CU Trades, Consumer Groups Ask Congress to Regulate Fintech Competition

NAFCU and CUNA were among 11 banking and consumer groups that sent a letter to Congress to close a loophole that allows some companies to evade regulation the groups said is necessary to protect consumers and the financial system.

They are attacking an arcane artifact of the early 1900s called “industrial loan companies” (ILCs) that originally were formed to provide loans to industrial workers who usually would not otherwise have access to credit. These non-depository institutions were allowed to have FDIC insurance without FDIC regulation after the agency was created in the 1930s.

Now companies are using these legal shells to contain companies that do many of the things banks and credit unions do, but without the regulation.

In a three-page letter sent Tuesday to the House Financial Services Committee, the groups urged the committee to close the ILC loophole in current law by passing “The Close the ILC Loophole Act” (H.R. 5912).

Reps. Chuy Garcia (D-Ill.) and Lance Gooden (R-Texas) introduced the bill in the House last November, and it was referred to the Financial Services Committee. Chair Maxine Waters (D-Calif.) held a hearing in April 2021 that included the loophole issue.

“Simply put, this regulatory loophole creates safety and soundness risks for the institution, risks to the financial system and additional risks for consumers and taxpayers,” the groups wrote. “Currently, ILCs of any size can collect FDIC-insured savings from retail customers and offer mortgages, credit cards and consumer loans, which enable them to operate as full-service banks.”

“It should come as no surprise that several large companies that used the loophole to acquire ILCs, evading the type of consolidated supervision meant to ensure soundness and regulatory compliance, then required public bailouts during the 2007-2008 financial crisis,” the groups wrote.

Concerns raised by the groups include:

• Fintechs can offer a wide variety of services similar to that of a full-service bank without being subject to the same information security as regulated bank holding companies.
• Fintechs can gain access to FDIC-insured deposits and “potentially a vast trove of consumer financial information all without being subject to the information security and prudential standards that apply to regulated bank holding companies.”
• Fintechs owning an industrial loan company can offer services that mix commerce and banking in ways that Congress has generally prohibited.
• Because the corporate owners of ILCs are not considered bank holding companies, they also evade the limitations imposed by Congress on the ability of banking organizations to expand into new activities if their insured depository institution subsidiaries have a less-than-satisfactory record of performance under the Community Reinvestment Act.
• A company can buy an ILC with the purpose of using its legal status as the shell for a company offering entirely different services, but with the same absence of regulation.

“These pre-existing ILCs should not be permitted to essentially sell that status to an unaffiliated third party, thereby allowing a new company to take advantage of the exception after the loophole is closed by Congress,” the groups wrote. “Allowing existing ILCs to transfer their rights to an unaffiliated party would be the legislative equivalent of attempting to close the barn door but leaving the side of the barn wide open.”