Becoming or owning an industrial loan company (or ILC)—the elusive "nonbank bank" option, as Congress coined the term in 1987— still has an allure for financial services providers that want to (1) lend on a national scale while avoiding state-by-state licensure, (2) accept (insured) deposits with some limits, and (3) avoid full, comprehensive regulation and supervision of parent companies and various affiliates by the Federal Reserve under the Bank Holding Company Act.

Fintechs and other non-banks considering becoming or obtaining an ILC may have noted some recent developments at the FDIC, including the approval of a (kind of) new ILC's application for FDIC deposit insurance, as well as a proposed rule concerning the FDIC regulations for parent companies of ILCs.

Key Takeaways

• The approval of the recent ILC application for FDIC deposit insurance does not represent a softening of the FDIC's stance on ILCs generally and does not represent the development or use of the ILC as a bank-lite or alternative charter for fintechs under the current FDIC leadership. It also does not represent a more permissive mix of commerce and banking that proved controversial in previous applications. Only a significant change at the FDIC, such as stemming from a new administration, would likely change this policy.
• The proposed rule for ILC parent companies would add criteria to Part 354 of the FDIC's regulations for the FDIC to analyze the risk the parent company presents to the ILC, including a particular focus on shell or captive companies. The proposed rule also closes gaps in the current rule and grants the FDIC purview to supervise companies and transactions not currently subject to Part 354. Comments on the proposed rule are due October 11, 2024.
• The ILC developments, while notable, do not represent a liberalization or modernization of the U.S. bank regulatory framework. Instead, they confirm the current FDIC leadership's cautious approach to ILCs generally.

FDIC Approves an ILC's Application for Deposit Insurance

Earlier this summer, the FDIC approved a deposit application for an ILC submitted by Thrivent Financial for Lutherans (Thrivent) for Thrivent Bank, a Utah-chartered ILC. Thrivent is a fraternal benefit society, which is a unique type of organization that is owned by members who share a common bond. It offers financial products and services and sponsors Thrivent Federal Credit Union. Thrivent Bank will merge with the credit union and absorb its products, customers, and personnel. Thrivent Bank's services will be available to new customers nationwide, regardless of religious affiliation, and it will operate online only.

In approving the application, Acting Comptroller of the Currency Michael Hsu, who is an FDIC director, remarked that the ILC "would look a lot like a community bank." That says a lot. The FDIC is fundamentally comfortable with the community bank model. The FDIC's approval does not amount to a credible federal option for fintechs or other organizations interested in providing financial services that do not look a lot like community banks.

While another administration may take a different tack, the current administration or one that follows in its footsteps is not expected to change this policy at the FDIC in the near term.

And although the FDIC has been criticized for the time it takes to review deposit insurance applications by ILCs in formation—a congressionally authorized option that has not yet been eliminated—the current FDIC board can now point to one such approval as evidence that it does not, in fact, maintain a complete ban on approving such applications.

Proposed Rule

Additional Criteria

The proposed rule would add criteria that the FDIC would consider when assessing the risks presented to an ILC by its parent company. Such criteria include the business purpose for control of the ILC, intercompany relationships, the compliance history and supervisory record, the novelty of the parent company's businesses (including any new or innovative processes), accessibility of information, and processes that mitigate risks from the parent company.

Shell or Captive Structures

Additionally, the proposed amendments address shell or captive structures related to an ILC. A heavily dependent relationship between an ILC and the parent company presents concentration risks. To monitor these risks, the proposed amendments would permit the FDIC to review each filing on a case-by-case basis, within the context of the statutory factors, to determine the degree of independence between the ILC and the parent company. The focus of the analysis would be on the independence of the ILC's board and management, the viability of the ILC's business model, and the franchise value of the ILC independent of the parent company. An ILC would be presumed to be a shell or captive institution if it:

• cannot function independently,
• is significantly or materially reliant on the parent company, or
• serves only as a funding mechanism for a parent or affiliate.

Where an ILC is presumed to be a shell or captive institution, if the ILC's products are available only to an affiliate's customers or a small portion of the community, this would weigh heavily against resolving the convenience and needs factor.

Written Commitments

The proposed amendments would also clarify the relationship between written commitments and the FDIC's evaluation of the statutory factors applicable to an ILC filing. Part 354 of the FDIC's regulations permits the FDIC to condition the approval of a filing by entering into written agreements and commitments with the ILC and its parent. However, the FDIC notes that these commitments do not replace any statutory factors required by the filing and do not compensate for fundamental weaknesses with respect to such statutory factors. These commitments will not necessarily be a remediating condition in the resolution of a statutory factor where there are other unfavorable facts and circumstances. The proposed rule would clarify Section 354.4 to expressly state this policy. This would apply to required commitments in any written agreements or conditions imposed as part of the FDIC's approval of, or non-objection to, a filing.

Closing Gaps

Additionally, the proposed amendments would revise the scope of Part 354 to close certain gaps not addressed by the current rules and:

• Include conversions involving a proposed ILC under Section 5 of the Home Owners' Loan Act (HOLA) or other transactions as determined by the FDIC. The FDIC has received some filings where a parent company would control an ILC as the result of conversion under Section 5(i)(5) of the HOLA, which permits a federal savings association to convert to a state bank (including an ILC) with approval from state and federal regulators if it meets certain financial, management, and capital requirements. Because these conversions raise similar issues, if approved, they would also be subject to Part 354.
• Ensure that an ILC's parent company would be subject to Part 354 if there is a change of control at the parent company or a merger in which the parent company is the resultant entity. As Part 354 is currently written, ILCs and their parent companies are not subject to Part 354 unless the parent company controls the ILC through certain enumerated procedures within the definition of "Covered Company." But there are scenarios, such as when there is a change of control at the parent company or in a merger where the parent company is the resultant entity (new management with a new plan for the industrial bank could be installed), where the parent company is not considered a Covered Company subject to Part 354. The proposed rule would close this gap and clearly provide that the FDIC will review these transactions.
• Provide the FDIC the regulatory authority to apply Part 354 to other situations where an ILC would become a subsidiary of a company that is not subject to federal consolidated supervision by the Federal Reserve. This "catch-all" provision would, nevertheless, allow a company to present its case in writing if it does not agree with the FDIC's application of Part 354.