Rent-a-Bank: Bank Partnerships in addition to Evasion of Usury LawsJean Paulo
75 Pages Published: 17 Sep 2020
Adam J. Levitin
Georgetown University Law Center
Date Written: September 16, 2020
вЂњRent-a-bankвЂќ 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 bankвЂ™s federal exemptions that are statutory state legislation. The legitimacy of these plans happens to be probably the most bitterly contested вЂ” and still unresolved вЂ” 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 вЂњdis-aggregated,вЂќ such that the discrete elements of lending вЂ” marketing, underwriting, capital, servicing, and keeping of risk вЂ” 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 вЂњvalid-when-madeвЂќ doctrine used to aid rent-a-bank plans, just isn’t, as reported, a well-established, hundreds of years old, вЂњcardinal ruleвЂќ 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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