The states argue that the Final Rule “unlawfully extend[s] federal law in order to preempt state rate caps that would otherwise apply to . . . nonbank entities.” The complaint alleges that the FDIC “failed to follow the procedures set forth by Congress” for enacting FDIC rules, “ignored the potential for regulatory evasion, and failed to explain its rejection of evidence contrary to its proposal.” The states further argue that the FDIC does not have jurisdiction over the permitted activities of nonbanks and “impermissibly seeks to overturn a federal court’s construction of an unambiguous statute” that interest rate preemption does not extend to nonbanks.

The Final Rule seeks to address the uncertainty created by the U.S. Court of Appeals for the Second Circuit’s 2015 ruling in Madden v. Midland Funding, LLC[4] which threw into doubt the validity of interest rates on bank loans sold to fintech lenders or other nonbank third parties. It reinforces the common law principle of “valid-when-made,” a doctrine relied upon by many banks and fintech lenders as a core component of their business models.

The case is the People of the State of California et al. v. Federal Deposit Insurance Corp., case number 4:20-cv-05860, filed in the U.S. District Court for the Northern District of California.