FDIC Valid-When-Made Rule Amicus Brief

I filed an amicus brief today in support of the challenge of eight state attorneys general to the FDIC's Valid-When-Made Rule. I've blogged about the issue before (here, here, here, here, here and here). The FDIC's Valid-When-Made Rule and its statutory framework is a bit different than the OCC's parallel rule (which also got some amicus love from me), so the arguments here are a bit different.

My brief makes two basic points. First, the FDIC's rule is not consistent with law, as required by the APA. This is because the statutory basis for the rule, section 27 of the Federal Deposit Insurance Act (enacted in 1980), is based on section 85 of the National Bank of 1864 and is read in pari materia with the National Bank Act provision. That matters because the National Bank Act incorporates the common law as it existed in 1864, and the FDIC rule is inconsistent with the common law.

Specifically, the FDIC ignores a well-established common law doctrine in usury cases:  the anti-evasion doctrine. The United States Supreme Court and state supreme courts have repeatedly and consistently said that they will look to substance over form in usury cases. The FDIC's rule, however, promotes form over substance in rent-a-bank arrangements.  

The FDIC, however, claims that its rule is consistent with two other common law doctrines: the "valid-when-made" doctrine and the "stand in the shoes" principle of assignments. It's flat out wrong on both. The "valid-when-made" doctrine cannot be observed anywhere in law prior to a 1979 decision, and it's not even named in a case until 2019. (If you doubt me, you'd better present some evidence.) The doctrine isn't valid, but made up.

And the "stand in the shoes" principle applies only to assignable contract rights. It doesn't apply to status or regulatory privileges like a banking charter. Put another way, it's "stand in the shoes," not "stand in the feet." 

The second point is that the FDIC's rule has no impact on bank liquidity. Banks do not depend on loan sales for liquidity. If a bank is in a liquidity crunch, it goes to the Fed's discount window. A loan sale just takes too darn long to negotiate.  And if they do need to sell, there are some 5,000 banks around virtually none of which are subject to state usury laws. That's a plenty vibrant market. 

Many thanks to my counsel, Eliza Duggan and Ted Mermin of the Center for Consumer Law and Economic Justice at UC Berkeley Law School.