The Federal Housing Finance Agency (FHFA) believes California Attorney General Kamala Harris is pestering Fannie Mae with stupid questions. Whether that opinion is enough justification for the government-sponsored enterprise to ignore her queries is to be determined.
Earlier in the week Harris filed suit in San Francisco Superior Court, seeking to force Fannie to respond to a lengthy list of questions about defaulted loans it guarantees in the state and other matters. Appended to the filing is a letter from Arnold & Porter attorneys representing the FHFA, who argue that the agency's authority over Fannie shield it from California's questions.
"No state Attorney General has the authority to issue an administrative subpoena or investigative interrogatories to [Fannie Mae], and no court may compel a response to such interrogatories," the Arnold & Porter letter declares, arguing that federal oversight of the mortgage giants preempts state control. Harris' questions are "frequently vague and ambitious," it says.
The California Attorney General's questions were initially sent to both Fannie and Freddie Mac, but the Arnold & Porter letter specifically refers to Fannie.
The spat raises a number of unusual legal questions. Among them are whether banking preemption laws apply to the FHFA's oversight of the GSEs, whether the GSEs are functionally an arm of the government, and whether Harris's initial inquiries are a "visitorial" action that exceeds her office's power. The Supreme Court has held that states are on stronger legal footing when they seek to enforce state laws than in instances where they are merely conducting a "visitorial" investigation of a regulated entity's conduct.
Richard Gottlieb, director of the financial industry group at the Dykema law firm, calls the lawsuit "a stretch," saying the Federal Housing Finance Agency stands on "pretty solid ground" in arguing that Harris' questions infringe on its oversight of Fannie and Freddie.
"It's a question of whether the California Attorney General has any authority to investigate these agencies, and the answer should be no," he says. "They can sue, they just can't audit or investigate."
Gottlieb and several other lawyers cited the Supreme Court's Cuomo v. Clearing House case, which determined that the Office of the Comptroller of the Currency was the sole regulator of national banks but that it could not preempt state law enforcement agencies from enforcing their own laws.
Not everyone is so sure. Because Fannie and Freddie are not banks, the case does not fall into a classic mold for preemption, other lawyers say. Experts on preemption say the FHFA would likely try to remove the case to federal court, because of the perception that a state judge would be more sympathetic to Harris' cause.