Halt those ILC charters, community bankers urge

A legal loophole allows certain financial institutions and their parent companies to skirt regulatory oversight, endangering both consumers and the economy, according to the Independent Community Bankers of America. And on March 11, 2019, the organization issued a white paper setting forth why that loophole should be closed.

The paper, Industrial Loan Companies: Closing the Loophole to Avert Consumer and Systemic Harm, asks the Federal Deposit Insurance Corp. to impose an immediate moratorium on approving deposit insurance for these companies and urges Congress to close the ILC loophole permanently, the ICBA stated in a press release announcing the paper's publication.

ILCs are nontraditional U.S. financial institutions that may be owned by nonfinancial institutions. They provide niche financial services, including accepting deposits and making consumer and commercial loans. They may offer FDIC-insured deposits and are subject to both FDIC and state regulatory oversight. However, that is insufficient for the ICBA, an organization whose mission is to create and promote an environment where community banks flourish.

Fed out of the loop

"The industrial loan company loophole allows commercial interests to own full-service banks while avoiding key regulations and consolidated supervision by the Federal Reserve—threatening the financial system and creating an uneven regulatory playing field," ICBA President and CEO Rebeca Romero Rainey said. "Any company that wishes to own a full-service bank should be subject to the same restrictions and supervision that apply to any other bank holding company. To support a safe and sound financial system and to maintain the separation of banking and commerce, the FDIC should reinstate the moratorium on ILC applications and Congress should close this loophole for good."

While the ICBA and other organizations objected to Square's 2017 application for an ILC, a more controversial ILC application came from Walmart in 2005. The backlash was so strong at the time that the FDIC issued a six-month moratorium on granting ILC charters. Walmart eventually withdrew its application in 2007. Unlike new fintech applicants, Walmart is a big-box retailer, a distinction that may factor into any decisions the FDIC makes about fintechs seeking charters today.

The ICBA stated it issued the white paper "as technology companies such as Square, SoFi, and Nelnet have sought industrial loan company charters under Utah law and filed deposit insurance applications with the FDIC to benefit from the federal safety net while avoiding the legal restrictions of the Bank Holding Company Act. ICBA's white paper argues that these firms should be subject to the same restrictions and supervision as any other bank holding company."

Rainey added, "In the new era of big data, tech conglomerates, and artificial intelligence, we should stop and think before giving these companies further reach into the economic lives of Americans. FDIC approval of new ILC deposit insurance applications would put the federal safety net, and ultimately the American taxpayer, at risk."

The ICBA's white paper is available at www.icba.org/advocacy/reports .

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