The Bank Policy Institute (BPI) has expressed its views on a proposal by the Federal Deposit Insurance Corporation (FDIC) to amend regulations concerning industrial loan companies (ILCs) and their parent companies. ILCs, which are state-chartered institutions similar to banks, differ in that their parent companies are commercial entities not subject to federal regulation or supervision. This distinction allows ILC parents to engage in commercial activities unlike regulated bank holding companies. The FDIC's proposal aims to tighten these rules and increase scrutiny of ILCs and their parent companies.
Paige Pidano Paridon, BPI Co-Head of Regulatory Affairs, stated, "We support the proposal but urge the FDIC to go even further to ensure regulations are applied consistently and equally." She emphasized that "a company doing business as a bank should be regulated as a bank."
Currently, the FDIC requires ILC applicants to agree to certain conditions before charter approval. These include providing a list of all subsidiaries of the ILC parent, submitting an annual report about operations, and undergoing an independent audit annually. The new proposal seeks to expand these prerequisites by considering factors such as whether an ILC can continue operating if its parent company fails.
Despite these improvements, BPI argues that ILC parent companies still operate under less stringent requirements than traditional banks. They recommend phasing out grandfather clauses for existing rules, petitioning Congress to close the loophole in the Bank Holding Company Act exempting ILCs from certain supervisions, reimposing a moratorium on new ILC charters until legislative action is taken, and formalizing regulatory requirements for both ILCs and their parent companies.
Industrial loan companies have evolved since their inception in the early 1900s when they provided financing for industrial workers unable to obtain credit elsewhere. Over time, they expanded significantly in size and number. In 1987, Congress passed legislation allowing them exemptions from being classified as banks under certain acts. By 2005, this led to concerns about large commercial entities like Walmart seeking entry into banking through this route.
A subsequent moratorium on new applications was imposed by the FDIC in 2006 due to opposition against such developments but was lifted in 2020 with approvals granted for fintech firms Square and Nelnet under revised guidelines established that year.
For more information on this topic or related resources provided by BPI regarding historical perspectives or current debates surrounding ILCs within financial services sectors across America today please contact Sean Oblack at sean.oblack@bpi.com.