Rent-A-Bank Schemes in Consumer Finance Loans

By Anthony Estrada

In 2007, the Oregon Legislature capped the interest rate on consumer finance loans[1] at 36 percent, or 30 percent above the Federal Reserve discount rate, when it enacted HB 2871.[2] Despite these legislative efforts, a number of consumer finance brokers are using “Rent-A-Bank” schemes in partnership with out-of-state, state-chartered banks to circumvent the rate caps. The Oregon Division of Financial Regulation (DFR), which conducts financial examination of consumer finance brokers, has identified consumer finance loans with interest rates upwards of 178 percent!

The Federal Deposit Insurance (FDI) Act permits state-chartered banks to charge interest at the rate permitted by the state in which the state-chartered bank is located. However, this interest rate exportation may be challenged if the loan broker is determined to be the “true lender” of the loan.[3]

Rent-A-Bank schemes involve nonbank brokers utilizing out-of-state state-chartered banks as a conduit to originate loans to circumvent state usury laws. These nonbank entities list the state-chartered banks on loan documents, or claim to be acting as loan servicers on behalf of the banks, so they can enjoy the benefits of the exportation privileges that apply to national banks or out-of-state state-chartered banks. The bank will fund the loan and almost immediately sell it back to the nonbank, which will provide the majority of services typically provided by the lender.[4]

Several state attorneys general and courts have begun applying a “true lender” test to determine which entity is the actual, rather than nominal, lender. The analysis often focuses on which party has the predominant economic interest. Other factors include which party:

  • Designed, brands, or holds the intellectual property on the loan product and collateral;
  • Markets, offers and processes loan applications;
  • Services the loan and handles customer service;
  • Purchases, has first right of refusal, or ultimately holds the bulk of the loans, receivables, or participation interests; and/or
  • Has the ability to change the entity that originates the credit or to whom the credits or receivables are sold.[5]

The Oregon Legislature, along with consumer organizations and advocates, recognizes that interest rate limits are the simplest and most effective protection against predatory lending. Certain consumer finance brokers are using Rent-A-Bank schemes to circumvent those limits and charge exorbitant interest rates to Oregon consumers. If you or a client suspect a consumer finance lender of charging excessive interest rates, consider the true lender analysis to determine whether there exists a cause of action. Finally, DFR regulates consumer finance brokers and may be a useful resource for guidance and information:  dfr.oregon.gov

[1] A “consumer finance loan” is a loan or line of credit that is unsecured or secured by personal or real property and that has periodic payments and terms longer than 60 days. See ORS 725.010(2).

[2] See ORS 725.340(1).

[3] The exportation may also be challenged if the state in which the loan is made “opts out” of the interest rate exportation clause under the FDI Act. See 12 U.S.C. 1831d.

[4] For more information on Rent-A-Bank schemes, see the 2020 testimony of Lauren Saunders of the National Consumer Law Center before the House Financial Services Committee here.

[5] See Ubaldi vs. SLM Corp, 852 F. Supp. 2d 1190, Flowers vs. EZPawn Oklahoma, 307 F. Supp. 2d 1191, Glaire vs. La Lanne-Paris Health Spa, Inc., 12 Cal 3d 915, Eul vs. Transworld Systems, 2017 WL 1178537, George Cash America vs. Greene, 734 SE 2d 67.