CUNA Regulatory Comment Call


August 31, 2006

FDIC REQUESTS PUBLIC COMMENT ON ISSUES RELATED TO INDUSTRIAL LOAN COMPANIES (ILCs)

EXECUTIVE SUMMARY

  • Industrial loan companies or ILCs (which encompasses industrial banks) are state- chartered banks, first chartered in the early 1900’s as small loan companies for industrial workers. Currently, 61 insured ILCs operate from California, Colorado, Hawaii, Indiana, Minnesota, Nevada, and Utah with reported total assets approximating $155 billion. Under current law, certain ILCs may be owned by or affiliated with commercial entities.

  • The rapid growth of the ILC industry, the trend toward commercial company ownership of ILCs and the nature of some ILC business models have raised questions about the risks posed by ILCs to the Federal Deposit Insurance Corporation’s (FDIC’s) Deposit Insurance Fund, including whether their commercial relationships pose any safety and soundness risks.

  • Recently, the ILC issue has generated considerable public interest because of pending applications by retail giants seeking to purchase ILCs. Of particular note is the application for federal deposit insurance submitted to the FDIC in July of 2005 by Wal-Mart Bank, a proposed Industrial Loan Company (ILC) headquartered in Salt Lake City, Utah.

  • In comment letters and testimony at FDIC public hearings on Wal-Mart Bank’s application, commenters expressed concerns. They focused on: the absence of consolidated supervisory requirements for the parent companies of ILCs; the absence of an obligation by the ILC parent company to keep the ILC well capitalized; and differences in authority to examine affiliate relationships. Commenters also raised concern about the potential blurring of the separation of banking and commerce that might be presented by an ILC.

  • This is also an important issue for credit unions because some credit unions have applied to own ILCs so they can provide credit-union-oriented solutions to serve their members. Those applications are under fire from bankers upset about potential increased competition.

  • On July 28, 2006, the FDIC imposed a six-month moratorium on FDIC action regarding (1) any application for deposit insurance submitted to the FDIC by, or on behalf of, an ILC or (2) any change in bank control notice submitted to the FDIC with respect to an ILC. The purpose of the moratorium is to preserve the status quo while the FDIC conducts an evaluation of the ILC industry.

  • In its evaluation, the FDIC will examine the current legal and business framework of ILCs and the possible benefits, risks and supervisory issues associated with ILCs, including:
    • Industry developments;
    • The various facts, issues, and arguments raised with respect to the ILC industry;
    • Whether there are emerging safety and soundness issues or other risks to the Deposit Insurance Fund or other policy issues involving ILCs; and
    • Whether statutory, regulatory, or policy changes should be made in the FDIC's oversight of ILCs in order to protect the Deposit Insurance Fund or other important Congressional objectives.

  • The FDIC believes that public input will assist the FDIC in deciding how to respond to those issues in light of the recent trends and changes in the ILC industry.

  • Comments are due to the FDIC by October 10, 2006. Please send your comments to CUNA by September 29, 2006. Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Deputy General Counsel Mary Dunn at mdunn@cuna.com or to Senior Regulatory Counsel Catherine Orr at corr@cuna.com; or mail them to Mary or Catherine in c/o CUNA's Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, 6th Floor - South Building, Washington, DC 20004. You may also contact us at 800-356-9655, ext. 6743, if you would like a copy of the FDIC’s Request for Comment, or you may access it here.

BACKGROUND

  • Generally, the authority of ILCs to engage in activities is determined by the laws of the chartering state. The authority granted to an ILC may vary from one state to another and may be different from the authority granted to commercial banks. Except for offering demand deposits, an ILC generally may engage in all types of consumer and commercial lending activities and all other banking activities permissible for banks in general.

  • The FDIC and the state chartering authorities directly supervise insured ILCs, which must comply with the FDIC’s rules and regulations. Like all insured depository institutions, ILCs receive regular examinations, during which compliance with the regulations is reviewed, focusing on safety and soundness, consumer protection, community reinvestment, information technology and trust activities. Overall performance and condition are also analyzed. The FDIC may examine an ILC’s relationship with its parent company and any other affiliate. However, the FDIC does not have the authority to examine affiliates that do not have a relationship with the ILC itself or to impose capital requirements on the parent company of the ILC.

  • ILC charters are unique in that, as long as they meet certain criteria (if they do not accept demand deposits or the institution’s total assets are less than $100,000,000), they are not considered “banks” under the Bank Holding Company Act. As a result, an ILC’s parent company that meets the criteria is not subject to supervision by the Federal Reserve Board and may not be subject to any other form of consolidated supervision. (The majority of companies that own ILCs are, in fact, financial entities; some are subject to consolidated supervision by the Federal Reserve Board or the Office of Thrift Supervision.)

