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For twenty-five years the main way a payday lender got around a state rate cap was to put an out-of-state bank’s name on the paperwork. Verifying all 52 jurisdictions turned up the single fact that settles what that arrangement was for.
Testimony to the United States Senate Committee on Banking
The payday lenders only used these rent-a-bank schemes in states like North Carolina that prohibited payday lending. In other states that allowed these high-rate loans, the payday lenders made the loans in their own names.North Carolina Attorney General, April 2021North Carolina · Senate testimonyTestimony of the North Carolina Attorney General to the US Senate Committee on Banking, Housing and Urban Affairs — very notably, the payday lenders only used these rent-a-bank schemes in states like North Carolina that prohibited payday lending; in other states that allowed these high-rate loans, the payday lenders made the loans in their own names
The industry’s case for bank partnerships has always been that they bring efficiency, scale and access to funding. If that were the reason, you would expect to see them everywhere. You do not. They appear only where the state has said no — which means the arrangement was doing one job, and everyone involved knew what it was.
A non-bank lender partners with a bank chartered in a state with no meaningful rate ceiling. The bank’s name goes on the loan documents. The non-bank recasts itself as the “marketing, processing and servicing agent”, then buys the loan — often within days, sometimes buying 95% of every loan the bank writes and assuming all the risk.
The claim is that federal law lets the bank export its home state’s rate, and that the loan is therefore the bank’s rather than the agent’s. In North Carolina, the banks used included ones chartered in Delaware, Texas, Kentucky and South Dakota, and the loans ran to 521%.
North Carolina’s payday statute sunset in 2001. Over half of the state’s 1,000 shops closed. The rest switched to bank partnerships. It took an enforcement action begun in 2005 to establish that the lender was the lender.
Georgia declared that an agency or partnership agreement with an out-of-state bank, where the in-state agent holds a predominant economic interest in the revenues, is a scheme or contrivance to circumvent state usury law.Georgia · StatuteO.C.G.A. § 16-17-1 — the General Assembly declares that the use of agency or partnership agreements between in-state entities and out-of-state banks, whereby the in-state agent holds a predominant economic interest in the revenues generated by payday loans made to Georgia residents, is a scheme or contrivance by which the agent seeks to circumvent the Georgia Installment Loan Act and the usury statutes of this state That is the modern true-lender test, seventeen years early, and almost nobody cites it.
After hearings and voluminous evidence, the Commissioner of Banks determined that Advance America was itself engaged in the business of lending and in breach of the Consumer Finance Act. The partnership did not let it ignore state law. It lost on appeal; consent agreements with the last three chains followed in March 2006.
The doctrine relied on — true lender — has been part of North Carolina law since the 1800s.
Maine enacted an anti rent-a-bank statute. Illinois’s Predatory Loan Prevention Act carried an anti-evasion provision reaching anyone who markets, brokers, arranges or facilitates a loan while holding a right to purchase it.
New Mexico tracked the Illinois and Maine language. Connecticut codified a predominant economic interest test and recalculated APR under the Military Lending Act. Minnesota added predominant-economic-interest and totality-of-circumstances tests.
North Dakota’s regulator states plainly what it does not cover: federally chartered banks and credit unions.North Dakota · RegulatorNorth Dakota Department of Financial Institutions — please be aware the Department does not regulate all institutions doing business in North Dakota; specifically, we do not regulate federally-chartered banks or credit unions That is true of every state banking regulator in the country, and it is the space the arrangement lives in.
A separate federal statute from 1980 lets a state-chartered, federally insured bank charge out-of-state customers its home state’s rate. Colorado has been litigating its position on that.
Ohio capped payday rates at 28% in 2008 and not one lender registered under the new licence. They relicensed under the Mortgage Lending Act and later as Credit Services Organizations, and carried on. An Ohio Supreme Court justice asked in a published opinion how the legislature could set out to regulate an industry and achieve nothing at all.
It took ten more years and a scandal that forced the House Speaker’s resignation to close it.
The lesson generalises. When a state says it has capped payday rates, the question is not what the number is. It is whether the cap follows the loan or only the label.
If you are in a state that prohibits payday lending and a lender is charging you triple digits, the loan documents may name a bank you have never heard of, chartered somewhere you have never been. That structure has been held unlawful in more than one state.
It does not automatically resolve what you owe — that depends on your loan, your state and who actually made it. But it does mean the arrangement deserves scrutiny rather than compliance.
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Every claim here is drawn from the state page it links to, where the regulator, statute or court citation is given in full.