFA’s structure violates Article II.  Congress encased the FHFA in so many layers of insulation…that the end result is an agency that is not accountable to the President… his ability to execute the laws—by holding his subordinates accountable for their conduct—has been impaired.  In sum, while Congress may create an independent agency as a necessary and proper means to implement its enumerated powers, Congress may not insulate that agency from any meaningful Executive Branch oversight.”

Considering this conclusion, another bureaucratic agency leaps to mind: the Consumer Financial Protection Bureau (CFPB).  It is surely unconstitutional on the same grounds!  But no, says the Court, and differentiates the two cases (therefore not contradicting the recent judgment of the D.C. Circuit that the CFPB structure is constitutional). The distinction is the partial oversight of the CFPB, but not the FHFA, by the Financial Stability Oversight Council.  In my opinion, the distinction is not convincing, and both bureaucracies are excessively insulated and fail the relevant test.  But that is not how the opinion turned out.

The Court limits its conclusions to the FHFA, finding that it is a unique case:

“The FHFA is sui generis, and its unique combination of insulating features offends the Constitution’s separation of powers.”

To remedy the problem, says the Court, the provision limiting removal of the FHFA Director to “for cause” situations must be deleted from the chartering act, the Housing and Economic Recovery Act of 2008 (HERA).  Then the life of the FHFA can go on, although its Director’s job tenure becomes less secure and more subject to the judgment of the President.

“We leave intact,” the Court concludes, “the reminder of HERA and the FHFA’s past actions….  In striking the offending provision from HERA, the FHFA survives as a properly supervised executive agency.”

Thus the final outcome is quite narrow, though important, but the concepts of how to assess whether a federal agency exceeds its allowable independence seem possibly to open broader considerations.

Alex J. Pollock

Senior Fellow

Mises Institute

Financial Services & Corporate Governance

Federalist Society’s Federalism & Separation of Powers Practice Group

The Federalist Society and Regulatory Transparency Project take no position on particular legal or public policy matters. All expressions of opinion are those of the author(s). To join the debate, please email us at [email protected].

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