WASHINGTON – When two different groups of credit union industry organizers announced plans in the last year to form organizations big enough to compete in the market for credit union credit card portfolios, they decided to use a structure which is unfamiliar to many in the credit union industry: industrial loan corporations, or ILCs. According to the FDIC, the federal agency charged with insuring and supervising the money deposited in ILCs, industrial loan companies have been around since roughly the turn of the century and are heirs, in some sense, to the finance companies which used to be found when there were fewer banks making fewer loans available. The first firm that could really be recognized as an ILC was the Fidelity Savings and Trust Company founded in Norfolk, Virginia in 1910. It, and a series of similar institutions by Arthur Morris, was known as `an industrial' or `an industrial bank' because their principle loans were to industrial workers. Early on, ILCs were not subject to federal supervision but were state-chartered and supervised. The companies behaved more or less like finance companies, the FDIC said, providing relatively higher cost loans to people who often could not obtain credit from any other sources. Instead of collateral, the loans often carried endorsements from two creditworthy individuals who knew the borrower. Some ILCs continue to offer relatively small loans for automobiles and other sorts of finance, the insurer said, but most have expanded their operations to include commercial and collateralized real estate lending. Some federal supervision came in the 1950s as some ILCs began to be allowed by their states to accept deposits and applied for, and received, federal deposit insurance. Many ILCs began to add the word “bank” to their names as well. Because the thrift certificates that ILCs offered, instead of taking deposits, were not subject to federal regulation of depository interest rates, ILCs generally offered higher interest rates than did banks or mainstream thrifts. This helped them somewhat overcome the lack of federal insurance, but some ILCs still found it difficult to attract additional savings customers. In order to help its ILCs, both Utah and California started Industrial Loan Guarantee Corporations to help them compete with federally insured banks. The corporations were not funded through tax revenues, but by assessments on ILCs. They never got big enough and when ILCs failed in each state, the corporations were depleted. Further compounding the problem, the federal government stopped regulating depository interest and the resulting competition further pressed the ILCs. Formal federal supervision of the ILCs began in 1982, when a new law authorized the FDIC to offer deposit insurance for thrift certificates, in addition to deposits, and provided for federal regulation of ILCs similar to that of stand-alone banks. Because the ILC industry had deteriorated somewhat by that time, a number of ILCs were refused depository insurance and had to be liquidated. FDIC responded by making its requirements for insuring ILCs uniform and similar to those for insuring banks. FDIC would consider the financial history and condition of the applicant; the adequacy of the applicant's capital structure, future earnings prospects, and character of management; the convenience and needs of the community; and whether the applicant's corporate powers were consistent with its authorizing act. The insurer's actions stabilized the ILC sector and the charter began to attract the attention of commercial firms in the mid-1980s. ILCs looked good to commercial firms because they were not subject to regulation under the Bank Holding Company Act, a law which governs the relationships between a bank and its principal investors. More than 40 commercial firms established ILCs in the 1980s and, in 1987, Congress passed another law which brought many of the existing ILCs under the Bank Holding Company Act while grandfathering the existing commercial bank owners as exempt from it. This cleared the way for ILCs, which are commercially owned to be insured and regulated as federally insured banks, while their relationships with their commercial owners remained largely free of federal regulation, although most have very pro-active state regulation, FDIC said. ILCs Active in Seven States Currently, seven states in the U.S. charter ILCs: California, Colorado, Hawaii, Indiana, Minnesota, Nevada, and Utah. The charter remains popular in particular in California, Utah and Nevada with commercial firms who would like to own a bank without having to undergo BHCA regulation which would prevent them from being able to do so. In general, banks and ILCs are regulated in much the same way except in the following areas. ILCs cannot always accept on-demand deposits in certain states and they can be owned by corporations that are not financial institutions. Those corporate owners cannot be regulated as banks and thus cannot be told not to begin certain financial activities if their subsidiary ILC has a CRA rating that is consider unsatisfactory. The owners cannot be told to divest themselves of an ILC if the ILC is judged to have lower than acceptable capital (though the usual low capital enforcement regulations which apply to banks also apply to ILCs and owners of ILCs may also be personally liable for losses they cause the ILC, FDIC said.) The lack of close federal supervision of the relationship between an ILC and its nonbank corporate owner has drawn a lot of negative attention in the last couple of years as the number of ILCs has shrunk, but the assets the remaining institutions hold have grown. A September 2005 report from the Government Accountability Office found that between 1987 and 2004, ILC assets grew over 3,500% from $3.8 billion to over $140 billion, while the number of ILCs declined about 46% from 106 to 57. The amount of estimated insured deposits in the ILC industry has also grown significantly; however, these deposits represent less than 3% of the total estimated insured deposits for all banks. Critics of ILCs are concerned that the current regulatory regime lacks sufficient authority to regulate the commingled banking activities of an ILC and the commercial activities of its corporate parent. They question whether a retailer such as Wal-Mart, which has been considering using the ILC charter, offering mortgages and other financial products through an ILC in a way that was not subject to federal disclosure and consumer protection regulations, makes sense. The GAO report found that three of the six ILCs which applied for and received federal deposit insurance in 2004 were owned by nonbank commercial corporations. [email protected]