A bipartisan group of senators reintroduced legislation to compel companies that operate industrial loan companies (ILCs) to adhere to the same rules and consumer protection regulations as traditional banks to reduce the prevalence of “shadow banking” practices, which can pose risks to consumers and to the financial system.
If enacted, the “Close the Shadow Banking Loophole” Act would eliminate a regulatory carve-out in the Bank Holding Company Act exempting ILCs from supervision by the Federal Reserve, which oversees other entities covered by the Bank Holding Company Act. Proponents of the bill note ILCs owned by “Big Tech” and commercial companies currently have advantages over traditional banks due to this gap in regulatory oversight.
Senate Banking Committee Chair Sherrod Brown (D-Ohio) first introduced the legislation in 2007 but it did not receive a vote at that time. Upon reintroduction, the bill has support from financial trade groups, consumer advocates and senators on both sides of the political aisle.
“Letting Big Tech and commercial companies operate banks without proper oversight will only open doors for predatory lending, invasions of consumer privacy, and broader financial instability,” Brown said in a statement. “To protect consumers’ pocketbooks and ensure a strong banking system for Main Street, we need to ensure all banking institutions play by the same rules.”
The bill has gained bipartisan support and is cosponsored by Sens. John Kennedy (R-La.), Bob Casey (D-Pa.), Chris Van Hollen (D-Md.), Mike Braun (R-Ind.), and Roger Wicker (R-Miss.).
“American consumers deserve confidence that our financial system is stable and accountable to protect consumers,” Kennedy said. “Allowing companies to run their own big full-service banks without effective oversight puts individual Americans and the U.S. financial system at risk. I’m working to close the shadow banking loopholes that have left consumers vulnerable.”
The banking industry has expressed strong support for the bill, which aims to level the playing field for traditional financial institutions.
“The Independent Community Bankers of America (ICBA) and the nation’s community banks thank Chairman Brown and Sen. Kennedy for introducing legislation to permanently close the industrial loan company loophole,” ICBA President and CEO Rebeca Romero Rainey said in a statement. “The ILC loophole allows large commercial and technology firms to own full-service banks while skirting regulatory oversight—threatening the financial system, endangering consumers, and creating an uneven regulatory landscape. The Close the Shadow Banking Loophole Act will ensure any company that wishes to own a full-service bank is subject to the same restrictions and supervision that apply to any other bank holding company.”
The legislation also has been endorsed by Americans for Financial Reform, Ohio Credit Union League, Bank Policy Institute, Center for Responsible Lending, National Community Reinvestment Coalition, PNC Financial Services Group, Ohio Bankers League, Credit Union National Association, National Association of Federally-Insured Credit Unions, and Art Wilmarth, professor emeritus of law at George Washington University.