Lawmakers stay clear of ILC charter debate … for now

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WASHINGTON — Most lawmakers on Capitol Hill appear reluctant to announce positions on a pair of fintech firms’ recent applications for industrial loan company charters. But that neutrality may give way if more firms — especially bigger companies — enter the ILC field.

“I’m not sure that there is anything imminent or on the horizon that will force legislators to make a choice,” said John Beaty, a partner at Venable LLP and a former Federal Deposit Insurance Corp. attorney. “That said, if a major commercial company steps in and … threatens community bank operations, that could make everyone sit up and start thinking about it.”

A decade ago, the issue of ILCs dominated banking policy discussions, stoked by Walmart's application for a charter. The retailer's bid united community bankers and anti-Walmart forces in opposition, and led to a legislative effort to clamp down on commercially owned ILCs. The controversy was further amplified when Home Depot also submitted an application. But the legislative effort died down after both retailers withdrew their bids.

But so far with the more recent applications, lawmakers are staying relatively neutral, in contrast to the concerns already expressed by community banking representatives. Several members of the Senate Banking Committee and House Financial Services Committee were approached for comment on the recent applications by Social Finance, or SoFi, and Square to charter Utah-based ILCs. But none took a definitive position.

“I haven’t reached a conclusion on that yet,” said Senate Banking Committee Chair Mike Crapo, R-Idaho.

“I don’t know; I haven’t thought about the ILCs,” said the committee’s top Democrat, Sen. Sherrod Brown of Ohio.

Some members have made tentative positions known, however. Rep. Maxine Waters, D-Calif., the ranking member of the House Financial Services Committee, said last month that the FDIC should be skeptical of SoFi’s application, citing unresolved “concerns related to financial inclusion, consumer benefits, supervision, and regulation of such entities.”

Rep. Patrick McHenry, R-N.C., said Tuesday that he didn’t think a hearing on the issue was necessary, but noted that “we need to have a broader conversation about fintech structure.” And an aide for Sen. Elizabeth Warren, D-Mass., said that she is supportive of any developments that bring greater consumer options and competition for deposits, but only so long as applicable consumer protections are still maintained.

Marcus Stanley, policy director for Americans for Financial Reform, said that part of the reason for the neutrality of lawmakers is bandwidth; even within the realm of financial regulation and banking, there are bigger fish to fry.

But he said the other part of it is that the applications in and of themselves are not especially foreboding, as compared to Walmart. The Dodd-Frank Act even included a moratorium — since expired — on the granting of new ILC charters. But the fintech ILC applications do not seem to be causing as big a stir, he said.

“I think just sizewise, they don’t present the sort of threat to the bank charter models that Walmart would,” Stanley said. “They’re perceived as a little more boutique … but the fundamental issues with the ILC model are still there.”

Those outstanding issues might spark a louder debate down the line. They include, for example, the extent to which policymakers are comfortable with a large retailer using an ILC to establish a banking platorm, which is still legal under federal law. There is also the question of whether the supervisory structure for ILC parents, which do not have to register as Federal Reserve bank holding companies and instead face consolidated oversight from the FDIC, is sufficient.

But Beaty said the concerns that applied to earlier applications — primarily that a commercial company could use its financial arm to stifle competition — do not seem to apply when it comes to the fintechs.

“It really comes down to, is there ... competition from an entity that can dominate other financial services companies by virtue of some expertise it has achieved in another area?” Beaty said. “I just don’t see that happening from what’s happening right now.”

Pratin Vallabhaneni, an associate at Arnold & Porter Kaye Scholer LLP and a former FDIC official, said that even if Square and SoFi are granted a charter, it is not a foregone conclusion that larger tech giants — such as Amazon or Apple — would be granted charters as well if they are interested. While there is no inherent legal prohibition on a commercial company obtaining an ILC charter, he said, the state regulators and FDIC still have the discretion to refuse a charter if they do not think it is appropriate.

“Just because there’s not a legal prohibition doesn’t mean there’s not a prudential policy reason why the FDIC or state might or might not grant a license,” Vallabhaneni said. “I think people forget that difference.”

But Oliver Ireland, a partner at Morrison & Foerster and a former Federal Reserve official, said there should be little question of whether more entities will want access to an ILC charter, especially if SoFi and Square are successful in their applications.

“The ILC charter has been dormant for quite a while,” Ireland said. “There are active ILCs, but we haven’t had new ILCs, and if you start to have new ILCs, will you have more applications for new ILCs? I think you probably" will.

The emergence of fintech is a key difference between the current environment and when Walmart filed its application. But Ireland noted that the issue of where fintechs belong in the regulatory universe has also largely caught lawmakers and regulators by surprise, after they spent much of the last decade thinking about the financial crisis and its aftermath.

“Most of the last eight or nine years has been focused on the financial crisis,” Ireland said. “At the same time, you have had a technological change in what has come to be called fintech that has been developing while policy people have been focusing on something else.”

Stanley said even if the question of whether an individual company should have an ILC charter is probably too narrow to garner congressional interest, the broader question of whether there ought to be a bank charter that allows companies to skirt Bank Holding Company Act restrictions is not. And if more and larger companies take that avenue, lawmakers will have to notice.

“If we see a host of entities trying to get through this loophole, then you could start getting people’s attention,” Stanley said. “But by that point it could be too late.”

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