NCLC and Coalition Support Senate Bill to Close Industrial Loan Company Loophole

December 6, 2022 — Press Release

Washington, D.C. — Today, a broad coalition of financial services and consumer organizations expressed
support for new legislation to close the industrial loan company (ILC) charter loophole, the “Close the Shadow Banking Loophole Act.” The legislation, introduced by Senate Banking Committee Chairman Sherrod Brown (D-OH), Sen. Bob Casey (D-PA) and Sen. Chris Van Hollen (D-MD), prohibits shadow banks and nonbank commercial entities from taking advantage of legal loopholes. These loopholes allow these companies to control a full-service FDIC-insured depository institution without being subject to the comprehensive set of rules designed to keep the financial system safe.

The coalition, which includes the Americans for Financial Reform, Bank Policy Institute, Center for Responsible Lending, Consumer Federation of America, Credit Union National Association, Independent Community Bankers of America, Mid-Size Bank Coalition of America, National Association of Federally-Insured Credit Unions, National Community Reinvestment Coalition, National Consumer Law Center (on behalf of its low-income clients), National Community Reinvestment Coalition and U.S. PIRG, stated the following in a letter:

“The time is now for Congress to close the ILC loophole before it is further exploited by firms seeking to gain all of the advantages of an FDIC-insured bank charter without the concomitant supervision and regulation that Congress has established for the corporate owners of full-service insured banks. As financial services trades and consumer advocates, we come together to fully support this legislation and look forward to working with the committee to advance this legislation in the future.”

Why this matters:

Congress sought to preserve a competitive economy by establishing a strict separation between banking and commerce. The ILC loophole allows commercial entities to undermine the intent of Congress and ignore the protections designed to maintain that separation. This loophole:

• Creates a riskier financial system and less competitive economy;
• Gives major commercial firms – including Big Tech companies – access to sensitive balance and transaction data, adding to their trove of personal and behavioral data; and 
• Exempts these nonbanks from many consumer data and privacy protections. 

The Senate legislation would eliminate the loophole and strengthen protections for consumers, taxpayers, and the financial system.

A short history of industrial loan companies:

Industrial loan companies offer special exemptions for any type of organization to control a full-service FDIC-insured depository institution without being subject to the same consolidated oversight and prudential standards or limitations applied to traditional financial institutions. These charters were established in the early 1900s and have historically been held by small, locally owned institutions. 

The Competitive Equality Banking Act excluded ILCs from the definition of a “bank” in the Bank Holding Company Act in 1987. As a result, the size and number of these companies ballooned until, in 2013, the Dodd-Frank Act imposed a temporary moratorium on new ILCs. That moratorium has been lifted. 

Additional Background:

The coalition, which represents a broad cross-section of regulated banks, credit unions and consumer protection organizations, also supported H.R. 5912, the “Close the ILC Loophole Act” introduced in the House by Congressman Jesús “Chuy” García (D-IL), Stephen Lynch (D-MA), Lance Gooden (R-TX) and Pete Sessions (R-TX). The House bill passed through committee earlier this year.