Industrial Loan Companies (ILCs): Background and Policy Issues

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Industrial Loan Companies (ILCs): Background
~~August 21~~September 9, 2020 , 2020
and Policy Issues
David W. Perkins
Industrial loan companies (ILCs)—financial institutions chartered by a small number of Industrial loan companies (ILCs)—financial institutions chartered by a small number of ~~s tates~~states——
Specialist in Specialist in
operate in almost every way like a commercial bank, including taking deposits insured by the operate in almost every way like a commercial bank, including taking deposits insured by the
Macroeconomic Policy Macroeconomic Policy
Federal Deposit Insurance Corporation (FDIC). In many ways, ILCs are subject to the same laws Federal Deposit Insurance Corporation (FDIC). In many ways, ILCs are subject to the same laws

and regulations as all state banks; however, notable differences between the rules applicable to and regulations as all state banks; however, notable differences between the rules applicable to
the parent holding companies of ILCs and those applicable to bank holding companies have the parent holding companies of ILCs and those applicable to bank holding companies have

made ILCs the subject of long-standing debate. Recent efforts by technology-focused financial made ILCs the subject of long-standing debate. Recent efforts by technology-focused financial
services companies (financial technology or “fintech” companies) to establish new ILCs have elevated the visibility of ILC services companies (financial technology or “fintech” companies) to establish new ILCs have elevated the visibility of ILC
policy issues. policy issues.
The ILC segment of the FDIC-insured depository industry is relatively small; as of March 31, 2020, 23 ILCs were operating The ILC segment of the FDIC-insured depository industry is relatively small; as of March 31, 2020, 23 ILCs were operating
in 5 states. Their combined assets made up less than 1% of all FDIC-insured institutions’ combined total assets. This small in 5 states. Their combined assets made up less than 1% of all FDIC-insured institutions’ combined total assets. This small
segment draws attention because ILCs are, provided they meet certain criteria, excluded from the definition of a bank under segment draws attention because ILCs are, provided they meet certain criteria, excluded from the definition of a bank under
the Bank Holding Company Act (BHCA; P.L.84-511). As a result, parent companies that own ILCs are not prohibited from the Bank Holding Company Act (BHCA; P.L.84-511). As a result, parent companies that own ILCs are not prohibited from
operating industrial or commercial enterprises (i.e., companies producing or selling nonfinancial goods and services) and are operating industrial or commercial enterprises (i.e., companies producing or selling nonfinancial goods and services) and are
not subject to supervision by the Federal Reserve, as are bank holding companies. not subject to supervision by the Federal Reserve, as are bank holding companies.
Opponents of the BHCA exemption argue that this exemption allows for a blending of banking and commerce that U.S. Opponents of the BHCA exemption argue that this exemption allows for a blending of banking and commerce that U.S.
policy generally has sought to avoid. In their view, the blending of banking and commerce creates incentives for imprudent policy generally has sought to avoid. In their view, the blending of banking and commerce creates incentives for imprudent
underwriting, inappropriately extends government-backed bank safety nets, and increases opportunities for companies to underwriting, inappropriately extends government-backed bank safety nets, and increases opportunities for companies to
exercise distortionary market power. In addition, opponents argue that lack of Federal Reserve supervision of ILCs results in exercise distortionary market power. In addition, opponents argue that lack of Federal Reserve supervision of ILCs results in
inadequate regulatory oversight, placing banks and their holding companies at a disadvantage. Proponents argue that ILCs inadequate regulatory oversight, placing banks and their holding companies at a disadvantage. Proponents argue that ILCs
allow for a degree of banking and commerce blending that, on net, is beneficial, allowing organizations to realize economies allow for a degree of banking and commerce blending that, on net, is beneficial, allowing organizations to realize economies
of scope and information efficiencies, diversify risks, provide customer convenience, and increase the availability of credit of scope and information efficiencies, diversify risks, provide customer convenience, and increase the availability of credit
and financial services. Proponents also argue that existing FDIC and state-level regulation and supervision are sufficient to and financial services. Proponents also argue that existing FDIC and state-level regulation and supervision are sufficient to
mitigate risks. mitigate risks.
Policymakers periodically have addressed ILC-related issues since the 1910s. Early on, states enacted ILC-related laws; these Policymakers periodically have addressed ILC-related issues since the 1910s. Early on, states enacted ILC-related laws; these
laws were not uniform, and some states permitted ILCs to take deposits. After the FDIC was established in 1933, it granted laws were not uniform, and some states permitted ILCs to take deposits. After the FDIC was established in 1933, it granted
deposit insurance to ILCs on a case-by-case basis, depending on the state laws applicable to and practices of the individual deposit insurance to ILCs on a case-by-case basis, depending on the state laws applicable to and practices of the individual
ILCs. Over time, the differences between banks and ILCs narrowed, leading to calls for FDIC insurance to be more widely ILCs. Over time, the differences between banks and ILCs narrowed, leading to calls for FDIC insurance to be more widely
available to insure deposits at ILCs. The Garn-St. Germain Depository Institutions Act (P.L. 97-320)available to insure deposits at ILCs. The Garn-St. Germain Depository Institutions Act (P.L. 97-320) explicitly made ILCs explicitly made ILCs
eligible for FDIC insurance in 1982, and states began requiring ILCs to be FDIC-insured. The current regulatory framework eligible for FDIC insurance in 1982, and states began requiring ILCs to be FDIC-insured. The current regulatory framework
for ILCs was in large part shaped by the Competitive Equality Banking Act (CEBA; P.L. 100-86)for ILCs was in large part shaped by the Competitive Equality Banking Act (CEBA; P.L. 100-86) in 1987,in 1987, as the law as the law
exempted an ILC’s parent from the BHCA, thus creating the avenue for commercial enterprises to own an institution that exempted an ILC’s parent from the BHCA, thus creating the avenue for commercial enterprises to own an institution that
could offer FDIC-insured deposits. could offer FDIC-insured deposits.
Efforts by Walmart and The Home Depot to own ILCs in the mid-2000s resulted in widespread objections related to fears Efforts by Walmart and The Home Depot to own ILCs in the mid-2000s resulted in widespread objections related to fears
that large retailers would exercise anticompetitive market power. These objections led to two official moratoriums on FDIC that large retailers would exercise anticompetitive market power. These objections led to two official moratoriums on FDIC
insurance approvals for ILCs spanning from 2006 to 2008 (as implemented by the FDIC) and from 2010 to 2013 (as insurance approvals for ILCs spanning from 2006 to 2008 (as implemented by the FDIC) and from 2010 to 2013 (as
mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act [P.L. 111-203]).mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act [P.L. 111-203]). The debate has been The debate has been
reignited by recent applications, including one by a large Japanese retailer. In March 2020, the FDIC approved two new ILC reignited by recent applications, including one by a large Japanese retailer. In March 2020, the FDIC approved two new ILC
applications and issued a proposed rule on ILC applications. applications and issued a proposed rule on ILC applications.
As these developments unfold, Congress may consider ILC-related issues. If Congress were to decide to restrict ILCs, then As these developments unfold, Congress may consider ILC-related issues. If Congress were to decide to restrict ILCs, then
making new ILCs ineligible for FDIC insurance, repealing the BHCA exemption, or partially amending aspects of their making new ILCs ineligible for FDIC insurance, repealing the BHCA exemption, or partially amending aspects of their
current regulation could be options with varying degrees of restriction. For example, S. 2839 would subject ILC holding current regulation could be options with varying degrees of restriction. For example, S. 2839 would subject ILC holding
companies to Federal Reserve supervision and prohibit commercial firms from becoming ILC holding companiescompanies to Federal Reserve supervision and prohibit commercial firms from becoming ILC holding companies . Were . Were
Congress to decide it does not want to restrict ILCs or hinder their establishment, it could expand ILC access to FDIC Congress to decide it does not want to restrict ILCs or hinder their establishment, it could expand ILC access to FDIC
insurance, perhaps by placing requirements on the FDIC to grant insurance if certain conditions are metinsurance, perhaps by placing requirements on the FDIC to grant insurance if certain conditions are met . If Congress wanted . If Congress wanted
to prevent the establishment of new ILCs while it considers the issues at hand, it could implement another moratorium.to prevent the establishment of new ILCs while it considers the issues at hand, it could implement another moratorium.
Congressional Research Service Congressional Research Service

Industrial Loan Companies (ILCs): Background and Policy Issues

Introduction
In recent years, several technology-focused financial service companies (sometimes characterized In recent years, several technology-focused financial service companies (sometimes characterized
as financial technology or “fintech” companies) have applied to state bank regulators and the as financial technology or “fintech” companies) have applied to state bank regulators and the
Federal Deposit Insurance Corporation (FDIC) to establish an Federal Deposit Insurance Corporation (FDIC) to establish an industrial loan company (ILC; also (ILC; also
~~cal ed~~called industrial banks or industrial loan corporations). ILCs are state-chartered institutions that industrial banks or industrial loan corporations). ILCs are state-chartered institutions that
can be, depending on the state, can be, depending on the state, ~~al owed~~allowed to make loans, process payments, and take deposits to make loans, process payments, and take deposits
insured by the FDIC.1 In short, ILCs provide bank services. Certain ILC applications—and the insured by the FDIC.1 In short, ILCs provide bank services. Certain ILC applications—and the
FDIC’s approval of two ILC applications in March 2020—have reignited a policy debate over FDIC’s approval of two ILC applications in March 2020—have reignited a policy debate over
whether aspects of ILC regulation contravene long-standing U.S. banking policy. whether aspects of ILC regulation contravene long-standing U.S. banking policy.
ILCs are controversial because under the Banking Holding ILCs are controversial because under the Banking Holding Company Act (BHCA;Company Act (BHCA; P.L. 84-511), P.L. 84-511),
they are exempt from the definition of a bank,2 they are exempt from the definition of a bank,2 ~~al owing~~allowing a degree of blending of a banking a degree of blending of a banking
enterprise and a commerce enterprise. The BHCA enterprise and a commerce enterprise. The BHCA ~~general y~~generally subjects companies that own banks to subjects companies that own banks to
regulation and supervision by the Federal Reserve and prohibits them from owning nonfinancial regulation and supervision by the Federal Reserve and prohibits them from owning nonfinancial
enterprises.3 Because ILCs are exempt from the definition of a bank under the BHCA,enterprises.3 Because ILCs are exempt from the definition of a bank under the BHCA, ILC parent ILC parent
companies are not subject to the prohibition against commercial ownership or to Federal Reserve companies are not subject to the prohibition against commercial ownership or to Federal Reserve
supervision. supervision.
Since at least as far back as the Glass- Since at least as far back as the Glass-~~Steagal~~ Steagall Act (Sections 20, 21, 26, and 32 of The Banking Act (Sections 20, 21, 26, and 32 of The Banking
Act of 1933; P.L. 73-66), Congress Act of 1933; P.L. 73-66), Congress ~~general y~~generally has sought to separate banking enterprises that take has sought to separate banking enterprises that take
deposits and make loans from commercial enterprises producing and deposits and make loans from commercial enterprises producing and ~~sel ing~~selling goods and services. goods and services.
The rationale for this policy is to prevent various potential negative outcomes, including an The rationale for this policy is to prevent various potential negative outcomes, including an
increased occurrence of imprudent lending backed by government safety nets and an increased increased occurrence of imprudent lending backed by government safety nets and an increased
likelihoodlikelihood of organizations exercising distortionary market power.4 On the other hand, those who of organizations exercising distortionary market power.4 On the other hand, those who
favor ILCs discount arguments for strict separation of banking and commerce and maintain that favor ILCs discount arguments for strict separation of banking and commerce and maintain that
these mixed enterprises provide potential benefits—including economies of scope, risk these mixed enterprises provide potential benefits—including economies of scope, risk
diversification, information efficiencies, and customer convenience—that could exceed the diversification, information efficiencies, and customer convenience—that could exceed the
~~potential~~ potential costs resulting from the extension of government safety nets and reduced competition.5costs resulting from the extension of government safety nets and reduced competition.5
This report examines ILCs and related policy issues. It begins with an overview of ILCs and the This report examines ILCs and related policy issues. It begins with an overview of ILCs and the
current state of the industry. Next, the report examines the policy issues raised by ILCs. It then current state of the industry. Next, the report examines the policy issues raised by ILCs. It then
summarizes the current regulatory framework’s development and examines industry and policy summarizes the current regulatory framework’s development and examines industry and policy
developments since 2005. These developments include the FDIC’s and Congress’s developments since 2005. These developments include the FDIC’s and Congress’s
implementation of moratoriums on new ILC approvals and recent developments involving fintech implementation of moratoriums on new ILC approvals and recent developments involving fintech
companies. The report concludes with brief descriptions of selected, possible legislative companies. The report concludes with brief descriptions of selected, possible legislative
alternatives. alternatives.

