Romney leads bipartisan push to give ILC applications a fair shake

WASHINGTON — A bipartisan group of senators is warning the Federal Deposit Insurance Corp. to give new industrial loan company charter applications due consideration, urging the regulator to "follow the laws that Congress carefully designed." 

The letter, obtained by American Banker and addressed to acting FDIC Chairman Martin Gruenberg on Thursday morning, was written by Sen. Mitt Romney, R-Utah. Notably, Romney's letter was signed by four Democratic senators and four other Republicans. 

"We write today to express support for the industrial loan company charter and respectfully remind you to ensure the Federal Deposit Insurance Corp. continues to follow the laws that Congress carefully designed for the FDIC to consider new deposit insurance applicants, including ILCs," the letter said, which was signed by Sens. Romney, Catherine Cortez Masto, D-Nev., Marsha Blackburn, R-Tenn., Roy Blunt, R-Mo., Gary Peters, D-Mich., Jacky Rosen, D-Nev., Bill Hagerty, R-Tenn., Mike Lee, R-Utah, and Kyrsten Sinema, D-Ariz.  

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"Unfortunately, some seek to pause or even close the charter," the lawmakers said. "We strongly oppose regulatory actions, both formal and informal, that might target the ILC charter in a manner not consistent with the laws Congress has passed." 

The FDIC declined to comment for this story, except to say it will respond to the lawmakers' offices directly.

Granted and supervised by the FDIC, ILC charters have long been viewed with skepticism by the broader banking industry as well as some consumer advocates. ILC charters are the only federal bank charters that can be owned by commercial companies rather than bank holding companies, meaning industrial banks are not directly supervised by the Federal Reserve. 

The industrial bank system is small compared with the broader sector, totaling roughly $183 billion across about two dozen institutions today, but some fintechs and other nonbank entities have sought ILC charters as a way to enter the U.S banking system without the typical full brunt of regulatory scrutiny.

Congress has mulled legislative changes to address what some call the ILC "loophole" for years, but no reform has been made since the passage of Dodd-Frank in 2010, which introduced a brief moratorium on new ILCs that expired in 2013. Several bank trade associations have called on Congress to limit the ownership of ILCs by nonbanks, including the Bank Policy Institute, Consumer Bankers Association, and Independent Community Bankers of America. 

But the lawmakers in Thursday's letter argued that ILC applications should not be treated differently than traditional charters, and that industrial banks could even play a key role in the promotion of more de novo financial institutions. 

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"The ILC charter allows new and expanded credit opportunities in the regulated banking sector," the senators wrote. "We ask for the FDIC both for continued supervision of ILCs to ensure safety, soundness and consumer protection, as well as full and fair consideration of any de novo applications without an inherent disadvantage for an ILC charter." 

Under the Trump administration, then-FDIC Chair Jelena McWilliams revived the agency's consideration of industrial banks after a decadelong freeze following the 2008 financial crisis. Along with a rulemaking to update the capital requirements for industrial banks and their parent companies, McWilliams approved two new entities for ILC charters in March 2020 — the student loan servicer Nelnet, and the fintech firm formerly known as Square, now Block. 

When the agency broke its 12-year ILC freeze, McWilliams argued that under current federal law the FDIC "must consider the same statutory factors under section 6 of the [Federal Deposit Insurance] Act that it considers for other deposit insurance applications, including traditional banks."

The arrival of the Biden administration was a poor omen for other industrial bank hopefuls, however — now-acting Chair Gruenberg has long been skeptical of ILCs, dissenting from the approval of Square's ILC application in 2020 (but voting in favor of Nelnet's). When Gruenberg was the Senate-confirmed FDIC chair between 2011 and 2018, no new industrial banks were approved by the agency.