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“Rent a bank” plans will be the car of option for subprime loan providers wanting to avoid state usury

“Rent a bank” plans will be the car of option for subprime loan providers wanting to avoid state usury

Abstract

“Rent a bank” plans will be the automobile of option for subprime loan providers wanting to avoid state usury, licensure, as well as other customer security rules. In a lease a bank arrangement, a non bank loan provider agreements by having a bank which will make loans per its specs after which purchases the loans from the bank. The non bank loan provider then claims to shelter when you look at the bank’s federal statutory exemptions from state legislation. The legitimacy of these plans is probably the most bitterly contested but still unresolved estion that is legal customer finance for pretty much 2 decades.

The lease a bank sensation is really a purpose of a binary, entity based regulatory approach that treats banking institutions differently than non banking institutions and therefore treats bank safety and soundness legislation as a replacement for usury rules. The entity based regulatory system is dependant on the dated presumption that deals align with entities, are student loans installment loans so that an individual entity will perform a whole deal. Customer lending, nevertheless, has become “dis aggregated,” such that the discrete areas of financing advertising, underwriting, capital, servicing, and holding of danger are often split among multiple, unaffiliated entities.

The binary, entity based regulatory system is really a mismatch for such dis aggregated transactions involving a mosaic of entities, some bank plus some bank that is non. The mismatch facilitates regulatory arbitrage of usury laws and regulations through rent a bank plans, as non banking institutions claim favorable regulatory therapy by virtue associated with the marginal participation of the bank in a deal.