1 James R. Barth and Yanfei Sun,1 James R. Barth and Yanfei Sun, A New Look at the Performance of Industrial Loan Corporations, University of Utah, , University of Utah,
Utah Center for Financial Services,Utah Center for Financial Services, January 2018, p. 6, at http://industrialbankers.org/wp-content/uploads/2018/10/January 2018, p. 6, at http://industrialbankers.org/wp-content/uploads/2018/10/
~~ILC_REPORT _BART H_2018~~ILC_REPORT_BARTH_2018.pdf (hereinafter Barth and Sun, .pdf (hereinafter Barth and Sun, A New Look at the ~~Perform ance~~Performance of Industrial Loan
Corporations). ).
2 12 U.S.C. 2 12 U.S.C. §1841(c)(2)(H). §1841(c)(2)(H).
3 12 U.S.C.3 12 U.S.C. §§1843-1844. §§1843-1844.
4 Independent Community Bankers of America (ICBA), 4 Independent Community Bankers of America (ICBA), Industrial Loan Companies: Closing the Loophole to Prevent
~~Consum er and System ic Harm~~ Consumer and Systemic Harm, March 2019, pp. 1-4, at https://www.icba.org/docs/default-source/icba/advocacy-, March 2019, pp. 1-4, at https://www.icba.org/docs/default-source/icba/advocacy-
documents/reports/ilc-white-paper.pdf (hereinafter ICBA, documents/reports/ilc-white-paper.pdf (hereinafter ICBA, Industrial Loan ~~Com panies~~Companies: Closing the Loophole to Prevent
~~Consum er and System ic Harm~~ Consumer and Systemic Harm). ).
5 Barth and Sun, 5 Barth and Sun, A New Look at the Performance of Industrial Loan Corporations, pp. 38-40. , pp. 38-40.
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Industrial Loan Companies (ILCs): Background and Policy Issues

Overview of Industrial Loan Companies
ILCs are financial institutions chartered in a ILCs are financial institutions chartered in a ~~smal~~ small number of states—currently, California, number of states—currently, California,
~~Hawai~~ Hawaii, Minnesota, Nevada, and Utah6—that are permitted to make a wide array of loan types, , Minnesota, Nevada, and Utah6—that are permitted to make a wide array of loan types,
offer most types of deposit accounts, and open branches across state lines. Except for a federal offer most types of deposit accounts, and open branches across state lines. Except for a federal
law that law that ~~technical y~~technically restricts their ability to offer checking accounts (discussed later in this restricts their ability to offer checking accounts (discussed later in this
section), they, in effect, act as full service banks. As is the case with traditional banks, an ILC section), they, in effect, act as full service banks. As is the case with traditional banks, an ILC
may be owned by a parent may be owned by a parent holding company.7.7
In general, the regulation of banks and ILCs, where it relates directly to the insured depository, In general, the regulation of banks and ILCs, where it relates directly to the insured depository,
are similar.8 The Federal Deposit Insurance Act (FDI Act; P.L. 81-797) defines “state bank” to are similar.8 The Federal Deposit Insurance Act (FDI Act; P.L. 81-797) defines “state bank” to
include ILCs.9 As with any state bank that is not a member of the Federal Reserve System, the include ILCs.9 As with any state bank that is not a member of the Federal Reserve System, the
FDIC is the primary federal regulator of ILCs and supervises them along with the chartering FDIC is the primary federal regulator of ILCs and supervises them along with the chartering
state’s bank agency. (Currently, there are no ILC members of the Federal Reserve System.) As a state’s bank agency. (Currently, there are no ILC members of the Federal Reserve System.) As a
result, state bank regulators and the FDIC subject state-chartered banks and ILCs to supervision result, state bank regulators and the FDIC subject state-chartered banks and ILCs to supervision
and regulation, including safety and soundness requirements (e.g., capital standards and and regulation, including safety and soundness requirements (e.g., capital standards and
restrictions on transactions with insiders), as restrictions on transactions with insiders), as ~~wel~~ well as compliance with federal consumer as compliance with federal consumer
protection, community reinvestment, and anti-money laundering laws.10protection, community reinvestment, and anti-money laundering laws.10
Certain federal laws and regulations that apply to bank holding companies (BHCs) also apply to Certain federal laws and regulations that apply to bank holding companies (BHCs) also apply to
ILC holding companies: notably, Sections 23A and 23B of the Federal Reserve Act (P.L. 663-43) ILC holding companies: notably, Sections 23A and 23B of the Federal Reserve Act (P.L. 663-43)
prohibiting or restricting certain transactions between banks and their affiliates.11 In addition, prohibiting or restricting certain transactions between banks and their affiliates.11 In addition,
under Section 38A of the FDI Act, as amended by Section 616 of the Dodd-Frank under Section 38A of the FDI Act, as amended by Section 616 of the Dodd-Frank ~~Wal~~ Wall Street Street
Reform and Consumer Protection Act (Dodd-Frank; P.L. 111-203), the FDIC must require the Reform and Consumer Protection Act (Dodd-Frank; P.L. 111-203), the FDIC must require the
parent company of an ILC to “serve as a source of financial strength” for the depository ILC.12parent company of an ILC to “serve as a source of financial strength” for the depository ILC.12
These similarities aside, the regulation of the parent holding companies of banks and ILCs differ These similarities aside, the regulation of the parent holding companies of banks and ILCs differ
in a significant way. Under the Bank Holding Company Act (BHCA;in a significant way. Under the Bank Holding Company Act (BHCA; P.L.84-511), a parent P.L.84-511), a parent
company that owns a company that owns a bank, as defined in that act, is designated as a BHC.13 BHCs are , as defined in that act, is designated as a BHC.13 BHCs are ~~general y~~
generally prohibited from owning nonfinancial enterprises14 and are subject to supervision by the Federal prohibited from owning nonfinancial enterprises14 and are subject to supervision by the Federal
Reserve.15 ILCs that meet certain criteria are exempt from the BHCAReserve.15 ILCs that meet certain criteria are exempt from the BHCA definition of a bank.16 Thus, definition of a bank.16 Thus,

~~6 T hese~~ 6 These states were permitted to grandfather existing industrial banks and continue to charter new industrial banks states were permitted to grandfather existing industrial banks and continue to charter new industrial banks
under the Competitive Equality Banking Act (CEBA;under the Competitive Equality Banking Act (CEBA; P.L. 100-86). Colorado was also P.L. 100-86). Colorado was also ~~grandfat hered~~grandfathered, but the state has , but the state has
no active industrial banks and has since repealed its industrialno active industrial banks and has since repealed its industrial bank statute.bank statute. See FederalSee Federal Deposit Insurance Corporation Deposit Insurance Corporation
(FDIC), “Parent Companies of Industrial Banks and Industrial Loan Companies,” 85(FDIC), “Parent Companies of Industrial Banks and Industrial Loan Companies,” 85 Federal Register 17773, March 17773, March
31, 2020. 31, 2020.
7 FDIC, “Parent Companies of Industrial Banks and Industrial Loan Companies,” 857 FDIC, “Parent Companies of Industrial Banks and Industrial Loan Companies,” 85 Federal Register 17771-17773, 17771-17773,
March 31, 2020. March 31, 2020.
8 For more information on bank regulation, see CRS 8 For more information on bank regulation, see CRS Report R44918, Report R44918, Who Regulates Whom? An Overview of the U.S.
Financial Regulatory ~~Fram ework~~Framework, by Marc Labonte. , by Marc Labonte.
9 12 U.S.C. 9 12 U.S.C. §1813(a)(2). §1813(a)(2).
10 FDIC, “Parent Companies of Industrial Banks and Industrial Loan Companies,” 8510 FDIC, “Parent Companies of Industrial Banks and Industrial Loan Companies,” 85 Federal Register 17771-17773, 17771-17773,
March 31, 2020. March 31, 2020.
11 12 U.S.C. 11 12 U.S.C. §371c, 12 U.S.C§371c, 12 U.S.C §371c-1, 12 U.S.C. §1828(j), and 12 U.S.C.§371c-1, 12 U.S.C. §1828(j), and 12 U.S.C. §1468. §1468.
12 12 U.S.C.12 12 U.S.C. §1831o-1(b). §1831o-1(b).
13 12 U.S.C.13 12 U.S.C. §1841. §1841.
14 12 U.S.C.14 12 U.S.C. §1843. §1843.
15 12 U.S.C.15 12 U.S.C. §1844. §1844.
16 12 U.S.C.16 12 U.S.C. §1841(c)(2)(H). §1841(c)(2)(H). ~~T he~~The set of criteria most pertinent to this report is that the ILC is chartered in a state that set of criteria most pertinent to this report is that the ILC is chartered in a state that
requiredrequired ~~ILCs~~ ILCs to have FDIC insurance as of March 5, 1987, and that institution (1) does not except demand deposits, to have FDIC insurance as of March 5, 1987, and that institution (1) does not except demand deposits,
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link to page 7 link to page 16 link to page 12 link to page 7 link to page 16 link to page 12 Industrial Loan Companies (ILCs): Background and Policy Issues

parent companies that own an ILC are not designated as BHCs and are not subject to prohibitions parent companies that own an ILC are not designated as BHCs and are not subject to prohibitions
against commercial activity or to the Federal Reserve’s direct supervision.17against commercial activity or to the Federal Reserve’s direct supervision.17
To qualify for the BHCA To qualify for the BHCA exemption, ILCs cannot offer exemption, ILCs cannot offer demand deposits (i.e., checking accounts (i.e., checking accounts
or other deposits that the depository institution or other deposits that the depository institution ~~general y~~generally must make available must make available to the depositor for to the depositor for
withdrawal within less than seven days’ notice).18 Instead, ILCs withdrawal within less than seven days’ notice).18 Instead, ILCs ~~general y~~generally offer offer negotiable order
of withdraw (NOW) accounts. NOW accounts are not considered demand deposits because the (NOW) accounts. NOW accounts are not considered demand deposits because the
depository reserves the right to require seven days’ notice or more to transfer the funds.19 In depository reserves the right to require seven days’ notice or more to transfer the funds.19 In
practice, ILCs may choosepractice, ILCs may choose to make funds available upon request and not avail themselves of the to make funds available upon request and not avail themselves of the
~~al owable~~allowable seven days. Thus, a NOW account functions as a checking account from the seven days. Thus, a NOW account functions as a checking account from the
perspective of an ILC customer, although it is not perspective of an ILC customer, although it is not ~~technical y~~technically a demand deposit account.20 a demand deposit account.20
As of the end of the first quarter of 2020, there were 23 FDIC-insured ILCs chartered in 5 states, As of the end of the first quarter of 2020, there were 23 FDIC-insured ILCs chartered in 5 states,
14 of which were chartered in Utah.21 As shown 14 of which were chartered in Utah.21 As shown inin Table 1, these ILCs collectively held almost these ILCs collectively held almost
$165 $165 ~~bil ion~~ billion in assets and $135 in assets and $135 ~~bil ion~~ billion in deposits; both amounts are less than 1% of the total in deposits; both amounts are less than 1% of the total
amount held by amount held by al all insured depositories.22 Some of these ILCs are owned by parent companies insured depositories.22 Some of these ILCs are owned by parent companies
that are primarily involved in finance, including large organizations like UBS (a non-U.S. bank) that are primarily involved in finance, including large organizations like UBS (a non-U.S. bank)
and and ~~Sal ie~~ Sallie Mae (a student loan company). Nonfinancial commercial companies, including Toyota Mae (a student loan company). Nonfinancial commercial companies, including Toyota
and BMW, own others. Some ILCs are and BMW, own others. Some ILCs are ~~smal~~ small, niche lenders. For example, , niche lenders. For example, ~~Medal ion~~Medallion Bank Bank
specializes in loans for taxi cab “specializes in loans for taxi cab “~~medal ions~~medallions”—licenses to operate taxis issued by large cities—”—licenses to operate taxis issued by large cities—
and EnerBank is owned by a home construction company and makes construction loans.and EnerBank is owned by a home construction company and makes construction loans.
Currently, the ILC industry is relatively Currently, the ILC industry is relatively ~~smal er~~smaller than it has been at other times in recent history, than it has been at other times in recent history,
although it has always been although it has always been ~~smal er~~smaller compared with the compared with the ~~overal~~ overall depository industry. For example, depository industry. For example,
there were 54 FDIC-insured ILCs with nearly $264 there were 54 FDIC-insured ILCs with nearly $264 ~~bil ion~~billion in assets in 2007.23 The industry in assets in 2007.23 The industry
shrunk following the 2007-2009 financial crisis for numerous reasons. Companies such as shrunk following the 2007-2009 financial crisis for numerous reasons. Companies such as
Goldman Sachs, Morgan Stanley, and General Motors converted their ILCs to commercial banks Goldman Sachs, Morgan Stanley, and General Motors converted their ILCs to commercial banks
during the crisis and became BHCs. Other ILCs voluntarily closed, including those owned by GE during the crisis and became BHCs. Other ILCs voluntarily closed, including those owned by GE
and Target, and two and Target, and two ~~smal~~ small ILCs failed.24 However, there are recent indications that there may be a ILCs failed.24 However, there are recent indications that there may be a
resurgence of interest in establishing ILCs, including among technology-focused companies (as resurgence of interest in establishing ILCs, including among technology-focused companies (as
discussed in the discussed in the “Latest Developments” section, below). section, below).

(2) has less than $100 million in assets, or (3) is not acquired(2) has less than $100 million in assets, or (3) is not acquired by another company after August 10, 1987. by another company after August 10, 1987. ~~T his~~This is is
discusseddiscussed in more detail in the in more detail in the “ Current Regulatory Framework: 1987-Present””section, below. section, below.
17 An exception in which the Federal Reserve would17 An exception in which the Federal Reserve would have authority over an ILC parent holding company is if an ILC or have authority over an ILC parent holding company is if an ILC or
the parent is designatedthe parent is designated a ~~system ically im portant~~ a systemically important financial institution, or SIFI. Previously, one ILC was, or SIFI. Previously, one ILC was ~~designated as~~ designated as a a
SIFI;SIFI; currently, there are no ILCs designatedcurrently, there are no ILCs designated as SIFIs.as SIFIs. ~~See~~ See more detail, seemore detail, see ~~CRS~~ CRS Report R42150, Report R42150, ~~System ically~~Systemically
Important or “Too Big to Fail” Financial Institutions, by Marc Labonte. , by Marc Labonte.
18 12 C.F.R. §204.2(b)(1). 18 12 C.F.R. §204.2(b)(1).
19 12 C.F.R. §204.2(b)(3). 19 12 C.F.R. §204.2(b)(3).
20 ICBA, 20 ICBA, Industrial Loan Companies: Closing the Loophole to Prevent Consumer and Systemic Harm , pp. 5-6. , pp. 5-6.
21 Email correspondence between the author and the FDIC Office of Congressional Liaison, January 8, 2020; and 21 Email correspondence between the author and the FDIC Office of Congressional Liaison, January 8, 2020; and
FederalFederal Financial Institutions Examinations Council, “Bulk Data Download,”Financial Institutions Examinations Council, “Bulk Data Download,” at https://cdr.ffiec.gov/public/PWS/at https://cdr.ffiec.gov/public/PWS/
DownloadBulkData.aspx. DownloadBulkData.aspx.
22 FDIC, 22 FDIC, Quarterly Banking Profile: : First Quarter 2020, at https://www.fdic.gov/bank/analytical/qbp/2020mar/, at https://www.fdic.gov/bank/analytical/qbp/2020mar/
qbp.pdf#page=1; andqbp.pdf#page=1; and Congressional Research Service (CRS)Congressional Research Service (CRS) calculations. calculations.
23 Barth and Sun, 23 Barth and Sun, A New Look at the Performance of Industrial Loan Corporations, p. 9. , p. 9.
24 Barth and Sun,24 Barth and Sun, A New Look at the Performance of Industrial Loan Corporations,, pp. 9-10. pp. 9-10.
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Industrial Loan Companies (ILCs): Background and Policy Issues

