Jayne Munger
87 Geo. Wash. L. Rev. 468
Modern American society fosters a capitalist culture that depends on the extension of credit to purchase both basic and luxury items. Although the federal banking system has comprehensive regulation to control potential excesses, the nonbank lending industry is subject to a patchwork system of state laws that inadequately protects borrowers from predatory lending. Specifically, current state regulations leave a gap that permits an alternative lender to partner with a bank or a Native American tribe to evade the state maximum interest rates for loans to borrowers within that state. Nicknamed “rent-a-bank” and “rent-a-tribe” schemes, these devices allow predatory lending to continue even in states that have enacted laws to curb abusive practices. As these schemes are not generally prohibited, creative consumer advocates have found ways to sue these nonbank lenders, but courts have two applicable tests to choose between: the “predominant economic interest” test, which looks to the substance of the arrangement, or the “contractual” test, which promotes a legal fiction and allows these schemes to persist.
As significant barriers to resolution exist at the federal level, states should adopt an amendment to their consumer protection laws prohibiting these schemes directly. This Note discusses how these arrangements work and why they exist, and it proposes a model statutory provision for states to adopt, designed to deter entry into these schemes and to abolish the practice.
