Rent-a-Bank: Bank Partnerships in addition to Evasion of Usury Laws

Rent-a-Bank: Bank Partnerships in addition to Evasion of Usury Laws

75 Pages Published: 17 Sep 2020

Adam J. Levitin

Georgetown University Law Center

Date Written: September 16, 2020

Abstract

“Rent-a-bank” arrangements would be the car of option for subprime loan providers wanting to avoid state usury, licensure, along with other customer security guidelines. A non-bank lender contracts with a bank to make loans per its specifications and then buys the loans from the bank in a rent-a-bank arrangement. The non-bank loan provider then claims to shelter within the bank’s federal exemptions that are statutory state legislation. The legitimacy of these plans happens to be probably the most bitterly contested — and still unresolved — appropriate question in customer finance for pretty much 2 decades.

The rent-a-bank occurrence is a purpose of a binary, entity-based regulatory approach that treats banks differently than non-banks and that treats bank safety-and-soundness legislation as a replacement for usury laws and regulations. The entity-based regulatory system is founded on the dated presumption that deals align with entities, in a way that a single entity will perform an transaction that is entire. Customer lending, nevertheless, is now “dis-aggregated,” such that the discrete elements of lending — marketing, underwriting, capital, servicing, and keeping of risk — are generally split among multiple, unaffiliated entities.

The binary, entity-based system that is regulatory a mismatch for such dis-aggregated deals involving a mosaic of entities, some bank plus some non-bank. The mismatch facilitates regulatory arbitrage of usury regulations through rent-a-bank plans, as non-banks claim favorable treatment that is regulatory virtue associated with the marginal participation of a bank in a transaction.

The vigor of rent-a-bank plans relies on appropriate doctrine. This informative article suggests that the alleged “valid-when-made” doctrine used to aid same day payday loans in Colorado rent-a-bank plans, just isn’t, as reported, a well-established, hundreds of years old, “cardinal rule” of banking law. […]