Table 1. Industrial Loan Company (ILC) Number, Assets, and Deposits, by State
(as of March 31, 2020; $ in (as of March 31, 2020; $ in ~~bil ions~~billions) )
State
Number
Total Assets
Total Deposits
Utah Utah
14 14
$153.70 $153.70
$100.99 $100.99
Nevada Nevada
4 4
$9.66 $9.66
$5.13 $5.13
California California
3 3
$0.69 $0.69
$0.58 $0.58
~~Hawai~~
Hawaii 1 1
$0.60 $0.60
$0.41 $0.41
Minnesota Minnesota
1 1
$0.03 $0.03
$0.02 $0.02
Total ILCs Total ILCs
23 23
$164.7 $164.7
$107.1 $107.1
Total FDIC-insured Total FDIC-insured
5,165 5,165
$20,266 $20,266
$14,340 $14,340
ILCs as % of total ILCs as % of total
0.4% 0.4%
0.8% 0.8%
0.7% 0.7%
Sources: Email correspondence between the author and FDIC Office of CongressionalEmail correspondence between the author and FDIC Office of Congressional Liaison,Liaison, January 8, 2020; January 8, 2020;
FederalFederal Financial Institutions Examinations Council, “Bulk Data Download” at https://cdr.ffiec.gov/public/PWS/Financial Institutions Examinations Council, “Bulk Data Download” at https://cdr.ffiec.gov/public/PWS/
DownloadBulkData.aspx; and CongressionalDownloadBulkData.aspx; and Congressional Research Service calculations. Research Service calculations.
Policy Issues Raised by ILCs
ILC debates primarily involve two policy issues. One is related to the general separation of ILC debates primarily involve two policy issues. One is related to the general separation of
banking and commerce. ILC opponents often argue that the ownership of deposit-taking ILCs by banking and commerce. ILC opponents often argue that the ownership of deposit-taking ILCs by
commercial enterprises commercial enterprises ~~al ows~~allows too much blending of activities and too many associated risks. too much blending of activities and too many associated risks.
Proponents often argue that there are important benefits of ILCs as operated under current laws Proponents often argue that there are important benefits of ILCs as operated under current laws
and regulations, and that ILCs as financial services providers are appropriately regulated. The and regulations, and that ILCs as financial services providers are appropriately regulated. The
other issue is the related question of whether parent companies that own ILCs should be subject other issue is the related question of whether parent companies that own ILCs should be subject
to Federal Reserve supervision, as BHCs are. This section examines these policy issues. to Federal Reserve supervision, as BHCs are. This section examines these policy issues.
Separation of Banking and Commerce Policy Debate
~~Historical y~~Historically, the United States has adopted policies that separate banking enterprises from , the United States has adopted policies that separate banking enterprises from
commercial enterprises. These policies serve to prevent various interrelated outcomes, described commercial enterprises. These policies serve to prevent various interrelated outcomes, described
below.below.
Arguments for Strict Separation
One potential issue with mixing banking and commerce within a single organization is that the One potential issue with mixing banking and commerce within a single organization is that the
bank subsidiary could have incentives to make decisions based on the interests of the larger bank subsidiary could have incentives to make decisions based on the interests of the larger
organization, instead of on safe and sound banking principles.25 For example, a consumer who organization, instead of on safe and sound banking principles.25 For example, a consumer who
wishes to remodel his kitchen may need to take out a loan to buy appliances and fixtures from a wishes to remodel his kitchen may need to take out a loan to buy appliances and fixtures from a
retail company. If the consumer were to apply for the loan at a stand-alone bank, whether or not retail company. If the consumer were to apply for the loan at a stand-alone bank, whether or not
the bank would make the loan and under what terms depends largely on the applicant’s ability to the bank would make the loan and under what terms depends largely on the applicant’s ability to
repay. If the consumer were to apply for a loan at a bank owned by the retailer, the retailer would repay. If the consumer were to apply for a loan at a bank owned by the retailer, the retailer would
make an immediate profit on the sale of the goods, and the retailer-owned bank would later make make an immediate profit on the sale of the goods, and the retailer-owned bank would later make
profit on the loan repayment. Thus, the retailer-owned bank would have incentive to make loans profit on the loan repayment. Thus, the retailer-owned bank would have incentive to make loans

25 Kenneth Spong and Eric Robbins,25 Kenneth Spong and Eric Robbins, “Industrial Loan Companies: Growing“Industrial Loan Companies: Growing Industry Sparks a Public Policy Debate,” Industry Sparks a Public Policy Debate,”
FederalFederal Reserve Bank of KansasReserve Bank of Kansas City,City, ~~Econom ic~~Economic Review, Fourth Quarter 2007, pp. 59-61, at , Fourth Quarter 2007, pp. 59-61, at
https://www.kansascityfed.org/Publicat/ECONREV/PDF/4q07Spong.pdfhttps://www.kansascityfed.org/Publicat/ECONREV/PDF/4q07Spong.pdf (hereinafter Spong and Robbins,(hereinafter Spong and Robbins, “ “Industrial Industrial
Loan Companies: GrowingLoan Companies: Growing Industry Sparks a Public Policy Debate”). Industry Sparks a Public Policy Debate”).
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to riskier borrowers and at lower interest rates compared with the stand-alone bank. This logic to riskier borrowers and at lower interest rates compared with the stand-alone bank. This logic
would apply to any scenario in which a bank owned by a commercial parent receives loan would apply to any scenario in which a bank owned by a commercial parent receives loan
applications from the parent’s customers and suppliers. applications from the parent’s customers and suppliers.
A retailer or other commercial enterprise making a loan may not be considered problematic per A retailer or other commercial enterprise making a loan may not be considered problematic per
se. Whether a company can make profit by lending to its customers or suppliers is a matter of se. Whether a company can make profit by lending to its customers or suppliers is a matter of
market forces and does not necessarily raise policy concerns—even if the loans are riskier and market forces and does not necessarily raise policy concerns—even if the loans are riskier and
default at a higher rate. Concerns arise when the enterprise is default at a higher rate. Concerns arise when the enterprise is ~~al owed~~allowed to raise funding by to raise funding by
accepting government-backed deposits. Protecting depositories from possible negative effects of accepting government-backed deposits. Protecting depositories from possible negative effects of
risk-taking—and thus introducing what is known as risk-taking—and thus introducing what is known as moral hazard—removes certain market —removes certain market
incentives that constrain risk-taking (see the incentives that constrain risk-taking (see the “Deposit Insurance Based on FDIC Interpretation:
1933-1982” section, below). One main rationale for extending government guarantees to banks is section, below). One main rationale for extending government guarantees to banks is
that bank failures are that bank failures are ~~especial y harmful economical y and social y~~especially harmful economically and socially, as they expose individuals , as they expose individuals
seeking to keep their money safe—as opposed to investing for returns—to losses. In contrast, seeking to keep their money safe—as opposed to investing for returns—to losses. In contrast,
commercial enterprises commercial enterprises ~~general y~~generally are not given government support because their failures are seen are not given government support because their failures are seen
as less disruptive and impose losses on return-seeking, risk-accepting investors.26 For these as less disruptive and impose losses on return-seeking, risk-accepting investors.26 For these
reasons, proponents of separating banking and commerce argue that separation prevents an reasons, proponents of separating banking and commerce argue that separation prevents an
inappropriate extension of bank safety nets to commercial enterprises.27inappropriate extension of bank safety nets to commercial enterprises.27
Another potential Another potential issue with combined banking and commerce enterprises is that their in-house issue with combined banking and commerce enterprises is that their in-house
bank operations could increase opportunities for the enterprises to achieve the size and financial bank operations could increase opportunities for the enterprises to achieve the size and financial
resources necessary to exercise anticompetitive market power.28 Returning to the comparison resources necessary to exercise anticompetitive market power.28 Returning to the comparison
between the stand-alone bank and a retailer-owned bank, if the retailer-owned bank were able to between the stand-alone bank and a retailer-owned bank, if the retailer-owned bank were able to
make loans at a lower interest rate, then it could be difficult for the stand-alone bank to compete. make loans at a lower interest rate, then it could be difficult for the stand-alone bank to compete.
Similarly,Similarly, a retailer that does not own a bank and fund loans to customers with government-a retailer that does not own a bank and fund loans to customers with government-
backed deposits may have difficulty competing with a retailer that does. Where blending is backed deposits may have difficulty competing with a retailer that does. Where blending is
~~al owed~~allowed, these economies of scale and scope may , these economies of scale and scope may ~~natural y~~naturally lead to large conglomerates with the lead to large conglomerates with the
abilityability to exercise market power, to exercise market power, ~~potential y~~potentially stifling competition and charging consumers prices stifling competition and charging consumers prices
higher than free market prices. higher than free market prices.
Arguments Against Strict Separation
Some observers argue that potential benefits of Some observers argue that potential benefits of ~~al owing~~allowing the blending of banking and commerce, the blending of banking and commerce,
at least to a certain degree, could outweigh the potential costs, which separation aims to avoid. at least to a certain degree, could outweigh the potential costs, which separation aims to avoid.
Economies of scale and scope—provided they do not lead to the exercise of distortionary market Economies of scale and scope—provided they do not lead to the exercise of distortionary market
power—are considered beneficial in most contexts. They power—are considered beneficial in most contexts. They ~~al ow~~allow enterprises to be more efficient enterprises to be more efficient
and to reduce costs.29 Companies may, depending on market characteristics, pass on cost savings and to reduce costs.29 Companies may, depending on market characteristics, pass on cost savings
to consumers. For example, a commercial company that pays fees to use the payment processing to consumers. For example, a commercial company that pays fees to use the payment processing
services of a bank may be able to reduce costs by bringing that process in-house. In addition, a services of a bank may be able to reduce costs by bringing that process in-house. In addition, a
combined enterprise might be more resilient to economic or financial downturns because their combined enterprise might be more resilient to economic or financial downturns because their
risks are diversified; they make income from both banking and commerce, not exclusively one or risks are diversified; they make income from both banking and commerce, not exclusively one or
~~the other.30~~

the other.30 26 Under extraordinary circumstances, the government may act to support certain nonbank companies or industries, 26 Under extraordinary circumstances, the government may act to support certain nonbank companies or industries,
such assuch as ~~during~~ during the current experience with the coronavirus pandemic and the financial crisisthe current experience with the coronavirus pandemic and the financial crisis of 2007of 2007 -2009. -2009.
27 Spong and Robbins, 27 Spong and Robbins, “Industrial Loan Companies: Growing“Industrial Loan Companies: Growing Industry SparksIndustry Sparks a Publica Public Policy Debate,” pp. 62-64. Policy Debate,” pp. 62-64.
28 Spong and Robbins,28 Spong and Robbins, “Industrial Loan Companies: Growing“Industrial Loan Companies: Growing Industry SparksIndustry Sparks a Publica Public Policy Debate,” pp. 61Policy Debate,” pp. 61 -62. -62.
29 Barth and Sun,29 Barth and Sun, A New Look at the Performance of Industrial Loan Corporations, pp. 38-40. , pp. 38-40.
30 Barth and Sun,30 Barth and Sun, A New Look at the Performance of Industrial Loan Corporations, pp. 38-40. , pp. 38-40.
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Commercial businesses’ relationships with consumers and familiarity with specific market Commercial businesses’ relationships with consumers and familiarity with specific market
conditions could produce additional benefits. One could be information efficiency (e.g., conditions could produce additional benefits. One could be information efficiency (e.g.,
knowledge about their customers’ creditworthiness or needs).31 For example, if the above knowledge about their customers’ creditworthiness or needs).31 For example, if the above
hypothetical kitchen remodeler were instead a contractor who regularly made purchases from the hypothetical kitchen remodeler were instead a contractor who regularly made purchases from the
retailer, the retailer-owned bank might consider the contractor to be competent and know that retailer, the retailer-owned bank might consider the contractor to be competent and know that
home improvement loans have been performing home improvement loans have been performing ~~wel~~ well. A stand-alone bank with no specialization . A stand-alone bank with no specialization
in home remodeling may not have that information and thus might incorrectly judge the merits of in home remodeling may not have that information and thus might incorrectly judge the merits of
the loan application. Customer convenience could also improve if customers were able to shop the loan application. Customer convenience could also improve if customers were able to shop
for goods and services and receive financing at one location at the same time.32 In the case where for goods and services and receive financing at one location at the same time.32 In the case where
commercial-owned banks could more conveniently provide a customer with lower-cost financing commercial-owned banks could more conveniently provide a customer with lower-cost financing
based on better information, these would be benefits that could not be realizedbased on better information, these would be benefits that could not be realized in the case of a in the case of a
strict separation of banking and commerce. strict separation of banking and commerce.
In the context of the ILC debate, opponents to establishing more FDIC-insured ILCs assert that In the context of the ILC debate, opponents to establishing more FDIC-insured ILCs assert that
the risks and costs posed by the blending of banking and commerce warrant stricter separation.33 the risks and costs posed by the blending of banking and commerce warrant stricter separation.33
Meanwhile, ILC proponents assert that ILCs can use the BHCA exception to provide a safe and Meanwhile, ILC proponents assert that ILCs can use the BHCA exception to provide a safe and
efficient source of financing to borrowers who might not otherwise have access to the financial efficient source of financing to borrowers who might not otherwise have access to the financial
services ILCs provide.34services ILCs provide.34
Different Regulatory Treatment Policy Debate
U.S. depository institutions operate under charters offered at the federal and state levels and in U.S. depository institutions operate under charters offered at the federal and state levels and in
various forms, each of which is subject to different regulatory approaches. While these various forms, each of which is subject to different regulatory approaches. While these
differences have differences have ~~general y~~generally narrowed over time, certain differences remain. One of the rationales narrowed over time, certain differences remain. One of the rationales
for a multiple charter system is that it provides the opportunity for institutions with different for a multiple charter system is that it provides the opportunity for institutions with different
business models and ownership arrangements to choose a regulatory regime appropriately suited business models and ownership arrangements to choose a regulatory regime appropriately suited
to their business needs and risks. Under this system, multiple institution types are availableto their business needs and risks. Under this system, multiple institution types are available to to
meet market needs.35 meet market needs.35
This fragmented regulatory framework also can create This fragmented regulatory framework also can create ~~chal enges. One chal enge~~challenges. One challenge is that, in some is that, in some
circumstances, institutions engaged in similar businesses may be subject to different regulations.36 circumstances, institutions engaged in similar businesses may be subject to different regulations.36
Relatedly, this system may create avenues for institutions to actively seek out charters and ways Relatedly, this system may create avenues for institutions to actively seek out charters and ways
to structure themselves, largely to side-step certain regulations.37to structure themselves, largely to side-step certain regulations.37
The balance policymakers often aim to strike is to have enough differentiation between charters The balance policymakers often aim to strike is to have enough differentiation between charters
and regulatory regimes to provide for appropriate tailoring, while not inadvertently creating and regulatory regimes to provide for appropriate tailoring, while not inadvertently creating
regulatory gaps that could regulatory gaps that could ~~al ow~~allow excessive risk to enter the banking system and economy. excessive risk to enter the banking system and economy.

