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October 2, 1987

Lincoln Savings And Loan Association, Plaintiff,
Federal Home Loan Bank Board, Et Al., Defendants

The opinion of the court was delivered by: GESELL


 Plaintiff Lincoln Savings and Loan Association ("Lincoln"), is a state-chartered, federally-insured thrift doing business in California. Lincoln challenges the Federal Home Loan Bank Board's (the "Board") Direct Investment Rule (the "Rule"), 52 Fed. Reg. 8188 (1987) (to be codified at 12 C.F.R. § 563.9-8) on two grounds: first, that the Board lacked statutory authority to adopt this regulation; and, secondly, that the rule, in any event, is arbitrary, capricious and an abuse of discretion. The parties have filed cross-motions for summary judgment and a hearing has been held.

 As a result of the Great Depression, Congress created a federal insurance-of-accounts system to restore public confidence in the security of thrift institutions such as Lincoln and to ensure a sound and economical means of home financing. The Federal Savings and Loan Insurance Corporation ("FSLIC") fund reimburses a thrift depositor for savings lost through the failure of a savings and loan association. It is the statutory duty of the Board to administer the FSLIC fund and to this end the Board was granted extensive statutory authority. See Federal Home Loan Bank Act of 1932, ch. 522, 47 Stat. 725, codified at 12 U.S.C. §§ 1421-1449 (1982); National Housing Act of 1934, Title IV, ch. 847, 48 Stat. 1255, codified at 12 U.S.C. §§ 1724-1730 (1982).

 In the past five years, unprecedented stress has been placed on the FSLIC fund because of the number of thrifts which have recently failed or come into financial difficulty that threatened failure. The Board, after investigation, found a correlation between these emerging financial difficulties and the increasing trend of state-chartered thrifts to purchase "direct investments" -- a term that describes investments in a wide variety of commercial ventures, including equity securities and real estate. *fn1" Such investments, the Board concluded, pose greater risks to the financial health of thrifts than do mortgage loans to facilitate purchase of homes, the traditional business of the thrifts.

 Seeking to reduce the perceived risk of such investments, the Board issued a proposed direct investment rule in May, 1984. Following formal rulemaking procedures, including a notice and comment period, and after reviewing extensive studies by experts, the Board promulgated its first direct investment rule on January 31, 1985. See 50 Fed. Reg. 6912 (Feb. 19, 1985). After two years of additional study and practical experience, with expiration of this initial rule set for January 1, 1987, the Board held yet another formal rulemaking proceeding that extended from September, 1986 until the end of February, 1987. The Board studied performance under the earlier rule, performed additional studies, solicited comments and held public hearings as well. After this exhaustive process in which all relevant factors were considered, the Board then promulgated the present Rule.

 This Rule sets a threshold level for direct investments by individual thrifts beyond which the thrift cannot make such investments without prior approval from the Board. *fn2" Lincoln was refused approval for additional direct investment, a circumstance that apparently precipitated filing of the present complaint. *fn3"

 Lincoln first claims the Board had no authority to adopt the rule. It contends that enabling legislation does not authorize the Board to issue substantive regulations in an area where the states have traditionally regulated because Congress has not specifically indicated such authority. It reinforces this argument by reference to the dual regulatory scheme traditionally recognized by Congress, under which the states retain primary regulatory authority. Thus it suggests that the Board was intended to play only a minimal role -- that of protecting the FSLIC fund. Under Lincoln's view of the enabling statutes the Board possesses no general rulemaking authority to supplant state investment rules for thrifts and the sole mechanism for dealing with unsafe and unsound thrift investment practices is the Board's cease-and-desist power to be exercised through case-by-case adjudication. Certainly this argument becomes sharply focused here inasmuch as Lincoln is authorized under California law to make unlimited direct investments.

 Since its creation the Board has issued and enforced substantive regulations that govern the operation of federally-chartered thrifts and state-chartered associations insured by the FSLIC. *fn4" The Board is not manacled in the manner Lincoln suggests, as the statutory language, the legislative history, and case law will readily indicate. To carry out its responsibility as head of the FSLIC, Congress granted the Board authority to promulgate "rules and regulations . . . for carrying out the purposes" of the National Housing Act ("NHA"). 12 U.S.C. § 1725(a) (1982). Among the purposes of the NHA are the development and maintenance of a safe and economical system of home financing as well as the protection of the FSLIC fund from excessive risk. *fn5"

 Here, as in other instances, it is clear that the Rule is intended to serve the stated purposes of the NHA. Consistent with these purposes, the Rule functions "to allow institutions the flexibility to exercise their investment powers, as independently authorized by applicable law, in a manner that would expose neither the institutions themselves nor the FSLIC insurance fund to an unacceptable level of risk" and "to ensure that these institutions continue to fulfill their obligations to provide economical home financing." 52 Fed. Reg. 8188 (1987).

 In addition to section 1725(a), the Board also relied on Section 407 of the NHA, 12 U.S.C. §§ 1730(e) and 1730(m)(3) (1982), in promulgating the Rule. These provisions empower the Board to issue cease and desist orders upon determination by it that an association is engaged in unsafe and unsound practices. Section 1730(e) elaborates this general cease and desist authority and reads in relevant part:

Whenever, in the opinion of [FSLIC] an insured institution . . . is engaging or has engaged . . . in an unsafe or unsound practice . . . or is violating or has violated . . . a law, rule, or regulation . . . [FSLIC] may . . . issue . . . an order to cease and desist from any such violation or practice.

 Section 1730(m) then provides: "In the course of or in connection with any proceeding under this section, the Corporation . . . is empowered to make rules and regulations with respect to any such proceedings."

 In Independent Bankers Ass'n of America v. Heimann, 198 U.S. App. D.C. 431, 613 F.2d 1164 (D.C. Cir. 1979), the Court of Appeals interpreted provisions of the Financial Institutions Supervisory Act of 1966 that mirror the provisions at issue here. See 12 U.S.C. §§ 1818(b) and 1818(n) (1982). The Court held that these provisions authorize the Comptroller of the Currency to issue substantive rules concerning banks and bank personnel that engage in unsafe and unsound practices. Section 1818(b) authorizes the Comptroller to take administrative enforcement action, including the issuance of cease and desist orders, against banks and bank personnel that engage in unsafe and unsound practices, among other things. Section 1818(b) in turn authorizes the ...

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