The Federal Deposit Insurance Corp. (FDIC) plans to issue a notice of proposed rulemaking regarding the parent companies of industrial loan companies (ILCs) at its board meeting next week, according to the regulator’s meeting agenda, which was released on Wednesday.
ILCs are financial institutions owned by commercial firms that are not regulated by a federal banking agency. Banking trade groups have spoken out against them, calling their lack of oversight a consumer safety issue.
While the FDIC has not approved an ILC applicant in more than a decade, Square Capital and Japanese e-commerce company Rakuten have pending applications with the FDIC. And just last week, commercial equipment finance company GreatAmerica Financial Services Corp. became the latest company to seek approval to form a bank.
The FDIC’s meeting on Tuesday could shed some light on what steps the agency plans to take when it comes to ILC applications, as the model faces pushback from trade groups.
Rakuten filed its application in July and said it plans to establish an industrial bank in Utah to offer credit cards, personal and business loans, and deposits for existing customers. Utah is home to the majority of the U.S.'s ILCs.
San Francisco-based fintech Square refiled its ILC application in December 2018 after withdrawing an earlier bid. The company said a bank charter would allow it to provide loans and other financial services directly to its merchants.
GreatAmerica, which announced it filed an application March 5, said a banking subsidiary would allow it to provide a more comprehensive suite of financing options to small and medium sized businesses looking to acquire equipment.
"For the past 27 years, our manufacturer, equipment distributor, and dealer customers have relied on GreatAmerica to provide the financing needed by their customers to purchase equipment," GreatAmerica Chairman and CEO Tony Golobic said in a statement. "Establishing GreatAmerica Bank is just one of the things we are doing to ensure continued support of our customers into the future."
Nelnet and Interactive Brokers Group also have pending ILC applications with the FDIC, according to American Banker.
Trade groups including the Independent Community Bankers Association (ICBA) and the American Bankers Association (ABA) have challenged the ILC structure, saying the model exploits a loophole.
"There's nothing innovative about these companies trying to exploit a lighter regulatory regime under this ILC and do the same financial services that are already provided by multiple financial companies," Paul Merski, the ICBA's executive vice president of congressional relations and strategy, told Banking Dive in July.
ABA President and CEO Rob Nichols called on the FDIC to "rigorously review every aspect" of Rakuten’s application, following its announcement last summer to see if it meets the relevant requirements for a charter.
"As Japan's largest e-commerce site, Rakuten is a major technology firm engaged primarily in non-financial activities," Nichols said in a statement. "Allowing Rakuten to participate in banking activities would raise important questions about the free flow of credit, consumer privacy and possible conflicts of interest — questions not raised by current ILC charter holders."
A bill Sen. John Kennedy, R-LA, introduced in November would halt nonfinancial companies' ability to establish ILCs.
"It's just a bad idea for commerce and banking to mix," Kennedy said in a statement. "Not only is it unfair to community banks who have to play by different rules, it's bad for consumers."