31 Barth and Sun,31 Barth and Sun, A New Look at the Performance of Industrial Loan Corporations, pp. 38-40. , pp. 38-40.
32 Barth and Sun,32 Barth and Sun, A New Look at the Performance of Industrial Loan Corporations, pp. 38-40. , pp. 38-40.
33 ICBA, 33 ICBA, Industrial Loan Companies: Closing the Loophole to Prevent Consumer and Systemic Harm ,, pp. 1-4. pp. 1-4.
34 Barth and Sun,34 Barth and Sun, A New Look at the Performance of Industrial Loan Corporations, pp. 38-40. , pp. 38-40.
35 Administrator of National Banks, 35 Administrator of National Banks, National Banks and the Dual Banking System, Office of the Comptroller of the , Office of the Comptroller of the
Currency, September 2003, pp. 10-12, at https://www.occ.treas.gov/publications-and-resources/publications/banker-Currency, September 2003, pp. 10-12, at https://www.occ.treas.gov/publications-and-resources/publications/banker-
education/files/pub-national-banks-and-the-dual-banking-system.pdf. education/files/pub-national-banks-and-the-dual-banking-system.pdf.
36 U.S. 36 U.S. Government Accountability Office, Government Accountability Office, Complex and Fragmented Structure Could Be Streamlined to Improve
Effectiveness, GAO-16-175, February 25, 2016, pp. 13-19, at https://www.gao.gov/products/GAO-16-175. , GAO-16-175, February 25, 2016, pp. 13-19, at https://www.gao.gov/products/GAO-16-175.
37 For example, see Department of the 37 For example, see Department of the ~~T reasury~~Treasury, , Financial Regulatory Reform: A New Foundation, October 2009, pp. , October 2009, pp.
12, 32-33, at https://www.treasury.gov/initiatives/Documents/FinalReport_web.pdf. 12, 32-33, at https://www.treasury.gov/initiatives/Documents/FinalReport_web.pdf.
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Opponents of ILCs argue that the exemption from Federal Reserve regulation and supervision is Opponents of ILCs argue that the exemption from Federal Reserve regulation and supervision is
an example of a problematic loophole that creates a regulatory “blind spot.”38 For example, BHCs an example of a problematic loophole that creates a regulatory “blind spot.”38 For example, BHCs
are subject to capital ratio requirements and examination by the Federal Reserve; ILC parents are are subject to capital ratio requirements and examination by the Federal Reserve; ILC parents are
not. ILC proponents argue that current FDIC and state regulation and supervision of ILCs are not. ILC proponents argue that current FDIC and state regulation and supervision of ILCs are
sufficient.39 For example, Section 616 of Dodd-Frank added Section 38A to the FDI Act, sufficient.39 For example, Section 616 of Dodd-Frank added Section 38A to the FDI Act,
requiring federal parent regulators to ensure that requiring federal parent regulators to ensure that ~~al federal y~~all federally-regulated depository parents are -regulated depository parents are
sources of financial strength for subsidiary depositories. The FDIC has used this authority and sources of financial strength for subsidiary depositories. The FDIC has used this authority and
others to require ILC parents to enter into agreements consenting to examination by the FDIC.40others to require ILC parents to enter into agreements consenting to examination by the FDIC.40
Development of ILC Regulation
Financial industries and the laws and regulations that apply to them do not spring up together at a Financial industries and the laws and regulations that apply to them do not spring up together at a
moment in time. Instead, practices, institutions, and rules coevolve over time. During this moment in time. Instead, practices, institutions, and rules coevolve over time. During this
process, practices change, and policymakers try to identify and correct issues as they arise. process, practices change, and policymakers try to identify and correct issues as they arise.
Sometimes, this can lead to regulations and frameworks that years or decades after Sometimes, this can lead to regulations and frameworks that years or decades after
implementation seem incongruous or inconsistent. In these cases—which arguably includes the implementation seem incongruous or inconsistent. In these cases—which arguably includes the
ILC situation in which a type of institution acts in ILC situation in which a type of institution acts in al all ways similar to a bank but is ways similar to a bank but is ~~specifical y~~specifically
excluded from the definition of a bank in a particular law—it can be informative to examine the excluded from the definition of a bank in a particular law—it can be informative to examine the
history of regulation development. This section provides such an examination for the ILC history of regulation development. This section provides such an examination for the ILC
industry. industry.
Before Federal Deposit Insurance: 1910-1933
The first ILCs (as they are now The first ILCs (as they are now ~~cal ed~~called) started forming in 1910 with the aim of serving a niche ) started forming in 1910 with the aim of serving a niche
lending market. At that time, banks lending market. At that time, banks ~~general y~~generally required individuals to pledge collateral for a loan. required individuals to pledge collateral for a loan.
“Industrial” workers (e.g., laborers in factories and mines) “Industrial” workers (e.g., laborers in factories and mines) ~~general y~~generally did not own anything of did not own anything of
sufficient value to qualify, but they did have relatively stable incomes. ILCs identified this sufficient value to qualify, but they did have relatively stable incomes. ILCs identified this
underserved market and made underserved market and made ~~smal~~ small, unsecured loans to individuals who could produce , unsecured loans to individuals who could produce
references vouching for their creditworthiness. These early ILCs did not accept deposits. Instead, references vouching for their creditworthiness. These early ILCs did not accept deposits. Instead,
they raised funding by issuing a type of debt security they raised funding by issuing a type of debt security ~~cal ed~~called a a certificate of investment or or
certificate of indebtedness that was repaid in that was repaid in ~~instal ments~~installments over time (similar to a bond) but in over time (similar to a bond) but in
certain cases could be redeemed for cash at the ILC (similar to a deposit).41 certain cases could be redeemed for cash at the ILC (similar to a deposit).41
The industry evolved as it grew. States enacted laws related to ILCs, but they were not uniform. A The industry evolved as it grew. States enacted laws related to ILCs, but they were not uniform. A
1940 study found that by 1938, 31 (of the then 48) states had some provision in state law for the 1940 study found that by 1938, 31 (of the then 48) states had some provision in state law for the
operation of an ILC, and—depending on how one defined an ILC—there were between 317 and operation of an ILC, and—depending on how one defined an ILC—there were between 317 and
410 ILCs in the United States. The laws and regulations applicable to ILCs varied across states in 410 ILCs in the United States. The laws and regulations applicable to ILCs varied across states in
numerous ways, including in requirements related to permissible loan size, interest, and fees; numerous ways, including in requirements related to permissible loan size, interest, and fees;
minimum capital levels; and company organization and governance.42minimum capital levels; and company organization and governance.42

38 ICBA, 38 ICBA, Industrial Loan Companies: Closing the Loophole to Prevent Consumer and Systemic Harm ,, pp.10-12. pp.10-12.
39 Barth and Sun,39 Barth and Sun, A New Look at the Performance of Industrial Loan Corporations, pp. 38-40. , pp. 38-40.
40 A recent FDIC proposed rulemaking would40 A recent FDIC proposed rulemaking would codify this practice in regulation, ascodify this practice in regulation, as ~~discussed in the~~ “ discussed in the “FDIC Proposed
Rulemaking” section, below. For more information, see FDIC, “section, below. For more information, see FDIC, “ Parent Companies of Industrial Banks and Industrial Parent Companies of Industrial Banks and Industrial
Loan Companies,” 85Loan Companies,” 85 Federal Register 17772, 17776-17780, March 31, 2020. 17772, 17776-17780, March 31, 2020.
41 Raymond J. Saulnier,41 Raymond J. Saulnier, “Nature and Scope of Industrial Lending,” in “Nature and Scope of Industrial Lending,” in Industrial Banking Companies and Their Credit
Practices, ed. Raymond J. Saulnier, ed. Raymond J. Saulnier (Cambridge,(Cambridge, MA: National Bureau of Economic Research, 1940), pp. 12MA: National Bureau of Economic Research, 1940), pp. 12 -15. -15.
42 Raymond J. Saulnier,42 Raymond J. Saulnier, “Legal Status,” in “Legal Status,” in Industrial Banking Companies and Their Credit Practices, ed. Raymond J. , ed. Raymond J.
SaulnierSaulnier (Cambridge,(Cambridge, MA: National BureauMA: National Bureau of Economic Research, 1940), pp. 30of Economic Research, 1940), pp. 30 -56 (hereinafter Saulnier, “-56 (hereinafter Saulnier, “ Legal Legal
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The most pertinent difference between the states for the issues covered in this report was that The most pertinent difference between the states for the issues covered in this report was that
some states (about 16 in 1938) permitted ILCs to take deposits, although not some states (about 16 in 1938) permitted ILCs to take deposits, although not al all permissioned permissioned
ILCs necessarily did so.43ILCs necessarily did so.43
Deposit Insurance Based on FDIC Interpretation: 1933-1982
Lenders funded exclusively by debt and equity and not by government-guaranteed deposits face Lenders funded exclusively by debt and equity and not by government-guaranteed deposits face
certain market constraints and incentives to manage risks that deposit-accepting institutions do certain market constraints and incentives to manage risks that deposit-accepting institutions do
not. Investors in debt and equity demand compensation for exposure to risk of losses in the form not. Investors in debt and equity demand compensation for exposure to risk of losses in the form
of higher promised returns and monitor the risk-taking of companies in which they have invested of higher promised returns and monitor the risk-taking of companies in which they have invested
or may invest. When depositors have a guarantee that they or may invest. When depositors have a guarantee that they ~~wil~~ will not lose money, they often do not not lose money, they often do not
demand as high a return (if any) or monitor risk-taking as closely (if at demand as high a return (if any) or monitor risk-taking as closely (if at al all). Thus, institutions ). Thus, institutions
funded with guaranteed deposits have access to a less costly funding source, face less market funded with guaranteed deposits have access to a less costly funding source, face less market
constraints in their risk-taking, and have less cyclical volatilityconstraints in their risk-taking, and have less cyclical volatility in the availabilityin the availability of funding. For of funding. For
this reason, and because of the devastating economic and societal effects depository failures can this reason, and because of the devastating economic and societal effects depository failures can
have, the government closely regulates deposit-taking institutions for safety and soundness. These have, the government closely regulates deposit-taking institutions for safety and soundness. These
incentives, regulations, and the extension of government guarantees on deposits are at the heart of incentives, regulations, and the extension of government guarantees on deposits are at the heart of
the debates surrounding ILCs. the debates surrounding ILCs.
When the FDIC was established by the Banking Act of 1933 (P.L. 73-66) with the mandate to When the FDIC was established by the Banking Act of 1933 (P.L. 73-66) with the mandate to
protect depositors from losses, ILC eligibilityprotect depositors from losses, ILC eligibility for FDIC insurance depended on the state laws for FDIC insurance depended on the state laws
applicable to and the chosen practices of each individual ILC. As a result, for about the first 50 applicable to and the chosen practices of each individual ILC. As a result, for about the first 50
years of its existence, the FDIC made case-by-case determinations on whether an ILC would be years of its existence, the FDIC made case-by-case determinations on whether an ILC would be
insured.44 Information from several sources indicates that the FDIC granted insurance to ILCs insured.44 Information from several sources indicates that the FDIC granted insurance to ILCs
sparingly. For example, one study found the FDIC insured 71 ILCs in 15 states and the District of sparingly. For example, one study found the FDIC insured 71 ILCs in 15 states and the District of
Columbia in 1938.45 As of the end of that year, the FDIC had insured 13,661 institutions in total.46 Columbia in 1938.45 As of the end of that year, the FDIC had insured 13,661 institutions in total.46
An article examining the history of FDIC supervision of ILCs notes that between 1958 and 1979, An article examining the history of FDIC supervision of ILCs notes that between 1958 and 1979,
“at least six” ILCs that had been ineligible“at least six” ILCs that had been ineligible for insurance received it after changes to FDIC for insurance received it after changes to FDIC
policy.47 As of the end of 1979, the FDIC had insured a total of 14,688 institutions.48 policy.47 As of the end of 1979, the FDIC had insured a total of 14,688 institutions.48
ILC Eligibility Depending on State: 1982-1987
Congress made a significant change to the FDIC’s mandate as it applied to ILCs in the Garn-St. Congress made a significant change to the FDIC’s mandate as it applied to ILCs in the Garn-St.
Germain Depository Institutions Act of 1982 (Garn-St. Germain Act; P.L. 97-320). In the years Germain Depository Institutions Act of 1982 (Garn-St. Germain Act; P.L. 97-320). In the years
preceding the law’s enactment, the differences between the practices of and regulations applicable preceding the law’s enactment, the differences between the practices of and regulations applicable
to ILCs and banks had narrowed. For example, banks and ILCs had each expanded the types of to ILCs and banks had narrowed. For example, banks and ILCs had each expanded the types of
loans they made so that there had become significant overlap. In addition, the eliminationloans they made so that there had become significant overlap. In addition, the elimination of of
interest rate limits on certain bank accounts by the Depository Institutions Deregulation and interest rate limits on certain bank accounts by the Depository Institutions Deregulation and

