Senators urge FDIC to act on pending ILC applications

Bloomberg News

WASHINGTON — Both Republican and Democratic-aligned Senators Wednesday sent a letter to the Federal Deposit Insurance Corp. Wednesday asking the agency to fairly consider Industrial Loan Company Applications.

The bipartisan letter obtained by American Banker, led by Sen. Mitt Romney, R-Utah, included members from states — like Nevada, Utah and Michigan — which either have multiple ILC charters or notable pending applications.

"The FDIC should evaluate all ILC applications based on the existing laws and regulations that currently apply to all FDIC-insured banks [and] in the event an application does not satisfy the criteria for approval, the agency should provide specific feedback to the applicant that references the relevant statute or regulation," the letter said. "Action on a pending application should not be delayed indefinitely without a clear explanation to the applicant of the required steps to allow the review process to proceed."

Senators Catherine Cortez Masto, D-Nev.; Susan Collins, R-Maine; Kyrsten Sinema, I-Ariz.; Bill Hagerty, R-Tenn.; Angus King, I-Maine; Marsha Blackburn, R-Tenn.; Jacky Rosen, D-Nev.; Mike Lee, R-Utah; Gary Peters, D-Mich.; Debbie Stabenow, D-Mich. and Pete Ricketts, R-Nev., joined Romney in the letter.

The Senators not only pointed to the FDIC's lack of experience in reviewing applications, but also argued that skepticism towards ILCs is unfounded. 

"A July 2021 report found that compared to other financial institutions, ILCs have historically enjoyed a greater return on assets while maintaining higher capital levels," the letter noted. "In addition to strong financial performance, the industry has successfully weathered financial shocks such as the 2008 Financial Crisis and the COVID-19 Pandemic without an institutional failure leading to losses to the Deposit Insurance Fund."

Regulation and compliance

Experts expect 'stalemate' on ILC applications

January 25, 2023 1:55 PM

ILCs are a unique state banking charter regulated and insured by the FDIC. Like traditional banks, ILCs offer various loan types and deposit accounts. Unlike traditional bank holding companies, parent companies of ILCs are exempt from the Bank Holding Company Act granted they refrain from offering deposit accounts on demand. 

ILCs get around this by opting for negotiable order of withdrawal accounts which, unlike checking accounts, technically give the depository the right to require a week's notice to transfer funds, even though in practice ILCs can voluntarily transfer funds on demand. Opponents of the charter suggest the BHCA exemption allows ILCs to blend banking and commerce, contrary to U.S. legal doctrine that historically separates the two. 

In the early 2000s, big U.S. corporations like Walmart and The Home Depot attempted to acquire ILC charters, which elicited backlash over concerns their entry into banking would quash competition. The FDIC paused ILC charter approvals from 2006 to 2008, and again as part of a provision in the Dodd-Frank Act from 2010 to 2013.

In March 2020, the FDIC granted approval for two new ILC applications — after years of consideration and approved new parameters for consideration of future ILC applications.

Romney has been a long-time advocate for this kind of charter, with Utah being the home of the vast majority of existing ILCs. Dearborn, Michigan-based Ford — which has long sought an ILC charter — reapplied in 2022, though its application remains pending. 

Industry experts widely agree approval of any ILC applications remains unlikely during the Biden Administration, in part because current FDIC chair Martin J. Gruenberg has been skeptical of ILC applications in the past. Another ILC skeptic, Senate Banking Committee Chairman Sherrod Brown, D-Ohio, reintroduced the industry-supported Close the Shadow Banking Loophole Act in 2022 that would subject ILCs to supervision by the Federal Reserve. 

FDIC board member and former Republican staffer Jonathan McKernan recently called for more timely ILC app consideration, saying the FDIC is obligated to give the applications a fair shake.