In early August 2020, several state attorneys general filed suit against the Office of the Comptroller of the Currency (OCC) challenging the OCC’s proposed “Madden Fix.” Notably, while the Federal Deposit Insurance Corporation (FDIC) also issued their own Madden Fix, the agency was not named as a defendant in the initial lawsuit. As such, it is not surprising that a group of attorneys general, many of whom are involved in the suit against the OCC, have now filed a separate lawsuit challenging the FDIC’s Madden Fix. Specifically, on August 20, 2020, the attorneys general of California, Illinois, Minnesota, New Jersey, Massachusetts, New York, North Carolina, and the District of Columbia sued the FDIC in the U.S. District Court for the Northern District of California alleging that the agency’s rule “unlawfully extend[s] federal law in order to preempt state rate caps that would otherwise apply to . . . nonbank entities.”
This lawsuit, like its twin, can be traced back to the Second Circuit Court of Appeals’ decision in Madden v. Midland Funding. In Madden, the Second Circuit cast doubt on the valid-when-made doctrine, a legal concept that, for over a century, has allowed banks to sell, assign, and transfer loans freely. Under the valid-when-made doctrine, a loan is valid when it is created and remains valid when it is sold, even when the purchaser of the loan resides in a jurisdiction where the loan would otherwise be prohibited by state law. Following Madden, the banking and lending industry pushed for a “Madden Fix” by Congress and the prudential bank regulators. In June of this year, the FDIC issued a rule confirming that under section 27 of the Federal Deposit Insurance Act (12 U.S.C. § 1831d), if the amount of interest on a loan is permissible when it is made, it remains permissible despite the sale, assignment, or other transfer of the loan. Lenders saw this rule, along with the OCC’s Madden Fix rule, as a welcome first step in addressing the uncertainty created by Madden.
The lawsuit against the FDIC is largely identical to the suit against the OCC. In particular, the attorneys general contend that the agency’s rule violates the Administrative Procedures Act because the agency purportedly “ignored the potential for regulatory evasion and failed to explain its rejection of evidence contrary to its proposal.” The complaint also attacks the FDIC’s rulemaking as an allegedly impermissible attempt to use its regulatory authority to overturn the Second Circuit’s decision in Madden. There are some differences between this lawsuit and the OCC complaint. For instance, the FDIC suit invokes the language of the Federal Deposit Insurance Act itself, contending that the FDIC, through its rule, violates the act by attempting to extend federal preemption of state interest rate caps under Section 27 of the act to non-FDIC banks.
We are not surprised that the FDIC’s rule is facing a legal challenge, and we anticipate that the agency will vigorously contest these claims. However, this lawsuit adds to the current uncertainty surrounding the emerging fintech industry and bank-partnership model of lending. As we previously suggested in this space, there are practices that banks and non-bank lenders, as well as their fintech partners, can take to mitigate the risks posed by Madden and the True Lender doctrine – a related legal issue that lenders and their partners face during the process of launching innovative bank partnership efforts. Parties should carefully structure partnerships to reduce Madden and True Lender risk. In the meantime, we will continue to monitor this case, as well as the corresponding challenge to the OCC’s Madden Fix.