The proliferation of Industrial Loan Companies, which are enabling commercial entities to enter the banking business through the back door, is raising concerns on Capitol Hill, building a potential roadblock to the regulatory relief initiative for credit unions and banks
"We're creating a new kind of national banking system," warned Rep. Jim Leach (R-IA), the former chairman of the House Banking Committee and now a rank-and-file member, during last week's regulatory relief vote by the since- renamed Financial Services Committee. "This will give enormous breach to the concept of the separation of commerce and banking."
Leach was referring to the ability of several large non-financial entities to obtain de facto banking powers by obtaining charters in half-dozen states for Industrial Loan Companies that may obtain FDIC deposit insurance, but are not regulated by the Federal Reserve. The regulatory relief bill would provide interstate branching powers for ILCs. A separate bill would allow ILCs to offer withdrawal accounts for business customers.
Credit union lobbyists are concerned that the emerging debate over ILCs is creating a large obstacle to the Reg Relief bill, which is laden with credit union provisions. "This is a major stumbling block that they have to get through," said CUNA lobbyist Gary Kohn. "It's very clear that they have to get through some resolution to this issue, otherwise, this bill may be in trouble."
Debate Is Delayed
The Financial Services Committee put off debate on the ILC issue last week while it approved the Reg Relief package, including provisions providing NCUA broad new powers to set loan maturities and permissible investments for federal credit unions without the Congressional oversight currently required. The bill would also allow federal credit unions to retain their select groups after converting to community charters, provide check cashing and wire transfers to non-members within their fields of membership (FOM), and allow privately insured credit unions to join the Federal Home Loan Bank System.
Credit union champion Paul Kanjorski, the Pennsylvania Democrat who co-authored HR 1151, tried unsuccessfully to kill the FHLB provision by harking back to the decade-old debacle following the collapse of RISDIC, the private deposit insurer in Rhode Island. Kanjorski asserted a similar failure by the only surviving private insurer, Ohio-based American Share Insurance, would cause great harm to the credit union movement as a whole. He also claimed that approval of the FHLB provision would encourage growing numbers of credit unions to convert to private insurance, allowing them to avoid federal limits on minimum capital and member business loans enacted in his landmark credit union bill. But Kanjorski's effort to strike the FHLB provisions from the bill was easily defeated by the committee.
Bids to allow credit unions to offer secondary capital instruments and to count them as net worth under NCUA's minimum capital prompt corrective action rules-and to lift or eliminate the 12.25% (of assets) cap on member business loans-have been put off because of the fragile nature of the reg relief bill, according to Kohn. "It's very clear that this bill is tenuous enough as it is. There's enough opposition to those issues that we don't want to endanger it any more."
There are as many as 100 ILCs chartered around the country, 51 of which have deposit insurance under the FDIC. Utah, where ILCs where introduced under 1997 legislation, is considered the hotbed of these kind of hybrid banks, which are allowed to make consumer and commercial loans but may not accept demand deposits.
The growth of ILCs in Utah has caused controversy in recent years prompting the legislative tax force created this year to study credit union issues to also look at these entities.
Among the 33 companies chartering ILCs in Utah are Pitney Bowes, Sears, America Express, Citigroup, GE Capital, GMAC., Merrill Lynch, Morgan Stanley, Volkswagen, Volvo and BMW.
One Congressman's Concern
Leach worried that the ILC charter is helping companies skirt the Congressional ban that was carefully preserved in the 1998 Gramm-Leach-Bliley Act on commercial entities owning banks. Several members of the Financial Services Committee during last week's session raised the specter of retail giant Wal-Mart, which as been itching to get into banking, doing so through an ILC charter. Rep. Spencer Bachus (R-AL) noted that ILCs can and often are owned by commercial entities and are licensed to do business in all 50 states.
Rep. Ed Royce (R-CA) one of the states fostering the growth of ILCs, countered the critics by noting that ILCs are regulated and examined by both the FDIC and state authorities.