Status,” in Status,” in Industrial Banking Companies and Their Credit Practices). ).
43 Saulnier,43 Saulnier, “Legal Status,” in “Legal Status,” in Industrial Banking Companies and Their Credit Practices,, pp. 41-43. pp. 41-43.
44 Mindy West, “44 Mindy West, “~~T he~~The FDIC’s Supervision of Industrial Loan Companies: A Historical Perspective,” FDIC’s Supervision of Industrial Loan Companies: A Historical Perspective,” FDIC Supervisory
Insights, Summer, Summer 2004, pp. 5-13 (hereinafter West, “2004, pp. 5-13 (hereinafter West, “ The FDIC’s Supervision of Industrial Loan Companies: A The FDIC’s Supervision of Industrial Loan Companies: A
Historical Perspective”). Historical Perspective”).
45 Saulnier,45 Saulnier, “Legal Status,” in “Legal Status,” in Industrial Banking Companies and Their Credit Practices,, p. 42. p. 42.
46 FDIC, 46 FDIC, Annual Report for the Year Ending December 31, 1938, June 20, 1939, p. 41, at https://www.fdic.gov/about/, June 20, 1939, p. 41, at https://www.fdic.gov/about/
financial-reports/report/archives/fdic-ar-1938.pdf. financial-reports/report/archives/fdic-ar-1938.pdf.
47 West, “ 47 West, “~~T he~~The FDIC’s Supervision of Industrial Loan Companies: A Historical Perspective,” p. 8. FDIC’s Supervision of Industrial Loan Companies: A Historical Perspective,” p. 8.
48 FDIC, 48 FDIC, Annual Report for the Year Ending December 31, 1979 , August 1, 1980, pp. 139-140, at , August 1, 1980, pp. 139-140, at
https://www.fdic.gov/about/financial-reports/report/archives/fdic-ar-1979.pdf. https://www.fdic.gov/about/financial-reports/report/archives/fdic-ar-1979.pdf.
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Monetary Control Act (P.L. 96-221) had made those bank products more similar to ILC Monetary Control Act (P.L. 96-221) had made those bank products more similar to ILC
certificates, which tended to pay higher rates.49 This caused certain industry observers to assert certificates, which tended to pay higher rates.49 This caused certain industry observers to assert
that ILCs were in effect operating as banks, and it was in the public interest to guarantee their that ILCs were in effect operating as banks, and it was in the public interest to guarantee their
deposit-like funding.50 Utah and Californiadeposit-like funding.50 Utah and California established state funds to insure their ILCs’ established state funds to insure their ILCs’
certificates, but a certificates, but a ~~smal~~ small number of ILC failures quickly depleted those funds.51number of ILC failures quickly depleted those funds.51
Subsequent to these developments, Congress passed the Garn-St. Germain Act in 1982, and Subsequent to these developments, Congress passed the Garn-St. Germain Act in 1982, and
Section 703 made ILCs and their certificates of investment eligible for FDIC insurance, provided Section 703 made ILCs and their certificates of investment eligible for FDIC insurance, provided
the ILC “is chartered and operating under laws … comparable to laws applicable to banks the ILC “is chartered and operating under laws … comparable to laws applicable to banks
operating in the same state.”52operating in the same state.”52
The law did not require ILCs to apply and be approved for FDIC insurance. Relatively few ILCs The law did not require ILCs to apply and be approved for FDIC insurance. Relatively few ILCs
voluntarilyvoluntarily availed themselves of this option because, according to certain observers at the time, availed themselves of this option because, according to certain observers at the time,
they did not want to be subject to FDIC regulation.53 In response, a few states passed state laws they did not want to be subject to FDIC regulation.53 In response, a few states passed state laws
requiring their ILCs to become FDIC-insured.54requiring their ILCs to become FDIC-insured.54
Current Regulatory Framework: 1987-Present
The Competitive EqualityThe Competitive Equality Banking Act (CEBA; P.L. 100-86), enacted in 1987, largely shaped the Banking Act (CEBA; P.L. 100-86), enacted in 1987, largely shaped the
current regulatory framework and resulting policy debates related to ILCs. One of the CEBA’s current regulatory framework and resulting policy debates related to ILCs. One of the CEBA’s
main aims was to address the issue of “nonbank banks.” Nonbank banks were limited-service main aims was to address the issue of “nonbank banks.” Nonbank banks were limited-service
banks that either made loans or offered deposits, but not both. Under the BHCA at that time, by banks that either made loans or offered deposits, but not both. Under the BHCA at that time, by
offering one service but not both, these nonbanks did not meet the definition of a bank. Those that offering one service but not both, these nonbanks did not meet the definition of a bank. Those that
took deposits, however, were FDIC-insured, which provided a mechanism for commercial took deposits, however, were FDIC-insured, which provided a mechanism for commercial
enterprises and large financial conglomerates to offer FDIC-insured deposits while enterprises and large financial conglomerates to offer FDIC-insured deposits while ~~al owing~~allowing the the
parent of the nonbank bank to avoid designation as a BHCparent of the nonbank bank to avoid designation as a BHC subject to Federal Reserve subject to Federal Reserve
supervision. This scenario came to be viewed as a regulatory loophole, and Congress amended supervision. This scenario came to be viewed as a regulatory loophole, and Congress amended
the BHCAthe BHCA definition of a bank in the CEBA.55 definition of a bank in the CEBA.55
The CEBA The CEBA also enacted the exemption for ILCs—institutions that both took deposits and made also enacted the exemption for ILCs—institutions that both took deposits and made
loans and thus were not the nonbank banks the legislation primarily sought to address—that is at loans and thus were not the nonbank banks the legislation primarily sought to address—that is at
the root of much of today’s policy debate. Under the CEBA amended definition, an ILC is not the root of much of today’s policy debate. Under the CEBA amended definition, an ILC is not
considered a bank if it is chartered in a state that required FDIC insurance on March 5, 1987, and considered a bank if it is chartered in a state that required FDIC insurance on March 5, 1987, and
meets one of three conditions: (1) it does not accept demand deposits, (2) it has less than $100 meets one of three conditions: (1) it does not accept demand deposits, (2) it has less than $100
~~mil ion~~ million in assets, or (3) it has not been acquired by another company since August 10, 1987.56 in assets, or (3) it has not been acquired by another company since August 10, 1987.56
These conditions restricted the formation of new ILCs. For example, the grandfathering clause These conditions restricted the formation of new ILCs. For example, the grandfathering clause
restricts the exemption to ILCs to the six states that already had FDIC insurance requirements in restricts the exemption to ILCs to the six states that already had FDIC insurance requirements in

~~49 West, “T he~~ 49 West, “The FDIC’s Supervision of Industrial Loan Companies: A Historical Perspective,” p. 8. FDIC’s Supervision of Industrial Loan Companies: A Historical Perspective,” p. 8.
50 U.S.50 U.S. Congress, HouseCongress, House Committee on Banking, Finance, and Urban Affairs, Subcommittee on Financial Institutions Committee on Banking, Finance, and Urban Affairs, Subcommittee on Financial Institutions
Supervision, RegulationSupervision, Regulation and Insurance, and Insurance, Nonbank Banks, hearing on H.R. 20, 99th Cong., 1st sess.,, hearing on H.R. 20, 99th Cong., 1st sess., April 18, 1985, pp. April 18, 1985, pp.
245 (hereinafter Subcommittee on Financial Institutions Supervision, Regulation and245 (hereinafter Subcommittee on Financial Institutions Supervision, Regulation and Insurance, Insurance, Nonbank Banks, ,
hearing on H.R. 20, 99th Cong.). hearing on H.R. 20, 99th Cong.).
51 West, “51 West, “~~T he~~The FDIC’s Supervision of Industrial Loan Companies: A Historical Perspective,” p. 8. FDIC’s Supervision of Industrial Loan Companies: A Historical Perspective,” p. 8.
52 Section 703(c), Garn-St. Germain Depository Institutions Act of 1982 (P.L. 97-320). 52 Section 703(c), Garn-St. Germain Depository Institutions Act of 1982 (P.L. 97-320).
53 Subcommittee on Financial Institutions Supervision, Regulation and Insurance, 53 Subcommittee on Financial Institutions Supervision, Regulation and Insurance, Nonbank Banks, hearing on H.R. 20, , hearing on H.R. 20,
99th Cong., pp. 245-246. 99th Cong., pp. 245-246.
54 West, “54 West, “~~T he~~The FDIC’s Supervision of Industrial Loan Companies: A Historical Perspective,” p. 8. FDIC’s Supervision of Industrial Loan Companies: A Historical Perspective,” p. 8.
55 Lee Davison, “Banking Legislation and Regulation,” in 55 Lee Davison, “Banking Legislation and Regulation,” in History of the Eighties: Lessons for the Future. Vol. 1, An
~~Exam ination~~Examination of the Banking Crises of the 1980s and Early 1990s (Washington, DC: FDIC, 1997), p. 98. (Washington, DC: FDIC, 1997), p. 98.
56 12 U.S.C. 56 12 U.S.C. §1841(c)(2)(H)(i)(I). §1841(c)(2)(H)(i)(I).
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place.57 However, it place.57 However, it ~~stil~~ still created an avenue for new ILCs to form. The secondary condition ILCs created an avenue for new ILCs to form. The secondary condition ILCs
most frequently use today to get the exemption is to not accept demand deposits, instead most frequently use today to get the exemption is to not accept demand deposits, instead
accepting only NOW accounts and time deposits (as discussed in the accepting only NOW accounts and time deposits (as discussed in the “Overview of Industrial
Loan Companies” section, above).58 Thus, the CEBA exemption gave an opening for commercial section, above).58 Thus, the CEBA exemption gave an opening for commercial
enterprises to offer FDIC-insured deposits and operate what are in effect banks, but the opening is enterprises to offer FDIC-insured deposits and operate what are in effect banks, but the opening is
only availableonly available in a in a ~~smal~~ small number of states. number of states.
Recent Controversies and Developments
The current ILC regulatory framework sparked debate several times over the years. At times, this The current ILC regulatory framework sparked debate several times over the years. At times, this
debate attracted widespread concerns over the possibility that certain large retailers were debate attracted widespread concerns over the possibility that certain large retailers were
attempting to establish or acquire ILCs. In response, policymakers imposed official moratoriums attempting to establish or acquire ILCs. In response, policymakers imposed official moratoriums
on ILC approvals for FDIC insurance. Though these moratoriums have ended, the debate on ILC approvals for FDIC insurance. Though these moratoriums have ended, the debate
continues, as technology companies have applied for and in two cases been granted FDIC continues, as technology companies have applied for and in two cases been granted FDIC
insurance. This section examines these developments. insurance. This section examines these developments.
Controversial Applications and Official Moratoriums: 2005-2013
In the 1980s and 1990s, numerous commercial companies with household names—including In the 1980s and 1990s, numerous commercial companies with household names—including
large manufacturers and retailers, such as General Electric, General Motors, Sears, Target, and large manufacturers and retailers, such as General Electric, General Motors, Sears, Target, and
Harley-Davidson—established ILCs and attracted little public scrutiny.59 However, when the Harley-Davidson—established ILCs and attracted little public scrutiny.59 However, when the
large retail companies Walmart and The Home Depot initiatedlarge retail companies Walmart and The Home Depot initiated efforts to establish or acquire ILCs, efforts to establish or acquire ILCs,
the previously esoteric banking policy debate became a matter of relatively widespread interest, the previously esoteric banking policy debate became a matter of relatively widespread interest,
with many members of the general public with many members of the general public ~~general y~~generally opposed to regulators opposed to regulators ~~al owing~~allowing these retailers these retailers
to proceed with their plans.60to proceed with their plans.60
Walmart and The Home Depot began ultimately Walmart and The Home Depot began ultimately unsuccessful efforts to secure ILC charters in unsuccessful efforts to secure ILC charters in
2005 and 2006, respectively.61 Walmart applied to establish a new ILC in July 2005, asserting it 2005 and 2006, respectively.61 Walmart applied to establish a new ILC in July 2005, asserting it
sought cost savings in payment processing and would not open retail branches.62 The Home sought cost savings in payment processing and would not open retail branches.62 The Home
Depot applied to acquire EnerBank, a Utah-chartered ILC that specialized in home improvement Depot applied to acquire EnerBank, a Utah-chartered ILC that specialized in home improvement
loans. The Home Depot asserted that, by offering home improvement loans in its many retail loans. The Home Depot asserted that, by offering home improvement loans in its many retail
locations, it would improve access to credit to this market segment.63locations, it would improve access to credit to this market segment.63
Public opposition to Public opposition to ~~al owing~~allowing these companies to acquire ILC charters these companies to acquire ILC charters ~~general y~~generally resulted from resulted from
concerns related to the potential for these large retailers to increase their market power in the concerns related to the potential for these large retailers to increase their market power in the
retail industry and extend it into banking. retail industry and extend it into banking. ~~Smal~~ Small banks were banks were ~~especial y~~especially concerned. At that time, concerned. At that time,

