Earlier this week, Senator Sherrod Brown (D-Ohio) introduced a bill, the “Close the Shadow Banking Loophole Act,” (Act) that is intended to close what is often termed a “loophole” in the Bank Holding Company Act (BHCA) because it allows the parent companies of industrial loan companies (ILCs) to operate without the same level of federal oversight that applies to parent companies of other banking institutions. The bill is co-sponsored by Senators Bob Casey (D-Pa.) and Chris Van Hollen (D-Md.).
The ILC charter has been controversial for many years because an ILC under certain circumstances is not a “bank” under the BHCA. As a result, a company that controls an institution that is not a BHCA bank is not required to register as a bank holding company with the Federal Reserve Board and, therefore, is not subject to regulation and supervision by the Federal Reserve Board. Most importantly, the parent company of an ILC that is not a BHCA bank is also not subject to restrictions in the BHCA and Federal Reserve Board Regulation Y on nonbanking activities imposed on a bank holding company. Because this allows a commercial or fintech company to own or acquire an ILC, the absence of consolidated supervision of ILC parent companies by the Federal Reserve Board is characterized by ILC critics as a dangerous “loophole” in safety and soundness oversight of ILC parent companies.
The Act would make the following changes to current law:
- The BCHA provision that excepts ILCs from the definition of a “bank” would be amended to limit the exception to an ILC (1) that has been approved to receive FDIC deposit insurance on or before September 23, 2021, or (2) with a deposit insurance application pending on September 23, 2021 that is approved before September 23, 2023 by a 2/3 vote of FDIC Directors and for which the FDIC provided for a 90-day public comment period and public hearing. (Applications pending on September 23, 2021 that are not approved before September 23, 2023 are deemed to have been denied.)
- The parent company of an ILC with a deposit insurance application approved after September 23, 2021 would be subject to the supervisory authority of its “primary financial regulatory agency” as defined in Section 2 of Dodd-Frank (12 U.S.C. Sec. 5301) (e.g. the SEC for registered brokers or dealers) or, if Section 2 does not assign a “primary financial regulatory agency,” the FDIC. The primary regulator or FDIC could conduct examinations of the parent and any subsidiary and impose any conditions or restrictions on the parent company or any subsidiary, including restricting or prohibiting transactions between the parent company or subsidiary.
- The appropriate federal banking agency would be required to disapprove a change in control of an insured ILC subject to limited exceptions that include an exception for when the ILC will be controlled by an entity subject to consolidated supervision by the Federal Reserve Board as a bank holding company.
- The BHCA would be amended to give the FDIC authority the same authority to supervise the parent company of an ILC that is not subject to a primary financial regulatory agency as the Federal Reserve Board has with respect to a bank holding company or a subsidiary of a bank holding company. The ILCs subject to this FDIC authority would include ILCs approved for deposit insurance on or before September 23, 2021.
In December 2020, the FDIC issued a final rule setting forth the conditions it will impose and the commitments it will require to approve a deposit insurance application from an industrial bank or ILC whose parent company is not subject to consolidated supervision by the Federal Reserve Board. Given that the FDIC’s final rule already requires a company controlling an industrial bank to identify affiliates, consent to examination, report to the FDIC on its operations and activities, cause an independent audit of the industrial bank’s activities, limit its representation on the ILC’s board, and maintain capital and liquidity the FDIC deems appropriate, it is open to debate whether the Act is necessary. The Act appears to go further than the FDIC’s final rule by giving broad authority to “impose any conditions or restrictions on the parent company or any subsidiary” which could be read to give the agency authority to limit the parent company’s activities.
The Act has the support of a broad coalition of financial services and consumer organizations that includes Americans for Financial Reform, Bank Policy Institute, Center for Responsible Lending, Consumer Federation of America, Credit Union National Association, Independent Community Bankers of America, and the National Consumer Law Center (on behalf of its low-income clients). In a letter to Senator Brown, the organizations stated that “[t]he 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.”
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