The Independent Community Bankers of America (ICBA) released a white paper that examines why policymakers should close a legal loophole that allows industrial loan companies to avoid regulatory oversight.
In the report, called “Closing the Industrial Loan Company Loophole: An Urgent Priority to Prevent Systemic Risk and Consumer Harm,” ICBA calls on Congress to close the loophole. In addition, it urges the Federal Deposit Insurance Corporation to delay final decisions on pending ILC deposit insurance applications until all stakeholder feedback is incorporated.
“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 delay any decision on pending ILC applications and Congress should close the loophole for good.”
A loophole in the Bank Holding Company Act allows commercial and fintech companies to own or acquire ILCs chartered in a handful of states without being subject to federal consolidated supervision. ICBA argues that this leaves a major gap in oversight and introduces unnecessary systemic risk into the banking system.
Further, commercial ownership of ILCs — which are the functional equivalent of full-service banks — violates the U.S. policy of maintaining the separation of banking and commerce.
ICBA cited a “troubling number of new ILC applications for deposit insurance pending before the FDIC.” It called on the agency to reject the applications of ILCs that pose undue risks to the Deposit Insurance Fund and that fail to serve the needs of their communities.
ICBA delivered the white paper to the FDIC as well as House and Senate offices this week. The full report is available on the ICBA website.