57 As described57 As described ~~in footnote 6~~, in footnote 6, these states are California, Hawaii, Minnesota, Nevada, Utah, and Colorado, though these states are California, Hawaii, Minnesota, Nevada, Utah, and Colorado, though
Colorado has no active ILCs and has repealed its ILC statute. Colorado has no active ILCs and has repealed its ILC statute.
58 12 C.F.R. §204.2(c)(1)(i). 58 12 C.F.R. §204.2(c)(1)(i).
59 James R. Barth et al., 59 James R. Barth et al., Industrial Loan Companies: Supporting America’s Financial System , Milken Institute, April , Milken Institute, April
2011, p. 4, at http://webhome.auburn.edu/~barthjr/publications/2011/Industrial%20Loan%20Companies.pdf. 2011, p. 4, at http://webhome.auburn.edu/~barthjr/publications/2011/Industrial%20Loan%20Companies.pdf.
60 Bernard Wysocki Jr., “How Broad Coalition Stymied Wal-Mart’s Bid 60 Bernard Wysocki Jr., “How Broad Coalition Stymied Wal-Mart’s Bid to Own a Bank,” to Own a Bank,” The Wall Street Journal, ,
October 23, 2006, at https://www.wsj.com/articles/SB116118495912296504. October 23, 2006, at https://www.wsj.com/articles/SB116118495912296504.
61 Michelle Clark Neely, “Industrial Loan Companies Come Out of the Shadows,”61 Michelle Clark Neely, “Industrial Loan Companies Come Out of the Shadows,” Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis,
The Regional ~~Econom ist~~Economist Magazine, July 2007, at https://www.stlouisfed.org/~/media/files/pdfs/publications/, July 2007, at https://www.stlouisfed.org/~/media/files/pdfs/publications/
pub_assets/pdf/re/2007/c/industrial-loan.pdf (pub_assets/pdf/re/2007/c/industrial-loan.pdf (~~hereinaft er~~hereinafter Clark Neely, “ Clark Neely, “ Industrial Loan Companies Come Out of the Industrial Loan Companies Come Out of the
Shadows”). Shadows”).
62 Walmart, “Wal-Mart Withdraws ILC Charter Application,” press release, March 16, 2007, at 62 Walmart, “Wal-Mart Withdraws ILC Charter Application,” press release, March 16, 2007, at
https://corporate.walmart.com/newsroom/2007/03/15/wal-marthttps://corporate.walmart.com/newsroom/2007/03/15/wal-mart -withdraws-ilc-charter-application. -withdraws-ilc-charter-application.
63 Clark Neely, “Industrial Loan Companies Come Out of the Shadows.” 63 Clark Neely, “Industrial Loan Companies Come Out of the Shadows.”
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Walmart in particular was perceived to be pushing Walmart in particular was perceived to be pushing ~~smal~~ small “Mom and Pop” stores out of the retail “Mom and Pop” stores out of the retail
industry. If large retailers with numerous locations nationwide were able to provide bank services, industry. If large retailers with numerous locations nationwide were able to provide bank services,
community banks were concerned they would be similarly pushed out of business.64 community banks were concerned they would be similarly pushed out of business.64
Amid that debate and after receiving over 13,000 comment letters about Walmart’s application, Amid that debate and after receiving over 13,000 comment letters about Walmart’s application,
the FDIC announced an official moratorium in July 2006 on the acceptance, approval, or denial the FDIC announced an official moratorium in July 2006 on the acceptance, approval, or denial
of ILC applications for deposit insurance. In a notice published in the of ILC applications for deposit insurance. In a notice published in the Federal Register, the FDIC , the FDIC
asserted that, in light of the evolving nature of ILC applicants and the ongoing concerns, the asserted that, in light of the evolving nature of ILC applicants and the ongoing concerns, the
agency needed time to reexamine its policies related to these companies.65 Shortly afterwards, the agency needed time to reexamine its policies related to these companies.65 Shortly afterwards, the
FDIC issued a request for comments on issues related to ILCs.66 In February 2007, the FDIC FDIC issued a request for comments on issues related to ILCs.66 In February 2007, the FDIC
extended the moratorium67 and issued proposed rules that would require ILC parents to serve as extended the moratorium67 and issued proposed rules that would require ILC parents to serve as
sources of strength for their ILCs and provide the FDIC with more information on the parent sources of strength for their ILCs and provide the FDIC with more information on the parent
through reporting and examination.68 The moratorium through reporting and examination.68 The moratorium ~~eventual y~~eventually ended in January 200869 but by ended in January 200869 but by
that time—perhaps due in part to the public controversy and the then-unfolding problems in the that time—perhaps due in part to the public controversy and the then-unfolding problems in the
financial industry that would culminate in a major crisis—Walmart and The Home Depot had financial industry that would culminate in a major crisis—Walmart and The Home Depot had
ended their attempts to secure charters.70 The FDIC did not finalize the February 2007 proposal ended their attempts to secure charters.70 The FDIC did not finalize the February 2007 proposal
for numerous reasons, including the onset of the 2007-2009 financial crisis.71 for numerous reasons, including the onset of the 2007-2009 financial crisis.71
Continuing concerns over ILCs led Congress in July 2010 to mandate in Section 603 of the Dodd- Continuing concerns over ILCs led Congress in July 2010 to mandate in Section 603 of the Dodd-
Frank Act another moratorium on granting deposit insurance to new ILCs.72 After this mandatory Frank Act another moratorium on granting deposit insurance to new ILCs.72 After this mandatory
moratorium ended in July 2013, the FDIC did not approve any new ILC applications for over six moratorium ended in July 2013, the FDIC did not approve any new ILC applications for over six
years until March 17, 2020, as discussed in the years until March 17, 2020, as discussed in the “Latest Developments”” section, below.73 section, below.73
Post-Moratorium Limbo: 2013-2019
From the end of official moratoriums through the end of 2019, at least six companies—Nelnet, From the end of official moratoriums through the end of 2019, at least six companies—Nelnet,
Square, Rakuten, AmeriNat Bank, Interactive Bank, and SoFi, Square, Rakuten, AmeriNat Bank, Interactive Bank, and SoFi, al all of which owned and operated of which owned and operated
nonbank enterprises—submitted applications for ILC charters and FDIC insurance.74 nonbank enterprises—submitted applications for ILC charters and FDIC insurance.74 Al All of these of these
companies have existing nonbank financial enterprises, and several have substantial commercial companies have existing nonbank financial enterprises, and several have substantial commercial
~~operations:~~

operations: 64 Shaheen Pasha, “Coming Soon: A Walmart Bank?,” 64 Shaheen Pasha, “Coming Soon: A Walmart Bank?,” CNN Money, October 27, 2005. , October 27, 2005.
65 FDIC, “Moratorium on Certain Industrial Loan Company Applications and Notices,” 7165 FDIC, “Moratorium on Certain Industrial Loan Company Applications and Notices,” 71 Federal Register 43482, 43482,
AugustAugust 1, 2006. 1, 2006.
66 FDIC, “Industrial Loan Companies and Industrial Banks,” 71 66 FDIC, “Industrial Loan Companies and Industrial Banks,” 71 Federal Register 49456, August 23, 2006. 49456, August 23, 2006.
67 FDIC, “Industrial Loan Companies and Industrial Banks,” 7267 FDIC, “Industrial Loan Companies and Industrial Banks,” 72 Federal Register 5290-5292, February 5, 2007. 5290-5292, February 5, 2007.
68 FDIC, “Industrial Loan Companies and Industrial Banks,” 7268 FDIC, “Industrial Loan Companies and Industrial Banks,” 72 Federal Register 5217-5226, February 5, 2007. 5217-5226, February 5, 2007.
69 John Poirier, “No Extension of ILC Bank Moratorium-US FDIC Chief,” 69 John Poirier, “No Extension of ILC Bank Moratorium-US FDIC Chief,” Reuters, November 28, 2007, at https://, November 28, 2007, at https://
www.reuters.com/article/sppage012-n28632744-oisbn/no-extension-of-ilc-bank-moratorium-us-fdic-chief-www.reuters.com/article/sppage012-n28632744-oisbn/no-extension-of-ilc-bank-moratorium-us-fdic-chief-
idUSN2863274420071128. idUSN2863274420071128.
70 See70 See Walmart, “Wal-Mart Withdraws ILC Charter Application,” press release, March 16, 2007, at https://corporate.Walmart, “Wal-Mart Withdraws ILC Charter Application,” press release, March 16, 2007, at https://corporate.
walmart.com/newsroom/2007/03/15/wal-mart-withdraws-ilc-charter-application; and Joe Adler, “walmart.com/newsroom/2007/03/15/wal-mart-withdraws-ilc-charter-application; and Joe Adler, “ ILC Debate’s New ILC Debate’s New
~~T wist~~Twist: Home Depot Drops Its Bid,” : Home Depot Drops Its Bid,” ~~Am erican~~American Banker, January 25, 2008. , January 25, 2008.
71 FDIC, “Parent Companies of Industrial Banks and Industrial Loan Companies,” 85 71 FDIC, “Parent Companies of Industrial Banks and Industrial Loan Companies,” 85 Federal Register 17776, March 17776, March
31, 2020. 31, 2020.
72 Kobi Kastiel, “Dodd-Frank Moratorium Ends on Bank Charters for Commercial Firms,” 72 Kobi Kastiel, “Dodd-Frank Moratorium Ends on Bank Charters for Commercial Firms,” Harvard Law School Forum
on Corporate Governance, September 8, 2013, at https://corpgov.law.harvard.edu/2013/09/08/dodd-frank-moratorium-, September 8, 2013, at https://corpgov.law.harvard.edu/2013/09/08/dodd-frank-moratorium-
ends-on-bank-charters-for-commercial-firms/. ends-on-bank-charters-for-commercial-firms/.
73 Zain 73 Zain ~~T ariq~~Tariq and Rachel and Rachel Stone, “Japan’s Amazon Is Latest Stone, “Japan’s Amazon Is Latest ~~T ech~~Tech Heavyweight Seeking Heavyweight Seeking Industrial Bank Charter in Industrial Bank Charter in
U.S.,”U.S.,” S&P Global Market Intelligence, August, August 12, 2019. 12, 2019.
74 FDIC, “Bank Application Action Search,” at https://www.fdic.gov/regulations/applications/actions.html. 74 FDIC, “Bank Application Action Search,” at https://www.fdic.gov/regulations/applications/actions.html.
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  Nelnet is primarily a student loan servicer that is also a regional internet provider is primarily a student loan servicer that is also a regional internet provider
and a provider of education technology and business services to schools and and a provider of education technology and business services to schools and
churches.75churches.75
  Square ~~sel s~~sells computer hardware and software to businesses that enable computer hardware and software to businesses that enable
electronic payments.76 electronic payments.76
  Rakuten is a Japanese online retailer that owns a shopper rewards company in is a Japanese online retailer that owns a shopper rewards company in
the United States.77 the United States.77
  AmeriNat processes numerous different loan types.78 processes numerous different loan types.78
  Interactive Brokers, the filer for Interactive Bank’s application, is an online , the filer for Interactive Bank’s application, is an online
securities trading and investing brokerage firm.79 securities trading and investing brokerage firm.79
  SoFi primarily makes consumer loans for borrowers to consolidate student loan primarily makes consumer loans for borrowers to consolidate student loan
and credit card debts.80 and credit card debts.80
Whatever the details of the business models of each applicant, the nonbank nature of the Whatever the details of the business models of each applicant, the nonbank nature of the
prospective parent companies drew attention from policymakers, industry groups, and the prospective parent companies drew attention from policymakers, industry groups, and the
media.81 media.81
Before the FDIC approved two applications (discussed in the Before the FDIC approved two applications (discussed in the “Latest Developments”” section), section),
ILC application outcomes could be interpreted as revealing FDIC ILC application outcomes could be interpreted as revealing FDIC ~~unwil ingness~~unwillingness to approve such to approve such
applications. applications. Al All six prospective ILCs withdrew their applications—applications are rarely six prospective ILCs withdrew their applications—applications are rarely
rejected but are either “returned” or withdrawn by the applicants before rejection—and three of rejected but are either “returned” or withdrawn by the applicants before rejection—and three of
them to date have not refiled. Two that did refile, Square and Nelnet, were them to date have not refiled. Two that did refile, Square and Nelnet, were ~~eventual y~~eventually approved in approved in
March 2020, 922 days and 628 days, respectively, from their initial submissions of their original March 2020, 922 days and 628 days, respectively, from their initial submissions of their original
applications. Rakuten reportedly refiled in late May 2020.82 By comparison, 53 applications from applications. Rakuten reportedly refiled in late May 2020.82 By comparison, 53 applications from
commercial banks or savings associations on which actions had been taken were submitted from commercial banks or savings associations on which actions had been taken were submitted from
2016 to 2019. Of these, the FDIC approved 41, and the average time between receipt and 2016 to 2019. Of these, the FDIC approved 41, and the average time between receipt and
approval was 198 days.83approval was 198 days.83

75 Nelnet, “Our Businesses,”75 Nelnet, “Our Businesses,” at https://nelnetinc.com/businesses/. at https://nelnetinc.com/businesses/.
76 Square,76 Square, “About Us: Investor Relations,” at https://squareup.com/us/en/about/investors. “About Us: Investor Relations,” at https://squareup.com/us/en/about/investors.
77 Rakuten, “About Us,” at https://global.rakuten.com/corp/about/; and Rekuten USA,77 Rakuten, “About Us,” at https://global.rakuten.com/corp/about/; and Rekuten USA, “Company Overview,” at “Company Overview,” at
https://www.rakuten.com/help/article/company-overview-360002116927. https://www.rakuten.com/help/article/company-overview-360002116927.
78 AmeriNat, “About Us,” at https://www.amerinatls.com/about-us. 78 AmeriNat, “About Us,” at https://www.amerinatls.com/about-us.
79 Interactive Brokers, “About79 Interactive Brokers, “About the Interactive Brokers Group,” at https://www.interactivebrokers.com/en/index.php?f=the Interactive Brokers Group,” at https://www.interactivebrokers.com/en/index.php?f=
564. 564.
80 SoFi,80 SoFi, “About Us,” at https://www.sofi.com/our-story/. “About Us,” at https://www.sofi.com/our-story/.
81 See81 See ICBA, “ICBA Supports BillICBA, “ICBA Supports Bill to Close Industrial Loan Company Loophole,” press release, November 13, 2019, at to Close Industrial Loan Company Loophole,” press release, November 13, 2019, at
https://www.icba.org/news/icba-in-the-news/press-releases/2019/11/13/icba-supports-bill-to-close-industrial-loan-https://www.icba.org/news/icba-in-the-news/press-releases/2019/11/13/icba-supports-bill-to-close-industrial-loan-
company-loophole; and Brendan Pedersen, “company-loophole; and Brendan Pedersen, “ 14 years After Walmart, Banks Face a New14 years After Walmart, Banks Face a New ILC Bogeyman,” ILC Bogeyman,” ~~Am erican~~American
Banker, October 24, 2019. , October 24, 2019.
82 Jon Prior, “Rakuten Refiles with FDIC82 Jon Prior, “Rakuten Refiles with FDIC for ILC Charter,” for ILC Charter,” American Banker, May 29, 2020, at , May 29, 2020, at
https://www.americanbanker.com/news/rakuten-refiles-with-fdic-for-ilc-charter. https://www.americanbanker.com/news/rakuten-refiles-with-fdic-for-ilc-charter.
83 FDIC, “Bank Application Action Search” 83 FDIC, “Bank Application Action Search” at https://www.fdic.gov/regulations/applications/actions.html; and CRS ~~; and CRS~~ calculations. calculations. ~~T hree~~Three of the approvals were refiled applications of the approvals were refiled applications
filed earlier in the time period. filed earlier in the time period. ~~T hese~~These approvals came 272 days, 288 days, and 928 days from their initial approvals came 272 days, 288 days, and 928 days from their initial ~~filin g,~~
filing, respectively. respectively. ~~T he~~The bank that took 928 days to gain approval is a nontraditional bank in that it is an online only bank that bank that took 928 days to gain approval is a nontraditional bank in that it is an online only bank that
~~focuses~~ focuses on delivering services through mobile device applications. See Penny Crosman, “Varo gets vital FDIC OK for on delivering services through mobile device applications. See Penny Crosman, “Varo gets vital FDIC OK for
bank charter,” bank charter,” American Banker, February 10, 2020, at https://www.americanbanker.com/news/varo-gets-vital-fdic-ok-, February 10, 2020, at https://www.americanbanker.com/news/varo-gets-vital-fdic-ok-
for-bank-charter. This nontraditional technological approach may account for its relatively long application period. for-bank-charter. This nontraditional technological approach may account for its relatively long application period.
~~Because~~ Because this bank has a national bank charter, this report does not examine this bank in detail.this bank has a national bank charter, this report does not examine this bank in detail.
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In recent years, although Congress had In recent years, although Congress had ~~al owed~~allowed the official moratorium to expire, ILC proponents the official moratorium to expire, ILC proponents
voiced concerns that the FDIC had in effect maintained an unofficial moratorium on granting voiced concerns that the FDIC had in effect maintained an unofficial moratorium on granting
ILCs insurance. They argued this was unjustified because ILCs could safely provide credit and ILCs insurance. They argued this was unjustified because ILCs could safely provide credit and
other financial services,84 and the FDIC was other financial services,84 and the FDIC was ~~potential y~~potentially noncompliant with the requirement to noncompliant with the requirement to
make timely decisions on applications it faces pursuant to Section 343 of the Riegle Community make timely decisions on applications it faces pursuant to Section 343 of the Riegle Community
Development and Regulatory Improvement Act of 1994 (P.L. 103-325).85 Meanwhile, FDIC Development and Regulatory Improvement Act of 1994 (P.L. 103-325).85 Meanwhile, FDIC
leadership leadership ~~general y~~ generally maintained that the agency would give each ILC application due maintained that the agency would give each ILC application due
consideration and would approve those that met relevant requirements.86 consideration and would approve those that met relevant requirements.86
Latest Developments
Nelnet and Square Approved
The prolonged period without new ILC approvals ended on March 17, 2020, when the FDIC The prolonged period without new ILC approvals ended on March 17, 2020, when the FDIC
approved two ILCs—Nelnet and Square—for deposit insurance. Nelnet’s ILC is to approved two ILCs—Nelnet and Square—for deposit insurance. Nelnet’s ILC is to ~~al ow~~allow the the
organization to expand its student lending and take deposits.87 Square’s ILC is to organization to expand its student lending and take deposits.87 Square’s ILC is to ~~al ow~~allow the the
organization to increase loans to and accept deposits from its customers.88 organization to increase loans to and accept deposits from its customers.88
The FDIC press releases announcing the approvals noted that the companies met the necessary The FDIC press releases announcing the approvals noted that the companies met the necessary
evaluationevaluation criteria to receive deposit insurance.89 In addition, FDIC Chairman Jelena criteria to receive deposit insurance.89 In addition, FDIC Chairman Jelena
~~McWil iams~~McWilliams’s official statements noted that both had been approved under certain conditions, ’s official statements noted that both had been approved under certain conditions,
including that the new ILCs must hold significantly higher capital levels than typical banks, and including that the new ILCs must hold significantly higher capital levels than typical banks, and
the parent companies must be able to act as sources of strength for the depositories.90 the parent companies must be able to act as sources of strength for the depositories.90
Prior to the March 17 FDIC Board meeting, several bank industry associations and consumer Prior to the March 17 FDIC Board meeting, several bank industry associations and consumer
advocacy groups sent a joint letter to Chairman advocacy groups sent a joint letter to Chairman ~~McWil iams~~ McWilliams urging the FDIC not to approve the urging the FDIC not to approve the
applications at that time and requesting public hearings on the applications.91 The groups wanted applications at that time and requesting public hearings on the applications.91 The groups wanted
the FDIC to wait until numerous issues were addressed through a rulemaking process, which the the FDIC to wait until numerous issues were addressed through a rulemaking process, which the
FDIC was about to begin (discussed in FDIC was about to begin (discussed in “FDIC Proposed Rulemaking””). The issues concerning the ). The issues concerning the

