FDIC files reply in support of its summary judgment motion in lawsuit challenging its “Madden-fix” rule

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The FDIC has filed its reply in support of its motion for summary judgment in the lawsuit filed by a group of state attorneys general to set aside the FDIC’s “Madden-fix” rule.  The reply responds to the AGs’ opposition to the FDIC’s summary judgment motion.  The state AGs have also filed a motion for summary judgment.  The FDIC’s filing concludes the briefing on the cross-motions for summary judgment.  Oral argument on the motions is scheduled for August 6, 2021.

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.

The FDIC makes the following primary arguments in its reply:

  • In response to the AGs’ argument that the FDIC rule is not entitled to deference because Section 27 of the Federal Deposit Insurance Act (12 U.S.C. 1831d) is unambiguous, the FDIC argues:
    • The rule satisfies Chevron step one because it addresses two statutory gaps: 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 (i.e. at the time a loan is made or at the time a bank “takes” or “receives” interest) nor does anything in Section 27 address what happens upon a bank’s transfer of a loan charging a rate permitted by Section 27.
    • 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 “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 rule does not expand preemption to non-banks because it regulates the conduct and rights of banks when they sell, assign, or transfer loans.
  • In response to the AGs’ argument that the rule violates the Administrative Procedure Act (APA), the FDIC argues:
    • The FDIC complied with the APA’s procedural requirements in promulgating the rule and because the rule is reasonable, “it is by definition not arbitrary or capricious.”
    • With regard to the AGs’ assertion that the FDIC “ignore[d] evidence contradicting the agency’s premise that the inability to transfer preemption of state rate caps constrains bank liquidity,” there is no such contradiction because the premise described by the AGs “is a straw man of [their] own creation.”  The FDIC does not argue that rate caps constrain liquidity but instead argues that “banks’ inability to transfer enforceable rights in the loans they made constrains the loans’ value and liquidity.”
    • The FDIC did not speculate about Madden’s negative effects to issue the rule but instead “grounded the rule on accepted tools of statutory construction coupled with the agency’s own banking expertise.”  The rule was not targeted to address Madden’s effects but instead was intended to address the two statutory gaps in Section 27 “which exist independent of Madden.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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