Square Peg, Round Loophole

By Rebeca Romero Rainey

ICBA’s new white paper on industrial loan companies takes a deep dive into the long history of this obscure charter type and its transformation of recent years.

Dating back to 1910 with a mission to serve industrial workers, the ILC has morphed into the fashionable charter of choice for financial firms seeking to benefit from the federal safety net while avoiding legal restrictions and company oversight under the Bank Holding Company Act.

ICBA issued “Industrial Loan Companies: Closing the Loophole to Avert Consumer and Systemic Harm” as technology companies such as Square, SoFi, and Nelnet have sought ILC designations from the FDIC and Utah state regulators. While all three of these tech firms have withdrawn their problematic ILC deposit-insurance applications, Square has since reapplied.

There’s no secret why these companies are so interested in this rather obscure charter type. As ICBA details in the white paper, a loophole in the Bank Holding Company Act allows commercial and fintech companies to own or acquire ILCs chartered by just a handful of states without being subject to federal consolidated supervision and without having to divest their commercial activities.

Not only does this create an unlevel playing field relative to community banks and other financial institutions that must meet holding company standards, but it also leaves a dangerous gap in safety and soundness oversight while violating the longstanding U.S. separation of banking and commerce activities.

Many community bankers and others likely remember ICBA’s successful campaign against Walmart’s bid for an ILC charter in 2006. The effort by Walmart and another by Home Depot failed, ultimately leading to a temporary FDIC moratorium on ILC charters and a three-year moratorium imposed by the Dodd-Frank Act. This current campaign by tech firms to exploit the ILC loophole is no different.

The issues of a fair and competitive playing field, separation of banking and commerce, and safe and sound financial industry for Americans are no less important now than they were then. More than a decade after the Walmart battle, ICBA’s positions have not changed: the FDIC should impose an immediate moratorium on approving deposit insurance for ILCs, and Congress should close the ILC loophole permanently.

Consumers and our financial system cannot afford to have huge commercial or technology firms like Amazon, Google or Walmart exploiting the FDIC-insured ILC loophole and operating without adequate supervision.

I highly encourage members of Congress and financial regulators to read ICBA’s white paper and get the full story on the long, tangled history of this obscure corner of the financial sector. As we enter a new chapter in the ILC saga, let’s close the book on this risky and inequitable loophole.

Rebeca Romero Rainey is president and CEO of ICBA.