Rent-a-Bank: Bank Partnerships and the Evasion of Usury Laws
93 Pages Posted: 17 Sep 2020 Last revised: 9 Feb 2021
Date Written: February 8, 2021
“Rent-a-bank” arrangements are the vehicle of choice for subprime lenders seeking to avoid state consumer protection laws. In a rent-a-bank arrangement, a nonbank lender contracts with a bank to make loans per its specifications and then buys the loans from the bank. The nonbank lender then claims to shelter in the bank’s federal statutory exemptions from state regulation. The validity of these arrangements is the most bitterly contested legal question in consumer finance.
The rent-a-bank phenomenon is a function of a binary, entity-based regulatory approach that treats banks differently than nonbanks and that treats bank safety-and-soundness regulation as a substitute for consumer protection laws. The entity-based regulatory system is based on the dated assumption that transactions align with entities, such that a single entity will perform an entire transaction. Consumer lending, however, has become “disaggregated,” so the discrete parts of lending—marketing, underwriting, funding, servicing, and holding of risk—are frequently split up among multiple, unaffiliated entities.
The binary, entity-based regulatory system is a mismatch for disaggregated transactions involving a mosaic of bank and non-bank entities. The mismatch facilitates regulatory arbitrage of consumer protection laws through rent-a-bank arrangements, as nonbanks claim favorable regulatory treatment by virtue of the involvement of a bank in parts of a transaction.
The vitality of rent-a-bank arrangements depends on legal doctrine. This Article shows that the “valid-when-made” doctrine used to support rent-a-bank arrangements, is not, as claimed, a well-established, centuries old, “cardinal rule” of banking law, but a modern fabrication. The doctrine is not valid, but made up. Because the doctrine never existed historically, it cannot be essential for the smooth functioning of credit markets.
This Article argues that the better approach to disaggregated transactions is a presumption that bank regulation does not extend beyond banks, coupled with an anti-evasion principle that looks to substance over form. Such an approach would create greater certainty about the legality of transactions, while effectuating both state consumer protection laws and federal bank regulation policy.
Keywords: Rent-a-Bank, Usury, Bank Partnership, Valid-When-Made, True Lender, Madden, Elevate, World Business Lenders, Think Finance, Subprime Lending, Payday
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