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 https://paydayloanpennsylvania.net 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 rent-a-bank plans, just isn’t, as reported, a well-established, hundreds of years old, “cardinal rule” of banking law. It really is a fabrication that is modern totally unknown historically. The doctrine just isn’t legitimate, but made. As the doctrine never ever existed historically, it can not be needed for the functioning that is smooth of areas. The greater method of transactions that are dis-aggregated a presumption that bank legislation will not expand beyond banking institutions, along with an anti-evasion principle that appears to substance over type. Such a method would produce greater certainty concerning the legality of deals, while effectuating both state customer security rules and bank regulation policy that is federal.

Keyword phrases: Rent-a-Bank, Usury, Bank Partnership, Valid-When-Made, Real Lender, Madden, Elevate, World Company Lenders, Think Finance, Subprime Lending, Payday

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The Commonwealth of Kentucky is a state found in the East Central usa. Kentucky is usually within the combined selection of Southern states (in specific the Upland South), but it is often included, geographically and culturally, within the Midwest. Kentucky is regarded as four U.S. states constituted as a commonwealth (one other three Virginia that is being, and Massachusetts).

Region rated 37th in america – Total 40,409 sq mi

– Width 140 kilometers – size 379 miles

populace Ranked 26th in the usa – Total 4,269,245 (2008 est.) 4,041,769 (2000) – thickness 101.7/sq mi

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