Fintech in Brief: FDIC Signals Pending Decisions on ILC Applications and Proposes New Rules for ILCs and their Parent Companies

Nutter McClennen & Fish LLP

On March 17, the FDIC released for public comment a proposed rule for industrial banks and industrial loan companies (together, “ILCs”) and their parent companies and signaled that it is considering two pending ILC applications.

The purpose of the proposed rule is to codify existing practices utilized by the FDIC to supervise ILCs and their parent companies, including ensuring that the parent company serves as a source of strength for the ILC, and to provide transparency to future applicants and market participants as to what the FDIC requires of parent companies of ILCs. Comments on the proposed rule will be accepted for 60 days after publication in the Federal Register.

The proposed rule codifies eight prudential commitments that the FDIC has historically imposed in connection with approving or not objecting to certain ILC applications or notices. They require parent companies of ILCs to agree to, among other things, consent to FDIC examination of the parent company and its subsidiaries, maintain higher levels of capital and liquidity at the ILC and serve as a source of strength to the ILC, and limit parent company representation on an ILC’s board of directors to no more than 25% of the members of such board. The proposed rule also authorizes the FDIC to require additional commitments, including a contingency plan. Historically, these commitments were always enforceable under the Federal Deposit Insurance Act as conditions imposed in writing. However, by codifying them, the conditions may be better insulated from future legal challenges.

In her statement accompanying the proposed rule, Jelena McWilliams, Chairman of the FDIC, said the FDIC is considering two pending deposit insurance applications for ILCs and their parent companies that are predominantly financial in nature. As it relates to the mixing of banking and commerce and “nonfinancial” applicants, she added: “Some industrial banks today are owned by nonfinancial commercial firms, and the FDIC has received applications from groups seeking to establish new banks owned by commercial parents. Questions about the mixing of banking and commerce, and the ability of banks to affiliate with nonfinancial firms, involve complicated policy trade-offs that are best addressed by Congress.”

The ILC charter has garnered significant opposition from community banks, community groups, trade associations, and others dating back to at least July 2005, when Walmart applied to obtain an ILC charter to process its credit card payments. This longstanding opposition stems from the fact that an ILC charter allows a commercial firm to own and control an FDIC-insured depository institution without becoming subject to the Bank Holding Company Act and the supervision and regulation of the Federal Reserve on a consolidated basis. Opponents argue this mixing of banking and commerce results in an uneven regulatory playing field, increases the risk of consumer harm, and threatens the stability of the U.S. financial system, among other things. The FDIC’s proposed rule acknowledges the longstanding opposition.

In advance of the release of the proposed rule, Congresswoman Maxine Waters (D-CA), Chairwoman of the House Committee on Financial Services, late last week wrote a letter to Chairman McWilliams encouraging the agency not to grant any new ILC charters until after the FDIC receives and considers feedback on its proposed rule regarding ILCs and their parent companies.

It is possible that the FDIC’s approval of the pending deposit insurance applications is forthcoming. In February 2020, the FDIC’s approval of Varo Bank’s application for deposit insurance coincided with the FDIC’s release of a supplement to the Deposit Insurance Application Procedures Manual. If approved, it will establish the ILC charter as another potentially viable path forward for fintechs seeking a banking charter to allow them to operate independently and more efficiently across state lines.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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