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Financial Services Law Insights and Observations

FDIC counters states’ challenge to “valid-when made” rule

Courts FDIC Madden Interest Rate State Issues State Attorney General Federal Deposit Insurance Act Bank Regulatory


On May 20, the FDIC filed a motion for summary judgment in response to a challenge brought by eight state attorneys general to the FDIC’s valid-when-made rule. As previously covered by InfoBytes, the FDIC’s final rule clarifies that, under the Federal Deposit Insurance Act (FDIA), whether interest on a loan is permissible is determined at the time the loan is made and is not affected by the sale, assignment, or other transfer of the loan. The AGs filed a lawsuit last year (covered by InfoBytes here) arguing, among other things, that the FDIC does not have the power to issue the rule, and asserting that while the FDIC has the power to issue “‘regulations to carry out’ the provisions of the FDIA,” it cannot issue regulations that would apply to nonbanks. The AGs also claimed that the rule’s extension of state law preemption would “facilitate evasion of state law by enabling ‘rent-a-bank’ schemes,” and that the FDIC failed to explain its consideration of evidence contrary to its assertions, including evidence demonstrating that “consumers and small businesses are harmed by high interest-rate loans.”

The FDIC countered that the AGs’ arguments “misconstrue” the rule, which “does not regulate non-banks, does not interpret state law, and does not preempt state law.” Rather, the FDIC argued that the rule clarifies the FDIA by “reasonably” filling in “two statutory gaps” surrounding banks’ interest rate authority. “The rule, which enjoys widespread support from the banking industry, represents a reasonable interpretation of [the FDIA], and should be upheld under Chevron’s familiar two-step framework,” the FDIC stated. Moreover, the FDIC contended, among other things, that the rule is appropriate because the FDIA does not address at what point in time the validity of a loan’s interest rate should be determined and is “silent” about what effect a loan’s transfer has on the validity of the interest rate. The FDIC also challenged the AGs’ argument that it is improperly trying to regulate non-banks, pointing out that the rule “regulates the conduct and rights of banks when they sell, assign, or transfer loans” and that “any indirect effects the rule has on non-banks do[es] not place the rule outside the agency’s authority.”

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