Main Street Matters Blog

Boarding Up the ILC Loophole

Dec 04, 2019

By Paul Merski and Chris Cole


As nonbank technology companies increasingly seek industrial loan company charters, the ILC issue has once again come to the fore in Washington. ICBA continues to lead the opposition to mixing banking and commerce through exploitation of the ILC loophole, recently expressing strong support for new legislation that would close it. Here's a quick breakdown of the issue and the proposed legislative fix.

The Loophole

A loophole in the Bank Holding Company Act allows commercial and fintech companies to own or acquire ILCs chartered in only a handful of states without being subject to federal consolidated supervision. This leaves a dangerous gap in safety and soundness oversight.

In a comprehensive white paper issued earlier this year, ICBA detailed the transformation of the ILC charter into the fashionable charter of choice for commercial firms that want to get into the business of banking and take advantage of the federal safety net while avoiding legal restrictions and company oversight.

Recognizing the dangers of mixing banking and commerce, both the FDIC and Congress have previously placed moratoriums on the use of ILCs following ICBA’s successful campaign against Walmart’s bid for an ILC charter in 2006. ILCs have again become a hot-button issue as tech companies such as Rakuten, Square, SoFi, and Nelnet have sought ILC charters under Utah law and filed deposit insurance applications with the FDIC.

The Legislative Fix

Introduced by Senate Banking Committee member John Kennedy (R-La.), the Eliminating Corporate Shadow Banking Act of 2019 (S. 2839) would close the ILC loophole by amending the definition of “bank” under Section 2 of the Bank Holding Company Act of 1956.

As detailed in an ICBA summary of the bill, an “industrial company or an industrial bank or other similar institution” would no longer be exempted from the definition of “bank.” Therefore, these entities' parent companies would be subject to the BHCA, including provisions requiring entities that own or control banks to only be engaged in activities that are closely related to banking or finance.

The bill would grandfather existing ILCs, therefore permitting them to continue their commercial affiliations.

The Outlook

ICBA strongly supports the legislation to level the competitive playing field, support a safe and sound financial system, and maintain the long-standing and important separation of banking and commerce. "Any company that wishes to own a full-service bank should be subject to the same restrictions and supervision that apply to any other bank holding company," ICBA President and CEO Rebeca Romero Rainey said when the bill was introduced.

Our next steps are working with lawmakers to build bipartisan support for Senate legislation and to introduce a similar bill in the House heading into the second session of the 116th Congress.

ICBA looks forward to continuing to work with all concerned policymakers—and community bank grassroots advocates across the nation—to close the ILC loophole and maintain the separation of banking and commerce.

Paul Merski is ICBA group executive vice president of congressional relations and strategy. Chris Cole is ICBA executive vice president and senior regulatory counsel.