84 Rachel Witkowski, “Square’s84 Rachel Witkowski, “Square’s Banking BidBanking Bid Avoids Backlash Avoids Backlash ~~T hat~~That Doomed Walmart’s,” Doomed Walmart’s,” American Banker, February , February
12, 2019. 12, 2019.
85 Letter from Ceila Winslow, vice president of legal and regulatory affairs at the American Financial Services 85 Letter from Ceila Winslow, vice president of legal and regulatory affairs at the American Financial Services
Association, to Robert E. Feldman, executive secretary of the FDIC, February 11, 2019, at https://www.fdic.gov/Association, to Robert E. Feldman, executive secretary of the FDIC, February 11, 2019, at https://www.fdic.gov/
regulations/laws/federal/2018/2018-depositregulations/laws/federal/2018/2018-deposit -insurance-application-process-3064-za03-c-006.pdf. -insurance-application-process-3064-za03-c-006.pdf.
86 For example, U.S. 86 For example, U.S. Congress, Senate Committee on Banking, Housing, andCongress, Senate Committee on Banking, Housing, and Urban Affairs, Urban Affairs, Nominations of Jelena
~~McWilliam s,~~ McWilliams, Marvin Goodfriend, and ~~Thom as E. Workm en~~ Thomas E. Workmen, 115th Cong., 2nd sess.,, 115th Cong., 2nd sess., January 23, 2018, S.Hrg.January 23, 2018, S.Hrg. 115-241, 115-241,
p. 19. p. 19.
87 FDIC, “Statement by FDIC Chairman Jelena McWilliams87 FDIC, “Statement by FDIC Chairman Jelena McWilliams on Nelnet Bank,” press release, March 18, 2020, at on Nelnet Bank,” press release, March 18, 2020, at
https://www.fdic.gov/news/speeches/spmar1820a.html. https://www.fdic.gov/news/speeches/spmar1820a.html.
88 FDIC, “Statement by FDIC Chairman Jelena McWilliams 88 FDIC, “Statement by FDIC Chairman Jelena McWilliams on Squareon Square Financial Services,”Financial Services,” press release, press release, ~~Marc h~~March 18, 18,
2020, at https://www.fdic.gov/news/speeches/spmar1820.html. 2020, at https://www.fdic.gov/news/speeches/spmar1820.html.
89 FDIC, “FDIC Approves the Deposit Insurance Application for Square Financial Services, Inc., Salt Lake City, Utah,” 89 FDIC, “FDIC Approves the Deposit Insurance Application for Square Financial Services, Inc., Salt Lake City, Utah,”
press release, March 18, 2020, at https://www.fdic.gov/news/press-releases/2020/pr20033.html; and “press release, March 18, 2020, at https://www.fdic.gov/news/press-releases/2020/pr20033.html; and “ FDIC Approves FDIC Approves
the Deposit Insurance Application for Nelnet Bank, Salt Lake City, Utah Area,” press release, March 18, 2020, at the Deposit Insurance Application for Nelnet Bank, Salt Lake City, Utah Area,” press release, March 18, 2020, at
https://www.fdic.gov/news/press-releases/2020/pr20034.html. https://www.fdic.gov/news/press-releases/2020/pr20034.html.
90 FDIC, “Statement by FDIC Chairman Jelena McWilliams90 FDIC, “Statement by FDIC Chairman Jelena McWilliams on Nelnet Bank,” press release, March 18, 2020; and on Nelnet Bank,” press release, March 18, 2020; and
FDIC, “Statement by FDIC Chairman Jelena McWilliams on SquareFDIC, “Statement by FDIC Chairman Jelena McWilliams on Square Financial Services,”Financial Services,” press release, March 18, press release, March 18,
2020. 2020.
91 Letter from 91 Letter from ~~T he~~The Leadership Conference on Civil and Human Rights et al. to Jelena McWilliams, chairman of the Leadership Conference on Civil and Human Rights et al. to Jelena McWilliams, chairman of the
FDIC, March 15, 2020, at https://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/fdic-FDIC, March 15, 2020, at https://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/fdic-
ilc-letter-mar2020.pdf. ilc-letter-mar2020.pdf.
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Industrial Loan Companies (ILCs): Background and Policy Issues

groups were groups were ~~general y~~generally related to how ILC parent companies related to how ILC parent companies ~~wil~~ will be regulated, including whether be regulated, including whether
their nonfinancial activities would be limited and whether they would be subject to capital and their nonfinancial activities would be limited and whether they would be subject to capital and
~~liquidity~~ liquidity requirements and supervision.92requirements and supervision.92
FDIC Proposed Rulemaking
On March 17, 2020, the same day it approved two ILC applicants, the FDIC announced it was On March 17, 2020, the same day it approved two ILC applicants, the FDIC announced it was
issuing and seeking comments on a proposed rule on ILC applicants for insurance.93 Although the issuing and seeking comments on a proposed rule on ILC applicants for insurance.93 Although the
FDIC does not currently have rules requiring specific treatment of ILC applications, it has FDIC does not currently have rules requiring specific treatment of ILC applications, it has
~~historical y~~historically required ILCs to make certain commitments as conditions of approval. The stated required ILCs to make certain commitments as conditions of approval. The stated
purpose of the proposed rulemaking waspurpose of the proposed rulemaking was
~~to codify existing practices utilized by the FDIC to supervise industrial banks and their~~
~~parent companies, to mitigate undue risk to the [Deposit Insurance Fund] that~~ to codify existing practices utilized by the FDIC to supervise industrial banks and their parent companies, to mitigate undue risk to the [Deposit Insurance Fund] that may may
otherwise be presented in the absence of Federal consolidated supervision … and to ensure otherwise be presented in the absence of Federal consolidated supervision … and to ensure
thatthat ~~the parent company that owns or controls an industrial bank serves as a source~~ the parent company that owns or controls an industrial bank serves as a source of of
financial strength.94financial strength.94
The FDIC cited the “unique risk profiles” presented by recent ILC applications relative to The FDIC cited the “unique risk profiles” presented by recent ILC applications relative to
traditional banks—including lack of supervision of the parent, ILC affiliationtraditional banks—including lack of supervision of the parent, ILC affiliation with organizations with organizations
involved primarily in commercial activities, and business models involving innovative involved primarily in commercial activities, and business models involving innovative
technology and strategies—as motivation for the rulemaking. In general, the proposal would technology and strategies—as motivation for the rulemaking. In general, the proposal would
require ILCs and their parent companies to enter into certain commitments—which the FDIC has require ILCs and their parent companies to enter into certain commitments—which the FDIC has
~~historical y~~historically required on a case-by-case basis—including consenting to FDIC examination of the required on a case-by-case basis—including consenting to FDIC examination of the
parent company, filing annual reports on the parent and its subsidiaries, and maintainingparent company, filing annual reports on the parent and its subsidiaries, and maintaining the the
depository’s capital and liquiditydepository’s capital and liquidity at levels determined by the FDIC.95 The comment period on the at levels determined by the FDIC.95 The comment period on the
proposed rulemaking ended on July 1, 2020.96 As of this report’s date, the rule has not been proposed rulemaking ended on July 1, 2020.96 As of this report’s date, the rule has not been
finalized. finalized.
Commenters had mixed reactions to the proposal. ILC proponents expressed approval of the Commenters had mixed reactions to the proposal. ILC proponents expressed approval of the
FDIC’s apparent FDIC’s apparent ~~wil ingness~~willingness to again grant new ILCs deposit insurance through an explicitly to again grant new ILCs deposit insurance through an explicitly
codified process, even though they found certain details of the proposed rulemaking’s codified process, even though they found certain details of the proposed rulemaking’s
requirements to be unnecessarily restrictive.97 Although some ILC opponents were encouraged at requirements to be unnecessarily restrictive.97 Although some ILC opponents were encouraged at
what they viewed as a strengthening of supervision of ILC parents,98 they what they viewed as a strengthening of supervision of ILC parents,98 they ~~general y~~generally asserted that asserted that

92 Letter from 92 Letter from ~~T he~~The Leadership Conference on Civil and Human Rights et al. to Jelena McWilliams, chairman of the Leadership Conference on Civil and Human Rights et al. to Jelena McWilliams, chairman of the
FDIC, March 15, 2020. FDIC, March 15, 2020.
93 FDIC, “FDIC Seeks 93 FDIC, “FDIC Seeks Comment on Proposal to Ensure Safety and SoundnessComment on Proposal to Ensure Safety and Soundness of Industrial Banks,” press release, of Industrial Banks,” press release,
March 17, 2020, at https://www.fdic.gov/news/press-releases/2020/pr20031.March 17, 2020, at https://www.fdic.gov/news/press-releases/2020/pr20031.~~ht ml.~~
html. 94 FDIC, “Parent Companies of Industrial Banks and Industrial Loan Companies,” 8594 FDIC, “Parent Companies of Industrial Banks and Industrial Loan Companies,” 85 Federal Register 17772, March 17772, March
31, 2020. 31, 2020.
95 FDIC, “Parent Companies of Industrial Banks and Industrial Loan Companies,” 85 95 FDIC, “Parent Companies of Industrial Banks and Industrial Loan Companies,” 85 Federal Register 17772, 17776- 17772, 17776-
17780. 17780.
96 FDIC, “Parent Companies of Industrial Banks and Industrial Loan Companies: Extension of Comment Period,” 8596 FDIC, “Parent Companies of Industrial Banks and Industrial Loan Companies: Extension of Comment Period,” 85
Federal Register 31710, May 27, 2020. 31710, May 27, 2020.
97 For example, see comment letter from Celia Winslow, senior vice president of the American Financial Services 97 For example, see comment letter from Celia Winslow, senior vice president of the American Financial Services
Association, July 1, 2020, at https://www.afsaonline.org/Portals/0/AFSA%20ILC%20Letter%20-%20FINAL.pdf. Association, July 1, 2020, at https://www.afsaonline.org/Portals/0/AFSA%20ILC%20Letter%20-%20FINAL.pdf.
98 For example, see comment letter from Christopher Cole, executive vice president and senior regulatory counsel of 98 For example, see comment letter from Christopher Cole, executive vice president and senior regulatory counsel of
the ICBA, Julythe ICBA, July 1, 2020, at https://www.icba.org/docs/default-source/icba/advocacy-documents/letters-to-regulators/1, 2020, at https://www.icba.org/docs/default-source/icba/advocacy-documents/letters-to-regulators/
fdic-ilc-rule-commentfdic-ilc-rule-comment -letter.pdf?sfvrsn=6c292717_0. -letter.pdf?sfvrsn=6c292717_0.
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link to page 13 link to page 13 link to page 13 link to page 13 Industrial Loan Companies (ILCs): Background and Policy Issues

