People of the State of California v. Federal Deposit Insurance Corporation

Background

The plaintiffs were California, Illinois, Minnesota, New Jersey, New York, and North Carolina; the Commonwealth of Massachusetts; and the District of Columbia. They challenged part of the Federal Deposit Insurance Corporation’s 2020 Federal Interest Rate Authority Rule under the Administrative Procedure Act (APA), which allows a court to set aside agency action that is unlawful, exceeds the agency’s authority, or is arbitrary and capricious.

The challenged provision, 12 C.F.R. § 331.4(e), provides that whether interest on a loan is permitted under 12 U.S.C. § 1831d is determined when the loan is made. It further provides that permitted interest is not affected by the loan’s later sale, assignment, or other transfer. Section 1831d allows federally insured state-chartered banks to charge certain interest rates and preempts conflicting state laws for purposes of that section. States may opt out of the section, and the court noted that the FDIC rule did not eliminate that option.

The plaintiffs were concerned that nonbank lenders could use partnerships with federally insured banks to avoid state interest-rate caps. They argued that the FDIC exceeded its authority, effectively extended federal protection to nonbanks, and failed to address the relationship between the rule, “rent-a-bank” arrangements, and the “true lender” doctrine. The FDIC contended that Section 1831d left unresolved when interest-rate validity must be assessed and what effect a loan transfer has on that validity.

Court’s Analysis

The court applied the framework commonly associated with Chevron to determine whether Congress had directly answered the relevant statutory questions. It concluded that Section 1831d did not address either the timing question or the transfer question. The court therefore considered whether the FDIC’s interpretation was a permissible and reasonable construction of the statute.

The court held that the FDIC’s interpretation was not manifestly contrary to Section 1831d and was not arbitrary or capricious. The court reasoned that the rule could protect the parties’ expectations when a loan is made and could help federally insured state-chartered banks maintain capital and liquidity by providing greater certainty about loan transfers. The court also rejected the plaintiffs’ argument that the provision improperly transferred a federal preemption privilege to nonbanks, noting that the provision did not purport to regulate the transferee’s conduct or later changes to the interest rate.

The court separately considered whether the FDIC had engaged in reasoned decision-making under the APA. It found that the FDIC had acknowledged concerns about the “true lender” issue and rent-a-bank arrangements, explained why those issues did not have to be addressed in the same rulemaking, and noted that states retained the ability to opt out of Section 1831d. The court also concluded that the FDIC’s explanation was not contrary to the evidence before it.

Disposition

The court denied the plaintiffs’ motion for summary judgment and granted the FDIC’s cross-motion for summary judgment. It stated that it was upholding the Interest Provision, directed that a separate judgment be entered, and ordered the clerk to close the file. Judge Jeffrey S. White signed the order.