Banks call on Congress to freeze new ILC approvals

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WASHINGTON — Banks and consumer advocates are pushing for Congress to use coronavirus stimulus legislation to block the Federal Deposit Insurance Corp.’s approval of industrial loan company charters.

The Bank Policy Institute, Independent Community Bankers of America and the Center for Responsible Lending wrote to the heads of the Senate Banking and House Financial Services committees Wednesday, calling on them to include a three-year moratorium on regulatory approvals for ILCs in the next coronavirus relief package.

ILCs are federally insured banks that can be owned by commercial firms that in turn do not have to register as bank holding companies. They have drawn interest lately from companies seeking charter options — such as fintechs — that do not want to operate full-service banks. Square was recently approved for an ILC by the Federal Deposit Insurance Corp., but other bids are pending from Rakuten and the parent company of Edward Jones.

But the two banking trade groups and the Center for Responsible Lending echoed longstanding industry concerns that the charter gives firms a way into the banking system while avoiding regulatory requirements.

The letter comes after three banking trade groups wrote to the FDIC last month in opposition to the ILC application from the Japanese tech giant Rakuten.
The letter comes after three banking trade groups wrote to the FDIC last month in opposition to the ILC application from the Japanese tech giant Rakuten.

“While enactment of legislation to permanently close the loophole is preferable, this intermediate action will give Congress the time necessary to approve an appropriate legislative framework,” they said.

The proposed moratorium is similar to a temporary freeze on ILC decisions that was included in the 2010 Dodd-Frank Act.

“Congress should not abdicate its duty to address the ILC loophole and allow bank regulators to decide the fate of our banking system,” the groups wrote.

The letter comes after three banking trade groups wrote to the FDIC last month in opposition to the ILC application from the Japanese tech giant Rakuten. Rakuten first applied for an ILC charter last year, before withdrawing this past March and reapplying in May.

The policy question on whether commercial firms should be able to own ILCs has been looming for decades, and received the most attention just before the financial crisis when Walmart sought a charter in 2005. The retailer's bid drew a storm of opposition from banks and others that said a Walmart-owned bank would cross the traditional line separating banking and commerce. The application stalled and Walmart ultimately withdrew.

But more recently regulators have shown more openness to nontraditional companies getting bank charters.

In public remarks Wednesday, acting Comptroller of the Currency Brian Brooks suggested that the line between banking and commerce is disappearing.

"I'm not telling you that I think Walmart should get a charter or shouldn't get a charter, but I think a lot of those old walls have started to come down because of economic reality and the end of the day, it's customer demand that determines how we receive services, it's not these magic walls that got an enacted in some historical moment," Brooks said.

But the three groups in their letter Wednesday said proliferation of the ILC charter could harm consumers if firms use the license to skirt consumer protection requirements.

“A growth in ILCs poses broader consumer protection risks as well, because non-bank lenders, including very high-cost lenders, view the ILC charter as a far easier way to obtain banking privileges than obtaining a traditional bank charter and, consequently, becoming subject to consolidated Federal Reserve supervision,” their letter said.

Sen. John Kennedy, R-La., last year introduced legislation to prevent ILCs — also known as industrial banks — from being controlled, directly or indirectly, by a commercial firm. The bill appeared to be aimed at Rakuten, but also at potential banking aspirations from larger tech giants such as Google.

“Once Rakuten is permitted to own an ILC," the three groups wrote, "the door is open for other similarly large technology based commercial firms like Amazon, Apple, and Google to own ILCs as well, effectively changing the landscape and risk profile of the entire banking system, without any Congressional action.”

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ILCs FDIC ICBA Fintech regulations Licenses and charters Nonbank Square
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