Duke Law Journal

The True Lender Doctrine: Function over Form as a Reasonable Constraint on the Exportation of Interest Rates

Abstract

The exportation doctrine permits national and state banks to export interest rates that are legal in one state where they operate to any other state, thereby shielding the banks from liability resulting from state usury claims. The doctrine has expanded over the last forty years to permit state and national banks to preempt a variety of state consumer-financial-protection laws. The doctrine’s high-water mark is the emergence of the “rent-a-charter” arrangement, a scheme in which a nonbank lender uses a bank as a mere conduit to originate loans that are not subject to state usury laws. This Note argues that, at minimum, nonbank entities should not be allowed the benefit of the doctrine by temporarily occupying banks for the sole purpose of originating loans that are immune from state financial consumer protection laws.

A series of courts have recently begun applying a more exacting standard to these arrangements. Under the “true lender” doctrine, courts disregard the form of the lending configuration in favor of a searching examination of its substance, considering a variety of factors designed to determine which entity is the actual, rather than nominal, lender. This Note argues that the true lender doctrine’s singular focus on substance over form, combined with judicial agility to examine each factual constellation and detect any obfuscating formalities implemented by rent-a-charter parties, is presently the most effective way to sensibly limit the reach of the exportation doctrine. And, to the degree that banks assume more substantive duties in the lending process and retain some measure of risk in seeking to comply with the doctrine, the results are broadly consistent with regulatory approaches that have been deployed in the wake of the financial crisis.