the proposal did not address what they perceive as the fundamental issues: the proposal did not address what they perceive as the fundamental issues: ~~al owing~~allowing blending of blending of
commerce and banking and a lack of Federal Reserve supervision.99 commerce and banking and a lack of Federal Reserve supervision.99
Rakuten Application and Potential of Future Big Tech
In July 2019, Rakuten, a Japanese corporation, announced it would seek to establish an ILC in the In July 2019, Rakuten, a Japanese corporation, announced it would seek to establish an ILC in the
United States.100 Rakuten was founded in 1997 as an internet retail platform that connected United States.100 Rakuten was founded in 1997 as an internet retail platform that connected
consumers who joined the platform to member retailers. The company expanded and developed consumers who joined the platform to member retailers. The company expanded and developed
what it what it ~~cal s~~calls an “ecosystem” business model, wherein it offers a wide range of products and an “ecosystem” business model, wherein it offers a wide range of products and
services to meet a broad range of customer demand (e.g., retail shopping services; financial services to meet a broad range of customer demand (e.g., retail shopping services; financial
services including banking and insurance; travel tickets and reservations; and entertainment, such services including banking and insurance; travel tickets and reservations; and entertainment, such
as event tickets and digital media). Today, the company has over 70 subsidiaries and claims as event tickets and digital media). Today, the company has over 70 subsidiaries and claims
almost 1.4 almost 1.4 ~~bil ion~~ billion members in 30 countries.101 In the United States, it currently offers a shopper members in 30 countries.101 In the United States, it currently offers a shopper
rewards program to about 12 rewards program to about 12 ~~mil ion~~million members who receive rebates—which so far have totaled members who receive rebates—which so far have totaled
over $1 over $1 ~~bil ion,~~ billion, according to the company—for purchasing from retailers that pay Rakuten a according to the company—for purchasing from retailers that pay Rakuten a
commission.102 If permitted to establish an ILC, Rakuten plans to offer American members commission.102 If permitted to establish an ILC, Rakuten plans to offer American members
deposit accounts, credit cards, and consumer and business loans.103 Rakuten might be able use its deposit accounts, credit cards, and consumer and business loans.103 Rakuten might be able use its
business model to realize economies of scale and scope in the U.S. market and provide these business model to realize economies of scale and scope in the U.S. market and provide these
banking services through convenient, low-cost online delivery. banking services through convenient, low-cost online delivery.
In addition to the general arguments ILC opponents have made against recent applications, In addition to the general arguments ILC opponents have made against recent applications,
Rakuten’s size and business model have raised concerns. Because the company’s businesses are Rakuten’s size and business model have raised concerns. Because the company’s businesses are
highly integrated, relying on highly integrated, relying on ~~sel ing~~selling a multitude of goods and services to members, critics of the a multitude of goods and services to members, critics of the
ILC application argue the profitability and soundness of the depository would be heavily reliant ILC application argue the profitability and soundness of the depository would be heavily reliant
on the success of the commercial enterprises. This dynamic, they argue, increases the risks on the success of the commercial enterprises. This dynamic, they argue, increases the risks
associated with the blending of commerce and banking.104 Another concern hearkens back to the associated with the blending of commerce and banking.104 Another concern hearkens back to the
controversies around Walmart and The Home Depot (discussed in the controversies around Walmart and The Home Depot (discussed in the “Controversial Applications
and Official Moratoriums: 2005-2013” section, above) but has been reframed in the context of section, above) but has been reframed in the context of
“Big Tech.” Rakuten shares some similarities with large American technology companies—such “Big Tech.” Rakuten shares some similarities with large American technology companies—such
as Amazon, Facebook, Google, and Apple—including having an enormous number of users and as Amazon, Facebook, Google, and Apple—including having an enormous number of users and
the abilitythe ability to generate and collect vast amounts of data. If such companies were to generate and collect vast amounts of data. If such companies were ~~al owed~~allowed to to
operate banks, the argument goes, this would combine the long-standing problem of operate banks, the argument goes, this would combine the long-standing problem of
concentrating market power with newer problems associated with privacy, data protection, and concentrating market power with newer problems associated with privacy, data protection, and
~~data use.105~~

data use.105 99 For examples, see99 For examples, see comment letter from Christopher Cole, ICBA, Julycomment letter from Christopher Cole, ICBA, July 1, 2020; and comment letter from Defina 1, 2020; and comment letter from Defina
Stewart, senior vice presidentStewart, senior vice president and associate general counsel of the Bank Policy Institute, June 30, 2020, at and associate general counsel of the Bank Policy Institute, June 30, 2020, at
https://bpi.com/wp-https://bpi.com/wp-~~cont ent~~content/uploads/2020/06/BPI-ILC-NPR-Parent-Companies-of-Industrial-Banks-and-Industrial-/uploads/2020/06/BPI-ILC-NPR-Parent-Companies-of-Industrial-Banks-and-Industrial-
Loan-Companies-2020.06.30.pdf. Loan-Companies-2020.06.30.pdf.
100 Rakuten, “Announcement for Resolution to Establish a Company for Banking Operations in the United States,” 100 Rakuten, “Announcement for Resolution to Establish a Company for Banking Operations in the United States,”
press release, July 26, 2020, at https://global.rakuten.com/corp/news/press/2019/0726_06.html. press release, July 26, 2020, at https://global.rakuten.com/corp/news/press/2019/0726_06.html.
101 Rakuten, “About Us,” at https://global.rakuten.com/corp/about/. 101 Rakuten, “About Us,” at https://global.rakuten.com/corp/about/.
102 Rakuten USA,102 Rakuten USA, “Company Overview,” at https://www.rakuten.com/help/article/company-overview-360002116927. “Company Overview,” at https://www.rakuten.com/help/article/company-overview-360002116927.
103 Rakuten, “Announcement for Resolution to Establish a Company for Banking Operations in the United States,” 103 Rakuten, “Announcement for Resolution to Establish a Company for Banking Operations in the United States,”
press release, July 26, 2020. press release, July 26, 2020.
104 Letter from Hugh Carney, senior vice president of the American Bankers Association, and John Court, senior vice 104 Letter from Hugh Carney, senior vice president of the American Bankers Association, and John Court, senior vice
president and general counsel of the Bank Policy Institute, to Kathy Moe, director of the FDIC San Francisco Regional president and general counsel of the Bank Policy Institute, to Kathy Moe, director of the FDIC San Francisco Regional
Office, AugustOffice, August 30, 2019, at https://www.aba.com/-/media/documents/comment30, 2019, at https://www.aba.com/-/media/documents/comment -letter/aba-bpi-oppose-rakuten-ilc--letter/aba-bpi-oppose-rakuten-ilc-
application-083019.pdf. application-083019.pdf.
105 Letter from Christopher Cole, executive vice president and senior regulatory counsel of the ICBA, to Kathy Moe, 105 Letter from Christopher Cole, executive vice president and senior regulatory counsel of the ICBA, to Kathy Moe,
director of the FDIC Sandirector of the FDIC San Francisco RegionalFrancisco Regional Office, June 25, 2020, at https://www.icba.org/docs/default-source/icba/Office, June 25, 2020, at https://www.icba.org/docs/default-source/icba/
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Industrial Loan Companies (ILCs): Background and Policy Issues

Rakuten Rakuten ~~original y~~ originally applied for FDIC insurance on July 26, 2019. It withdrew this original applied for FDIC insurance on July 26, 2019. It withdrew this original
application on March 19, 2020, two days after the FDIC issued its proposed ILC rule, and it application on March 19, 2020, two days after the FDIC issued its proposed ILC rule, and it
resubmitted its application on May 29, 2020.106 Reportedly, the company incorporated FDIC resubmitted its application on May 29, 2020.106 Reportedly, the company incorporated FDIC
feedback on the original application107 and presumably considered the content of the proposed feedback on the original application107 and presumably considered the content of the proposed
rule in the resubmitted version.rule in the resubmitted version.
On July 27, 2020, Rakuten withdrew its second application.108 However, the proposed bank’s CEO reportedly has said the application will be resubmitted again.109 In any case, given large technology companies’ interest in and expansion into financial services, the availability of the ILC charter to commercial technology companies will likely continue to be a subject of debate. Selected Possible Legislative Alternatives
Given recent developments, Congress may choose to address ILC policy issues across a spectrum Given recent developments, Congress may choose to address ILC policy issues across a spectrum
of options. If Congress were to determine the current ILC legal and regulatory framework of options. If Congress were to determine the current ILC legal and regulatory framework
~~fundamental y al ows~~fundamentally allows too much blending of banking and commerce, it could implement more too much blending of banking and commerce, it could implement more
strict separation. Alternatively, if Congress were to find certain aspects of ILC regulation strict separation. Alternatively, if Congress were to find certain aspects of ILC regulation
problematic, it could place targeted new requirements and limits on those aspects. Either of these problematic, it could place targeted new requirements and limits on those aspects. Either of these
approaches could include grandfathered provisions for existing ILCs. On the other hand, if approaches could include grandfathered provisions for existing ILCs. On the other hand, if
Congress determines ILCs are beneficial and Congress determines ILCs are beneficial and ~~wel~~ well-regulated, it could decide to limit-regulated, it could decide to limit the FDIC’s the FDIC’s
apparent ability to delay ILC application decisions. In addition, if Congress were to require more apparent ability to delay ILC application decisions. In addition, if Congress were to require more
time to consider ILC issues and pending applications, it could reinstate a temporary moratorium time to consider ILC issues and pending applications, it could reinstate a temporary moratorium
on FDIC insurance approvals for ILCs. on FDIC insurance approvals for ILCs.
If Congress were to determine ILCs are entirely problematic, one approach it could take would be If Congress were to determine ILCs are entirely problematic, one approach it could take would be
to make future ILCs ineligibleto make future ILCs ineligible for FDIC insurance. As discussed above, the FDIC guarantee of for FDIC insurance. As discussed above, the FDIC guarantee of
deposits may raise certain policy concerns involving creating incentives for risk-taking and deposits may raise certain policy concerns involving creating incentives for risk-taking and
extending government safety nets to organizations that are commercial enterprises in part. extending government safety nets to organizations that are commercial enterprises in part.
Banning new ILCs from eligibilityBanning new ILCs from eligibility for FDIC insurance would eliminate these concerns, but at the for FDIC insurance would eliminate these concerns, but at the
cost of prohibiting certain potential future credit and financial services providers. cost of prohibiting certain potential future credit and financial services providers.
Similar to deposit insurance eligibility, Similar to deposit insurance eligibility, the fact that ILCs are exempt from the definition of a bank the fact that ILCs are exempt from the definition of a bank
under the BHCAunder the BHCA is the source of many other concerns related to ILCs and often characterized as a is the source of many other concerns related to ILCs and often characterized as a
loophole by banks and other ILC critics. Thus, another option for relatively sweeping change loophole by banks and other ILC critics. Thus, another option for relatively sweeping change
would be to amend the BHCAwould be to amend the BHCA to remove that exemption or to otherwise make the regulatory to remove that exemption or to otherwise make the regulatory
treatment of ILCs equivalent to banks. In the 116th Congress, S. 2839 takes the latter approach by treatment of ILCs equivalent to banks. In the 116th Congress, S. 2839 takes the latter approach by
subjecting ILC holding companies to Federal Reserve supervision and prohibiting commercial subjecting ILC holding companies to Federal Reserve supervision and prohibiting commercial
~~firms from becoming ILC holding companies.~~
~~Congress could take the more targeted approach of changing aspects of how ILCs and their~~
firms from becoming ILC holding companies. advocacy-documents/letters-to-regulators/comment-letter-to-the-fdic-on-rakuten.pdf?sfvrsn=23a02717_0. 106 FDIC, “Bank Application Action Search,” at https://www.fdic.gov/regulations/applications/ ... ; and FDIC, “Summary of New Deposit Insurance Application Activities,” at https://www.fdic.gov/regulations/applications/pending.html. 107 Jon Prior, “Rakuten Refiles With FDIC for ILC charter,” American Banker, May 29, 2020, at https://www.americanbanker.com/news/rakuten-refiles-with-fdic-for-ilc-charter. 108 FDIC, “Bank Application Action Search,” at https://www.fdic.gov/regulations/applications/actions.html. 109 Brenden Pederson, “Rakuten Withdrawal a Relief for Banks, but ILC Saga’s Far from Over,” American Banker, August 26, 2020, at https://www.americanbanker.com/news/rakuten-withdrawal-a-relief-for-banks-but-ilc-sagas-far-from-over. Congressional Research Service 16 Industrial Loan Companies (ILCs): Background and Policy Issues Congress could take the more targeted approach of changing aspects of how ILCs and their parents are regulated. For example, it could place limits on the size of the commercial operation parents are regulated. For example, it could place limits on the size of the commercial operation
of ILC affiliates or the portion of commercial business making up the organization’s business as a of ILC affiliates or the portion of commercial business making up the organization’s business as a
whole, instead of prohibiting commercial operations entirely. Such measures could reduce risks whole, instead of prohibiting commercial operations entirely. Such measures could reduce risks
associated with enabling large companies from exercising market power. If Congress were to associated with enabling large companies from exercising market power. If Congress were to
determine that lack of supervision of ILC parents is problematic, it could extend the supervisory determine that lack of supervision of ILC parents is problematic, it could extend the supervisory
authorities of the Federal Reserve or the FDIC to ILC parents and specify certain features of BHC authorities of the Federal Reserve or the FDIC to ILC parents and specify certain features of BHC
regulations that would and would not apply to those parents. Codifying aspects of the FDIC’s regulations that would and would not apply to those parents. Codifying aspects of the FDIC’s
recent rulemaking into law would be another possible approach along these lines. recent rulemaking into law would be another possible approach along these lines.

~~advocacy-documents/letters-to-regulators/comment-letter-to-the-fdic-on-rakuten.pdf?sfvrsn=23a02717_0.~~
~~106 FDIC, “Bank Application Action Search,” at https://www.fdic.gov/regulations/applications/ ... ; and FDIC,~~
~~“Summary of New Deposit Insurance Application Activities,” at https://www.fdic.gov/regulations/applications/~~
~~pending.html.~~
~~107 Jon Prior, “Rakuten Refiles With FDIC for ILC charter,” American Banker, May 29, 2020, at~~
~~https://www.americanbanker.com/news/rakuten-refiles-with-fdic-for-ilc-charter.~~
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16

~~Industrial Loan Companies: Background and Policy Issues~~

In the period leading up to the March 2020 approvals, some policymakers had become concerned In the period leading up to the March 2020 approvals, some policymakers had become concerned
that the FDIC seemed to be able to indefinitelythat the FDIC seemed to be able to indefinitely delay ILCs applications without delay ILCs applications without ~~cal ing~~calling for public for public
comments or initiating the rulemaking process and without a mandate from Congress.comments or initiating the rulemaking process and without a mandate from Congress.~~108~~110 Although Although
the FDIC’s eventual approval of two ILC applications and its issuance of a notice of proposed the FDIC’s eventual approval of two ILC applications and its issuance of a notice of proposed
rulemaking may have lessened these concerns, Congress may nevertheless determine that the rulemaking may have lessened these concerns, Congress may nevertheless determine that the
FDIC’s authorities and requirements related to granting deposit insurance should be amended to FDIC’s authorities and requirements related to granting deposit insurance should be amended to
address how the agency assesses and processes ILC applications. address how the agency assesses and processes ILC applications.

Author Information

David W. Perkins David W. Perkins

Specialist in Macroeconomic Policy Specialist in Macroeconomic Policy

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~~108 U.S.~~ 110 U.S. Congress, Senate Committee on Banking, Housing, and Urban Affairs, Congress, Senate Committee on Banking, Housing, and Urban Affairs, Nominations of Jelena McWilliams,
Marvin Goodfriend, and ~~Thom as E. Workm en~~ Thomas E. Workmen, 115th Cong., 2nd sess.,, 115th Cong., 2nd sess., January 23, 2018, S.Hrg.January 23, 2018, S.Hrg. 115-241, p. 18-19. 115-241, p. 18-19.
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