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Banks, credit unions, and consumer groups call for solution to ILC loophole

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Banking, Legislation, Nonbank Financial
Wednesday, April 13, 2022
Banks, credit unions, bankers’ associations and consumer groups has sent a letter to Maxine Waters (D-Cal.), chair of the House Committee on Financial Services, and Patrick McHenry (R-N.C.), the House Financial Services Committee’s ranking member, calling for the passage of new legislation to close the industrial loan company (ILC) loophole which exists in current law.

ILCs operate under a special exemption in federal law which permits any type of organization, including technology companies and commercial firms, to control full-service Federal Deposit Insurance Corporation (FDIC) insured banks without being subject to the same oversight, standards and limitations on the mixing of banking and commerce that has been established within the financial industry.

When these exceptions were initially created, ILCs were primarily small companies chartered for the limited purpose of providing small loans to industrial workers. According to Federal Reserve research, larger companies have been using the ILC model in recent years to gain access to the U.S. financial system and control entities that have essentially all the powers of full-service commercial banks, including the ability to accept deposits, make consumer and commercial loans and effectuate payments.

The organizations signing onto this letter express concern over the fact that these ILCs have the powers of commercial banks, while their corporate owners are not subject to the consolidated supervision and regulations by federal banking agency. This allows risks to build up in the organization outside the view of any federal supervisor, the letter asserts.

“The risks to consumers and the financial system from ILCs are not theoretical,” the letter contends. “It should come as no surprise that several large companies that used the loophole to acquire ILCs, evading the type of consolidated supervision meant to ensure soundness and regulatory compliance, then subsequently required public bailouts during the 2007-2008 financial crisis.”

The letter also expresses concern over the growing presence of technology firms in the financial industry. The ILC loophole allows for technology companies entering the financial technology (fintech) realm to acquire full-service banks along with all of the privileges without these technology companies being subjected to the oversight and regulations of a financial company going through a similar merger. Additionally, because these corporate owners of ILCs are not considered bank-holding companies, they also evade the limitations imposed by Congress on the ability of banking companies to expand into new activities if their insured depository institution subsidiaries have a less than satisfactory record of performance under the Community Reinvestment Act.

“The time is now for Congress to close the ILC loophole before it is further exploited by firms seeking to gain all of the advantages of an FDIC-insured bank charter without the concomitant supervision and regulation that Congress has established for the corporate owners of full-service insured banks,” the letter concludes.

 

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