BPI Supports FDIC Proposal to Regulate Banks as Banks

Washington, D.C. - The Bank Policy Institute commented today on an FDIC proposal to amend its rules governing industrial loan companies and their parent companies. Industrial loan companies are state-chartered institutions largely indistinguishable from banks, except for one key difference: their parent companies are commercial entities, such as car companies or internet retailers, not subject to federal regulation or supervision. As a result, unlike regulated bank holding companies, ILC parents can engage in commercial activities. The FDIC's proposal tightens these rules and applies additional scrutiny to ILCs and their parent companies.

What we're saying:

"We support the proposal but urge the FDIC to go even further to ensure regulations are applied consistently and equally," stated Paige Pidano Paridon, BPI Co-Head of Regulatory Affairs. "ILCs shouldn't be a shortcut to avoid compliance costs at the expense of financial stability or consumer safety. A company doing business as a bank should be regulated as a bank."

What we want:

The FDIC's current rule requires ILC applicants to agree to certain preconditions before their charter is approved, such as providing the FDIC with a list of all of the ILC parent's subsidiaries, submitting an annual report to the FDIC about the ILC parent's operations and undergoing an independent audit annually.

• The proposal expands this list of prerequisites the FDIC will consider and addresses factors such as whether the ILC can remain in business if the parent company fails. Despite these improvements, ILC parent companies continue to operate under less stringent requirements than their banking counterparts.

BPI recommends the following:

1. Phase out grandfather clauses. Rules exist for a reason. Just as classic cars aren't allowed to run red lights, ILCs should have to follow the current rules and regulations, regardless of when and how they were created.
2. Petition Congress to close the ILC loophole. U.S. policy has long recognized the risk of mixing banking and commerce. Congress should acknowledge these risks and close the existing loophole in the Bank Holding Company Act that exempts ILCs from the same supervision as banking organizations.
3. Reimpose the moratorium on approving ILC charters. Until Congress acts to close the ILC loophole, the FDIC should reimpose its moratorium on new ILC charters.
4. Turn handshake agreements into law. Rather than applying the rules on an ad hoc basis, the FDIC should promulgate regulations setting forth requirements for ILCs. Additionally, any rule applied to the ILC should also apply to the parent company.

What's the background?

Industrial loan companies originated in the early 1900s to offer financing to industrial workers who couldn't obtain credit. These institutions evolved through the 20th century but were mostly small, local lenders. In 1987, Congress passed the Competitive Equality Banking Act, which included a loophole carving out ILCs from the definition of a "bank" under the Bank Holding Company Act. There were only 11 ILCs as of 1987 with an average asset size of less than $45 million. By 2005, there were 58 ILCs with combined assets of $213 billion.

This dramatic increase, along with widespread opposition to Walmart applying for an ILC in 2005, resulted in an FDIC moratorium on new ILC applications in July 2006. The moratorium was reimposed under the Dodd-Frank Act but was lifted in 2020 with the approval of ILC applications for fintech companies Square and Nelnet. The FDIC instituted its current set of rules for ILCs in 2020 and this latest proposal would strengthen these requirements.

To access a copy of the letter, please click here.

Additional resources:

• Tangled Up in Technicalities - A Historical Perspective on the Current ILC Debate
• FinTech and Big Tech Companies Want the Benefits of Banking Without the Responsibilities. Loopholes Could Let Them Succeed.
• Is It OK for FinTechs To Use Regulatory Arbitrage To Avoid Consolidated Supervision?
• Industrial Loan Corporation (ILC) Issue Summary
• Financial Services and Consumer Groups Support Senate Bill to Close Industrial Loan Company Loophole
• Banks, Credit Unions and Consumer Groups Support H.R. 5912, The Close the ILC Loophole Act
• Banks, Credit Unions and Consumer Groups Call for Passage of Bipartisan Solution to Close ILC Loophole
• Financial System Integrity Depends on Congressional Action on ILCs

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About Bank Policy Institute.

The Bank Policy Institute (BPI) is a nonpartisan public policy, research and advocacy group, representing the nation's leading banks and their customers. Our members include universal banks, regional banks and the major foreign banks doing business in the United States. Collectively, they employ almost 2 million Americans, make nearly half of the nation's small business loans, and are an engine for financial innovation and economic growth.

Media Contact

Sean Oblack
Bank Policy Institute
[email protected]