Three weeks after California, Illinois and New York sued the Office of the Comptroller of the Currency (OCC) to enjoin its final rule purporting to override the Second Circuit’s Madden decision as to national banks and federal savings associations, in a complaint filed on August 20, 2020 in the same California federal district court, California, the District of Columbia, Illinois, Massachusetts, Minnesota, New Jersey, New York and North Carolina have sued the FDIC to enjoin its similar rule as to state banks.

The central allegations in the new complaint generally track those made in the lawsuit against the OCC.  The new complaint alleges:

  • The rule is “arbitrary, capricious, an abuse of discretion, and not in accordance with law; it is in excess of statutory jurisdiction, authority, and limitations, and short of statutory right; and it is taken without observance of procedure required by law.”
  • The plain language of the governing federal statute applies only to interest that an FDIC-insured state bank may charge.  Allegedly, the FDIC’s rule represents an expansion of the FDIA’s preemption of state law interest rate caps by extending the preemption to assignees of loans originated by such banks.  As such, the rule “allows [FDIC-insured state banks] to assign to non-banks the ability to preempt state-law interest rate limits through the purchase of their loans.”
  • The FDIC’s rule purports to regulate activities of non-banks which are beyond the FDIC’s jurisdiction.
  • Because the FDIC’s rule will facilitate “rent-a-bank” arrangements designed to evade state interest rate caps, it conflicts with the FDIC’s longstanding unfavorable view of such arrangements.  In addition, the FDIC failed to give meaningful consideration to this issue in the analysis provided with the rule.
  • The FDIC has taken conflicting positions on Madden’s effect on credit markets, stating that its Madden fix will rectify the disruption to credit markets caused by Madden while also stating that it is not aware of any significant effects on credit availability or securitization markets as a result of Madden. It also has not shown that sales of loans to non-banks have been significantly inhibited by Madden and has made misleading claims about how crucial securitizations and other loan transfers are to a bank’s safety and soundness and liquidity.

Unsurprisingly, our reaction to the new complaint mirrors our reaction to the complaint against the OCC.  In our view, serious flaws of the new complaint include the following:

  • The complaint repeatedly states that the FDIC Madden fix conflicts with the plain language of the governing statute but at most makes out the case that this provision does not directly address the question of whether the usury authority provided by these statutes carries over to loan assignees.
  • The complaint states: “If a non-bank buyer cannot charge the same rate of interest as the selling bank, bank loans may be sold for a discounted purchase price, but the FDIC has not shown that any such discount would materially interfere with any power granted by Congress.”  We commented that the AGs’ similar attempt to dismiss Madden’s pricing impact on national banks and federal savings associations didn’t hold water and the same holds true with regard to Madden’s impact on FDIC-insured state banks.