QUESTIONS REGARDING THE REQUEST FOR COMMENTS

  1. Have developments in the ILC industry in recent years altered the relative risk profile of ILCs compared to other insured depository institutions? What specific effects have there been on the ILC industry, safety and soundness, risks to the Deposit Insurance Fund, and other insured depository institutions? What modifications, if any, to its supervisory programs or regulations should the FDIC consider in light of the evolution of the ILC industry?











  2. Do the risks posed by ILCs to safety and soundness or to the Deposit Insurance Fund differ based upon whether the owner is a financial entity or a commercial entity? If so, how and why? Should the FDIC apply its supervisory or regulatory authority differently based upon whether the owner is a financial entity or a commercial entity? If so, how should the FDIC determine when an entity is “financial” and in what way should it apply its authority differently?











  3. Do the risks posed by ILCs to safety and soundness or to the Deposit Insurance Fund differ based on whether the owner is subject to some form of consolidated Federal supervision? If so, how and why? Should the FDIC assess differently the potential risks associated with ILCs owned by companies that (1) are subject to some form of consolidated Federal supervision, (2) are financial in nature but not currently subject to some form of consolidated federal supervision, or (3) cannot qualify for some form of consolidated federal supervision? How and why should the consideration of these factors be affected?











  4. What features or aspects of a parent of an ILC (not already discussed in Questions 2 and 3) should affect the FDIC's evaluation of applications for deposit insurance or other notices or applications? What would be the basis for the FDIC to consider those features or aspects?











  5. The FDIC must consider certain statutory factors when evaluating an application for deposit insurance (see 12 U.S.C. 1816), and certain largely similar statutory factors when evaluating a change in control notice (see 12 U.S.C. 1817(j)(7)). These factors include: the financial history and condition of the institution; the adequacy of capital and management; the complexity and perceived risk (to the Deposit Insurance Fund) of the proposal; sufficiency of risk management programs; relationships with affiliated entities; the convenience and needs of the community to be served by the institution; and any antitrust issues. Are these the only factors FDIC may consider in making such evaluations? Should the consideration of these factors be affected based on the nature of the ILC's proposed owner? Where an ILC is to be owned by a company that is not subject to some form of consolidated Federal supervision, how would the consideration of these factors be affected?











  6. Should the FDIC routinely place certain restrictions or requirements on all or certain categories of ILCs that would not necessarily be imposed on other institutions (for example, on the institution's growth, ability to establish branches and other offices, ability to implement changes in the business plan, or capital maintenance obligations)? If so, which restrictions or requirements should be imposed and why? Should the FDIC routinely place different restrictions or requirements on ILCs based on whether they are owned by commercial companies or companies not subject to some form of consolidated Federal supervision? If such conditions are believed appropriate, should the FDIC seek to establish the underlying requirements and restrictions through a regulation rather than relying upon conditions imposed in the order approving deposit insurance?











  7. Can there be conditions or regulations imposed on deposit insurance applications or changes of control of ILCs that are adequate to protect an ILC from any risks to safety and soundness or to the Deposit Insurance Fund that exist if an ILC is owned by a financial company or a commercial company? In the interest of safety and soundness, should the FDIC consider limiting ownership of ILCs to financial companies?











  8. Is there a greater likelihood that conflicts of interest or tying (the ILC requiring customers to purchase products or services from its affiliates as a condition for extending credit) between an ILC, its parent, and affiliates will occur if the ILC parent is a commercial company or a company not subject to some form of consolidated federal supervision? If so, please describe those conflicts of interest or tying and indicate whether or to what extent such conflicts of interest or tying are controllable under current laws and regulations. What regulatory or supervisory steps can reduce or eliminate such risks? Does the FDIC have authority to address such risks in acting on applications and notices? What additional regulatory or supervisory authority would help reduce or eliminate such risks?











  9. Do ILCs owned by commercial entities have a competitive advantage over other insured depository institutions? If so, what factors account for that advantage? To what extent can or should the FDIC consider this competitive environment in acting on applications and notices? Can those elements be addressed through supervisory processes or regulatory authority? If so, how?











  10. Are there potential public benefits when a bank is affiliated with a commercial concern? Could those benefits include, for example, providing greater access to banking services for consumers? To what extent can or should the FDIC consider those benefits if they exist?











  11. In addition to the information requested by the above questions, are there other issues or facts that the FDIC should consider that might assist the FDIC in determining whether statutory, regulatory, or policy changes should be made in the FDIC's oversight of ILCs?











  12. Given that Congress has expressly excepted owners of ILCs from consolidated bank holding company regulation under the Bank Holding Company Act, what are the limits on the FDIC's authority to impose such regulation absent further Congressional action?











  13. Other comments?











Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
Mary Mitchell Dunn • SVP & Deputy General Counsel • (202) 508-6736 • mdunn@cuna.com
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
Lilly Thomas • Assistant General Counsel • (202) 508-6733 • lthomas@cuna.com
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com
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