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1.4.1 Distinctions Between Depository and Non-Depository Creditors

The most basic division between types of creditors is the distinction between depository lenders, such as banks and savings and loan associations, which accept deposits, usually interest-bearing, and non-depository creditors, such as finance companies, which do not accept demand deposits from the public. Both depository and non-depository creditors act as intermediaries in the sense that they obtain funds from others (depositors and investors) and lend the funds at a profit to those who want money.

The acceptance of funds from the general public results in depositories traditionally being regulated by either federal or state government to ensure the safety of the public’s deposits. Regulation of non-depositories is generally both more recent and more limited. Another distinction between depositories and non-depositories is that federal law allows most depository institutions to “export rates,” that is to take advantage of the interest rate regulation of the depository’s home state instead of that where the loan is made. Non-depository lenders do not share that right.149

Other distinctions between depository and non-depository lenders have decreased over time. For example, while high-rate loans were traditionally the sole province of non-depositories, this is no longer the case. Some banks in fact are offering high-cost products such as overdraft “protection” and even payday loans. Meanwhile, many non-depository creditors made conscious and generally successful attempts to branch out into middle-income consumer markets, particularly the market for home equity loans.150

Aggressive preemption of state regulations by federal regulators overseeing federal depository institutions151 and the increase in large financial holding companies that own both depository and non-depository institutions further blurred these distinctions. It is no longer strictly true that poor people go to finance companies while wealthier borrowers do business with banks and other depository lenders.

Unfortunately, the result of this blurring of the lines has been an increase in abusive practices by depository institutions, not a decrease in abuse by non-depositories. Moreover, it is often the depositories that are funding or entering into other relationships with non-depositories offering payday loans, auto title loans, refund anticipation loans, and rent-to-own transactions.152 For example, until federal regulators ended the practice, banks lent their names—and the ability to preempt state law—to payday lenders through “rent-a-bank” relationships.153 Depositories also have directly entered the arena of small loans via credit cards, a relatively expensive form of credit,154 or overdraft loans, which cover bounced checks at effective annual percentage rates in excess of those charged by payday lenders.155


  • 149 See § 3.4, infra.

  • 150 {130} See Cathy Lesser Mansfield, The Road to Subprime “HEL” Was Paved with Good Congressional Intentions: Usury Deregulation and the Subprime Home Equity Market, 51 S.C. L. Rev. 473 (2000) (detailed analysis of the growth of subprime home equity lending by non-depository institutions).

  • 151 {131} See Patricia A. McCoy & Elizabeth Renuart, The Legal Infrastructure of Subprime and Nontraditional Home Mortgages, in Borrowing to Live: Consumer and Mortgage Credit Revisited 110, 113–115, 120–124 (Nicolas P. Retsinas & Eric S. Belsky ed. 2008) (detailing congressional and regulatory expansion of preemption of state rate and fee restriction related to mortgage lending from the 1970s to the early 2000s). See generally § 3.2, infra.

  • 152 {132} See Lynn Drysdale & Kathleen Keest, The Two-Tiered Consumer Financial Services Marketplace: The Fringe Banking System and Its Challenge to Current Thinking About the Socio-Economic Role of Usury Laws in Today’s Society, 51 S.C. L. Rev. 589 (2000) (providing a comprehensive overview of high-cost lending to poor families).

  • 153 {133} See § 9.6.1, infra.

  • 154 {134} See generally Ch. 8, infra (credit card abuses).

  • 155 {135} See Donald P. Morgan & Michael R. Strain, Fed. Reserve Bank of N.Y., Staff Rep. No. 309, Payday Holiday: How Households Fare after Payday Credit Bans 5–6 (Feb. 2008), available at (arguing that in the absence of payday lending, consumers substitute costlier overdraft protection loans); Leslie Parrish, Ctr. for Responsible Lending, Overdraft Explosion: Bank Fees Increase 35% in Two Years (2009), available at (reporting increase in overdraft fee income of 35% between 2006 and 2008); Eric Halperin, Lisa James & Peter Smith, Ctr. for Responsible Lending, Debit Card Danger: Banks Offer Little Warning and Few Choices As Customers Pay a High Price for Debit Card Overdrafts (Jan. 25, 2007), available at Cf. Gov’t Accountability Office, GAO No. 08-281, Bank Fees: Federal Banking Regulators Could Better Ensure That Consumers Have Required Disclosure Documents Prior to Opening Checking or Savings Accounts 13 (Jan. 2008), available at (overdraft fees increased 13% between 2000 and 2007). See generally Owen B. Asplundh, Consumer Protection Issues: Bounce Protection: Payday Lending In Sheep’s Clothing?, 8 N.C. Banking Inst. 349 (2004); § 9.5.1, infra.