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Financial trades ask Congress to tighten industrial loan company rules

Credit unions and banks could both be impacted by decision on regulations.

WASHINGTON, D.C. (April 8, 2022) — Credit union trade groups, community banker trade groups and consumer advocates are urging House Financial Services Chairwoman Rep. Maxine Waters, D-Calif., to schedule a markup of legislation they say would close a loophole that allows Industrial Loan Companies (ILCs) to operate without sufficient regulatory scrutiny.

ILCs are supervised by the Federal Deposit Insurance Corp. (FDIC) but are owned by commercial firms that are not regulated by a federal banking agency.

“Although ILCs have the powers of a commercial bank, their corporate owners—unlike the owners of commercial banks—are not subject to consolidated supervision and regulation by a federal banking agency, which can allow risks to build up in the organization outside the view of any federal supervisor,” the groups wrote in a joint letter to committee leaders. “Simply put, this regulatory loophole creates safety and soundness risks for the institution, risks to the financial system and additional risks for consumers and taxpayers.”

Main Credit Union Advocate Groups Among Those in Support

Groups signing the letter include the Credit Union National Association (CUNA), the National Association of Federally-Insured Credit Unions (NAFCU), the Independent Community Bankers of America, Americans for Financial Reform, and the Center for Responsible Lending.

They asked Waters to schedule a markup of H.R. 5912, introduced by Reps. Chuy Garcia, D-Ill., and Lance Gooden, R-Texas. The legislation would eliminate an exemption to the Bank Holding Company Act that permits ILCs and their corporate owner to operate outside that law’s regulatory framework.

Why the Groups Involved Want Stricter Regulations

The groups said that currently any organization may own a full-service, FDIC-insured bank, without being subjected to the same oversight or limitations on the mixing of banking services and commerce that Congress has instituted. They noted that when the exemption was established, ILCs were small financial institutions that provided small loans to industrial workers who did not qualify for credit elsewhere.

Since then, large commercial companies have used the ILC charter to gain access to the financial system. The groups said that ILCs can offer mortgages, credit cards and consumer loans. For instance, Wal-Mart applied for an ILC charter, but withdrew it in 2007 after the FDIC extended a temporary moratorium on charters.

In their letter to Chairwoman Waters, the groups noted that technology firms offering a wide variety of services may acquire a full-service bank.

Earlier this year, the FDIC said it expected additional applications for ILC charters. “The FDIC anticipates potential continued interest in the establishment of industrial banks, particularly with regard to proposed institutions that plan to pursue a specialty or limited purpose business model,” stated the agency.


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