New developments for industrial loan companies: an introduction

New developments for industrial loan companies: an introduction


  • A new rule proposed by the Federal Deposit Insurance Corporation (FDIC) codifies its approach to managing industrial loan companies (ILCs), although the rule does not by itself make it easier to obtain a loan company charter industrial.
  • Designed to provide very limited lending support to a market that commercial banks did not serve, some ILCs have since evolved into large-scale financial services companies with activities rivaling those of commercial banks, although they do not. do not need to be owned by banks and therefore not regulated like banks by the Federal Reserve.
  • This new rule gave no indication that the FDIC would lift the moratorium it set on new ILC requests in 2006, so it was surprising that a day after this rule, the FDIC announced that it had approved two news ILC.

The context

On March 17, the Federal Deposit Insurance Corporation (FDIC) unanimously approved a proposed rule which would “codify existing practices” used by the FDIC in the management of the industrial loan companies (ILC) it oversees. This rule proposal was followed closely on March 18 by news that the FDIC had approved ILC charters for fintech company Square and student loan manager Nelnet, the first new charters since 2006. What is it? So that an ILC and why is this subject a source of considerable controversy in the United States?

History and legal framework

ILCs, also known as industrial banks, emerged in early 1900s as a source of finance for industrial workers and other low-income wage earners, to whom traditional commercial banks were unwilling at the time to offer unsecured loans. Industrial banks have always been intended to provide only a fraction of the services provided by traditional banking, acting largely as lenders but not as deposit collectors (deriving their funding solely from the issuance of investment certificates). Industrial banks nonetheless dominated the middle-class consumer credit market for much of the 1920s and 1930s until traditional commercial banks expanded their consumer credit business.

Industrial banks have always been state charter, but a fortuitous impact of the 1982 Garn-St. German Deposit-Taking Institutions Act was to make industrial banks eligible for FDIC deposit insurance for the first time, placing these banks under the regulatory and supervisory authority of both their state and the FDIC.

These, however, are two other developments that have made ILCs the controversial subject that they are today. The first development is the gradual expansion of powers by individual states over the last century. As a result, many ILCs carry out activities largely identical to those of the major commercial banks today, including in some cases deposit-taking activities, as shown in the table below.

Source: Adapted from Lexis Nexis

In addition, ILCs did not necessarily stay small. As the Government Accountability Office (GAO) Noted in 2005, “The ILC industry has experienced significant asset growth and has grown from one-off, small and limited-purpose institutions to a diverse industry that includes some of the country’s largest and most complex financial institutions. »The total assets held by ILCs was grown up from $ 4.2 billion in 1987 to a peak of $ 213 billion in 2006. Following the FDIC moratorium of 2006 (see below), this number currently stands to $ 102.4 billion.

It is not of fundamental concern that industrial banks operate as commercial banks, provided that industrial banks are subject to the same regulation and supervision as commercial banks. This is not the case, however, and stems from the second development, the 1987 Law on Equal Banking Competition. This law identified ILCs as an exception to the rule that all companies that own and control banks must be registered as bank holding companies (BHCs). While this can get a bit technical, it has two implications. First, in the normal course of events, only banks can own and control banks. Second, these banks – both commercial banks and BHCs – are regulated and supervised by the Federal Reserve Board (the Fed). Following the 1987 Law on Equal Banking Competition, ILCs do not have to be owned by banks and are not subject to Fed supervision.

The fear of “single riskThat the ILC thus pose to the security and soundness of the banking system seems to have led the FDIC not to issue an ILC charter for decades. Nonetheless, the controversy surrounding CALs appears to be relatively new. In 1988, General Motors obtained an ILC charter, closely followed by other companies including BMW, Harley-Davidson, General Electric, and Target, all chartered in Utah or Nevada. In 2006, however, when Walmart applied to the FDIC to be chartered in Utah, there was a huge outpouring of protest. Two public hearings were held on Walmart’s specific case, and the FDIC has declared a moratorium on new ILC charter applications. Eventually, Walmart withdrew its application before a decision was made, and research by the Milken Institute shows that since that date, all states in which CALs are authorized have passed laws restricting the powers of CALs.

More recently, similar arguments both for and against the expansion of ILC membership have been made following the applications submitted in December 2018 by Square, an American fintech, and in August 2019 by Rakuten, a Japanese e-commerce company, both of which received a lot of media comment. On March 18, news broke that the FDIC had approved charters for Square and Nelnet, a student loan manager. Square has announced that it has already obtained charter approval from Utah, but Nelnet is believed to be still awaiting state-level approval.


The proposal is undoubtedly a step in the right direction. The simple codification of existing practices in a regulatory architecture is a desirable objective in itself, but the rule goes further by proposing new requirements, in particular that a parent company make available a capital pool or access to credit to the bank that belongs to him.

While these developments are to be welcomed (and the unanimity in the FDIC only underscores this point), the impact is limited only to the ILCs that the FDIC already regulates, and this proposal at first glance therefore does not indicate that any de novo ILC charters would be granted. It was therefore surprising that a day later the FDIC approved two new charters, the first since 2006. A new lease of life has been breathed into the viability of ILCs, and this is a series of decisions that fintechs and other companies will follow. up close and should lead to an explosion in the number of ILC requests to the FDIC.

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