U.S. Sens. Sherrod Brown (D-OH), Bob Casey (D-PA), and Chris Van Hollen (D-MD) introduced a bill in the Senate that would require companies that own an industrial loan company (ILC) to be subject to the same rules and consumer protections as traditional banks.
ILCs are state-chartered banking institutions whose holding companies are not subject to supervision by the Federal Reserve due to a loophole in the Bank Holding Company Act. As a result, ILCs owned by tech companies like Square are not subject to the same regulatory safeguards as traditional banks.
Their bill, the Close the Shadow Banking Loophole Act, would close this loophole. Thus, companies that acquire an ILC must be subject to the same supervision by the Federal Reserve as any other bank holding company under the Bank Holding Company Act. It would also provide a carve-out for existing ILCs.
“Letting Big Tech and commercial companies operate banks without proper oversight will only open doors for predatory lending, invasions of consumer privacy, and broader financial instability,” Brown, chair of the Senate Committee on Banking, Housing, and Urban Affairs, said. “To protect consumers’ pocketbooks and ensure a strong banking system for Main Street, we need to ensure all banking institutions play by the same rules.”
The bill has been endorsed by several organizations, including the National Community Reinvestment Coalition, the Independent Community Bankers of America (ICBA), Americans for Financial Reform, the Bank Policy Institute, the Center for Responsible Lending, the Credit Union National Association, the National Association of Federally-Insured Credit Unions, and PNC Financial Services Group, among others.
“The ILC loophole allows large commercial and technology firms to own full-service banks while skirting regulatory oversight—threatening the financial system, endangering consumers and the economy, and creating an uneven regulatory landscape. The Close the Shadow Banking Loophole Act will ensure a safe and sound financial system and protect the longstanding U.S. policy separating banking and commerce,” Rebeca Romero Rainey, president and CEO at ICBA, said.
The Bank Policy Institute also backs the proposed legislation.
“BPI supports Chairman Brown’s effort to close the ILC loophole and guarantee equal treatment for entities providing indistinguishable products and services under the law. Any entity seeking the benefits of bank ownership must be held to the same rules that apply to banks to prevent unacceptable risks to consumers, taxpayers, and the existing financial framework,” Ed Hill, senior vice president and head of government affairs at BPI, said.