United States: FDIC Files Summary Judgment Motion In Lawsuit Challenging Its "Madden-fix" Rule

The FDIC has filed  a motion for summary judgment in the lawsuit filed by the Attorney Generals of six states and District of Columbia to set aside the FDIC's "Madden-fix" rule.  The filing also includes the FDIC's opposition to  the summary judgment motion filed by the AGs.

The lawsuit is pending before the same California federal district court judge (Judge Jeffrey S. White) who is hearing  the lawsuit filed by three state AGs to set aside the OCC's similar Madden-fix rule.  Cross-motions for summary judgment have been filed in that case.  Oral argument on the motions was scheduled for May 7, 2021 but on May 6, the Clerk issued a notice vacating the hearing without setting a new date.

In its summary judgment motion, the FDIC argues that its Madden-fix rule should be upheld under the two-step Chevron framework as a reasonable interpretation of Section 27 of the Federal Deposit Insurance Act (12 U.S.C. 1831d) because:

• The rule passes Chevron step one because Congress has not spoken to the precise questions at issue.  Nothing in Section 27 addresses at what point in time the validity of a loan's interest rate should be determined for purposes of assessing compliance with Section 27, nor does anything in Section 27 address what happens to the validity of a loan's interest rate upon transfer.
• The rule passes Chevron step two because it is a reasonable interpretation of Section 27. The FDIC reasonably concluded that Congress could not have intended to give banks a right to make loans that would be "hampered by significant impairments to the loans' resale value and liquidity such as would occur if a bank could not transfer enforceable rights in the loans they made."  The reasonableness of the FDIC's interpretation is further demonstrated by court decisions adopting a similar construction of other statutes.

In their summary judgment motion, the AGs argue that the FDIC rule violates the Administrative Procedure Act because it exceeds the FDIC's authority and impermissibly preempts state law and is arbitrary and capricious.  In opposing the AGs' motion, the FDIC's arguments include:

• Responding to the AGs' argument that the rule exceeds the FDIC's authority because the plain language of Section 27 applies only to interest that a bank can charge, the FDIC argues that the AGs' argument does not properly view the statutory language in context.  According to the FDIC, Section 27 regulates the terms of a loan contract and because loan contracts are transferable "logic and common sense suggest that Congress could not have intended to depart from well-settled principles that an assignor can transfer enforceable rights in its contracts—or at least not without an explicit statement showing that it was doing so, which it did not provide here."
• Responding to the AGs' argument that the rule exceeds the FDIC's authority because the FDIC can only regulate FDIC-insured banks and the rule regulates non-banks, the FDIC argues that the rule regulates the conduct and rights of banks when they sell, assign, or transfer loans."  (emphasis included).  Any indirect effects the rule has on non-banks does not place the rule outside the FDIC's authority.  The assignee's ability to charge the contractual rate of interest follows from the fact that a bank's statutory authority to make loans at particular rates necessarily includes the power to assign the loans at those rates.
• Responding to the AGs' argument that the rule impermissibly preempts state law by extending the preemption of state interest rate limits to buyers of loans originated by FDIC-insured banks, the FDIC argues that the AGs mischaracterize the rule.  According to the FDIC, the rule "merely interprets the substantive meaning of [Section 27], it does not itself preempt state law."  Citing Smiley, the FDIC contends that an agency's interpretation of the substantive scope and meaning of a preemptive statute does not itself preempt state law (rather, the statute does) and therefore does not trigger the  presumption against preemption."
• Responding to the AGs' argument that the rule is arbitrary and capricious because the FDIC failed to give sufficient consideration to evidence that the rule will likely facilitate rent-a-bank schemes and failed to meaningfully address the true lender doctrine's applicability to loan sales potentially covered by the rule, the FDIC argues that the rule would not protect such schemes but, "to the contrary, the rule would only apply if a bank actually made the loan."  The FDIC also asserts that it fully considered whether the rule needed to address the application of the true lender doctrine and that it reasonably determined that it did not because "while both the true lender question and the question addressed by the [Madden-fix rule] 'ultimately affect the interest rate that may be charged to the borrower, the FDIC believes that they are not so intertwined that they must be addressed simultaneously by rulemaking.'"  With regard to the AGs' argument that the FDIC's basis for the rule lacks evidentiary support because the FDIC has not shown that Madden has caused any significant effects on credit availability or securitization markets, the FDIC asserts that the APA does not require it to provide evidence that widespread negative effects would occur (or have occurred) absent the regulation.  It contends that "before issuing a rule, an agency need not find that problems that need solving exist in the industry.  Rather, the agency can decide that the problem is the gap or ambiguity in the statute."  (emphasis included).  The FDIC asserts that "there is a rational connection between the problem the FDIC identified (the statutory gaps or ambiguity as to when validity is determined and what happened upon transfer) and the FDIC's solution (an interpretation clarifying that validity is determined at the loan's inception, and is not affected by the loan's transfer."

Under the modified scheduling order entered by the court:

• The FDIC must file its reply by July 15, 2021.
• Oral argument on summary judgment motions is scheduled for August 6, 2021.

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