Seven States and the District of Columbia Sue to Overturn FDIC’s New “Valid When Made” Rule
In yet another challenge to the current administration’s efforts to abolish the “Madden Rule,” on August 20, 2020, seven states and the District of Columbia sued the Federal Deposit Insurance Corporation (“FDIC”) to overturn the FDIC’s newly finalized “valid when made” doctrine. See FDIC Rule here and American Banker background report here.
Historically, certain national bank statutes preempt state interest limit statutes by allowing banks to “export” the interest rate limit of their home states when they provide loans to out-of-state customers. This allows national banks to charge interest rates that may exceed a given state’s usury limit. Most loans, however, are assigned or transferred to loan servicing companies. Consumer advocates and many state Attorneys General who are hostile to the banking industry have argued that the ability to export interest rates does not apply to the loan servicing companies. This was the gist of the argument made Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015), cert. denied, 136 S. Ct. 2505 (2016). Madden held that non-bank-entities could not take advantage of a national bank’s ability to charge rates higher than the local interest-rate cap.
On June 25, 2020, the FDIC published a Final Rule with the stated purpose to, in part, clarify that state-chartered banks and insured branches of foreign banks have regulatory authority in these areas parallel to the authority of national banks under regulations issued by the Office of the Comptroller of the Currency. The Final Rule further clarifies that a “valid-when-made” interest stated in the relevant loan documentation is not affected by a change in state law, a change in the relevant commercial paper rate, or the sale, assignment, or other transfer of the loan. This also ensures that non-bank-entities can rely on the interest rates set forth in the loan documentation. The Final Rule is very similar to the “valid when made” doctrine issued by the Office of the Comptroller of Currency in July 2020.
But consumer advocates and the states’ Attorneys General are not going down without a fight. On August 20, 2020, seven states—California, Illinois, Massachusetts, Minnesota, New Jersey, New York, and North Carolina—and the District of Columbia filed suit to overturn the new rule. A full panoply of arguments was thrown at the new FDIC Rule, including claims that the Rule:
- violates the Administrative Procedures Act (“APA”) by being arbitrary, capricious, and in excess of statutory authority;
- violates the APA because it was issued in violation of the APA procedural requirements;
- provides for preemption of state law beyond what Congress intended where such preemptions must be exactingly and narrowly construed;
- is contrary to the plain FDIA statutory language;
- relies on inaccurate and false factual predicates; and
- purports to give the FDIC regulatory authority over non-bank-entities which is not provided for in the FDIA.
Like the recent case filed to overturn the Comptroller’s version of this Rule, this lawsuit will prolong the legal uncertainty created by Madden. The case is captioned: People of the State of California, et. al. v. FDIC, U.S. District Court, Northern District of California, No. 20-cv-5860.