WASHINGTON — In an unusual alliance, banking trade groups and consumer advocates are speaking out in favor of a proposed Federal Deposit Insurance Corp. regulation that would tighten the screws on the corporate parents of industrial loan companies.
The strange bedfellows share concerns about the lack of direct oversight of ILCs, as well as the blending of banking and commerce that the charter enables.
ILCs are a unique state banking charter regulated and insured at the federal level by the FDIC. Like traditional banks, ILCs offer various loan types and deposit accounts. But unlike traditional bank holding companies, the parents of ILCs are exempt from the Bank Holding Company Act, provided they technically abstain from offering nominally demand deposit accounts.
In the early 2000s, big U.S. retailers like Walmart and The Home Depot attempted to acquire ILC charters, which elicited backlash, as banks expressed concern that their entry into the banking sector would quash competition. The FDIC paused ILC charter approvals from 2006 to 2008, and again from 2010 to 2013 as a result of a provision in the Dodd-Frank Act.
In March 2020, the FDIC granted approval for two new ILC applications — after years of consideration — and approved new parameters for the consideration of future ILC applications.
During the Biden administration, the FDIC
ILCs have long been a divisive issue for the banking industry. The firms enjoy an exemption from the definition of "banks" under the Bank Holding Company Act of 1956, even as they can take consumer deposits and make loans.
Nominally, ILCs cannot offer demand-deposits accounts to consumers. However, many ILCs get around this prohibition by offering quasi-demand deposit accounts known as negotiable order of withdrawal accounts. Industrial banks reserve the right to require a seven-day advance notice or more to make the funds in such accounts available to consumers.
Critics of ILCs argue that the accounts are essentially demand deposit accounts, since ILCs may in practice choose to make customer funds available immediately.
In a recent
The ICBA has repeatedly opposed the ownership of industrial banks by commercial, non-financial companies, saying that such ownership violates the separation between banking and commerce. The community banking trade group argues that these arrangements lead to inherent conflicts of interest that threaten both consumer protection and financial stability:
In its comment letter, the ICBA argued that non-financial parent companies could use their ILC branches to provide financing that directly benefits their own business operations, rather than making impartial credit decisions. This arrangement, ICBA says, could lead to reduced underwriting standards aimed at boosting sales for the parent company, ultimately increasing financial risk and undermining the stability of the broader banking system.
The ICBA warned that "shell or captive industrial banks," which depend heavily on their parent companies, pose significant financial risks. One example of this model, General Motors' financial arm, collapsed during the 2008 financial crisis and — like
Community bankers weren't the only industry voices to throw their support behind the FDIC's proposal. The Bank Policy Institute, which represents some of the largest U.S. financial firms, also wants enhanced regulatory oversight, especially for ILCs not supervised by the Federal Reserve Board.
In its
The big-bank trade group also called on the FDIC to petition Congress for legislative action to eliminate the Bank Holding Company Act exemption for industrial loan companies. And BPI urged the FDIC to withhold approval for any ILC application when the parent company is engaged in non-financial activities until those activities are subject to proper supervision.
The group said ILCs should be supervised like banks, and that a comprehensive regulatory framework for ILCs should include stringent reporting requirements and codified commitments between the FDIC and ILC parents.
Consumer advocacy groups like the National Community Reinvestment Coalition — which represents over 700 community-based organizations — also expressed concern with financial stability risks and the regulatory status of ILCs, with a particular emphasis on upholding financial institution's obligations to serve communities.
The NCRC stressed that ILC applicants should provide affirmative evidence that they are committed to serving the community, including information on their retail lending operations, branch presence and total assets. The group insisted that "the public must be able to judge capacity," and applications must be transparent about how banks will meet community needs through lending and investment.
NCRC also highlighted the fair-lending risks posed by industrial banks, including potential harm from high-cost lending products and predatory practices. The group urged the FDIC to ensure that applications detail the safety and soundness of retail lending and deposit products.
Not all of the comment letters were supportive of the FDIC's approach.
The Conference of State Bank Supervisors,which represents state banking regulators, submitted comments opposing parts of the proposal. The group said that the FDIC's proposed rule would hinder the establishment of, or impose "a bias" against, certain types of industrial banks.
"The industrial bank charter represents a lawful option under state and federal law for commercial firms to own a bank," CSBS wrote. "This provision would establish additional limitations and restrictions on industrial banks and their parents without justification."
The FDIC's proposed rule outlines certain considerations for evaluating applications. These include the business purpose behind the establishment or acquisition of the bank, the nature of intercompany relationships and the regulatory and compliance histories of the parent company and its affiliates.
CSBS argued in
The proposed changes, "would create a regulatory animosity against certain industrial banks that have been granted charters under state law," the CSBS wrote."The FDIC provides no clarity or path for such applicants to overcome the hurdles that would be erected by this rulemaking."
A bipartisan group of federal lawmakers also expressed concern about the FDIC's proposed rule. Signatories of the letter — including Reps. Ritchie Torres, D-N.Y. and Blake Moore R-Utah — said the rule could create significant uncertainty for existing ILCs, hindering their ability to provide essential services to consumers.
The lawmakers argued that ILCs are already subject to rigorous regulatory oversight comparable to that imposed on other FDIC-insured institutions. And they wrote that the FDIC's proposal would hinder the processing of future ILC applications..
The FDIC's proposed regulation would edit Part 354 of the agency's rules and regulations to enhance the oversight and risk management of ILCs and their parent companies.
Part 354 — which was previously revised in 2020 — requires certain conditions and written commitments in situations that would result in an industrial bank becoming a subsidiary of a company that is not subject to consolidated supervision by the Fed.
The FDIC's proposal would revise application requirements for ILCs and their holding companies, adding stricter criteria for ILCs to demonstrate their ability to operate independently from their parent companies.
Business models that rely heavily on the parent company for funding, lending or operational support would be subject to closer examination and potential rejection if they were deemed to pose significant risks.
The proposal would also allow the FDIC to hold public hearings on pending ILC applications and would require parent companies to make commitments to maintain their financial strength.
In a previous letter led by Sen. Mitt Romney, R-Utah, several senators pointed out regional interests, particularly in states like Utah and Nevada, where the presence of existing ILC charters or pending applications is significant. They argued that the FDIC should review ILC applications fairly and promptly.
