Rent-a-Bank: Bank Partnerships and the Evasion of Usury Laws

Abstract

“Rent-a-bank” arrangements are the vehicle of choice for subprime lenders seeking to avoid state usury, licensure, and other consumer protection laws. In a rent-a-bank arrangement, a non-bank lender contracts with a bank to make loans per its specifications and then buys the loans from the bank. The non-bank lender then claims to shelter in the bank’s federal statutory exemptions from state regulation. The validity of such arrangements has been the most bitterly contested — and still unresolved — legal question in consumer finance for nearly two decades. The rent-a-bank phenomenon is a function of a binary, entity-based regulatory approach that treats banks differently than non-banks and that treats bank safety-and-soundness regulation as a substitute for usury 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 “dis-aggregated,” such that 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 such dis-aggregated transactions involving a mosaic of entities, some bank and some non-bank. The mismatch facilitates regulatory arbitrage of usury laws through rent-a-bank arrangements, as non-banks claim favorable regulatory treatment by virtue of the marginal involvement of a bank in a transaction. The vitality of rent-a-bank arrangements depends on legal doctrine. This Article shows that the so-called “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. It is a modern fabrication, entirely unknown historically. 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. The better approach to dis-aggregated 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.