FDIC Federal Register Citations

[Federal Register: August 23, 2006 (Volume 71, Number 163)]
[Notices]              
[Page 49456-49459]
[DOCID:fr23au06-76]                        

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FEDERAL DEPOSIT INSURANCE CORPORATION

Industrial Loan Companies and Industrial Banks

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice and Request for Comment.

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SUMMARY: The FDIC is seeking comment on specific issues related to
industrial loan companies and industrial banks (collectively, ILCs), including
issues regarding the current legal and business framework of ILCs and
the possible benefits, detrimental effects, risks, and supervisory
issues associated with the ILC industry. The FDIC believes that public
input will assist the FDIC in identifying any potential risks to the
Deposit Insurance Fund, any emerging safety and soundness issues, or
other policy issues raised by ILCs and, further, will assist the FDIC
in determining whether statutory, regulatory, or policy changes should
be made in the FDIC's supervision of ILCs in order to protect the
Deposit Insurance Fund or other important Congressional objectives.

DATES: Written comments must be received on or before October 10, 2006.

ADDRESSES: You may submit comments by any of the following methods:
     Agency Web Site: http://www.FDIC.gov/regulations/laws/federal/notices.html.
 Follow instructions for submitting comments on the Agency Web site.
     E-mail: Comments@FDIC.gov.
     Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
     Hand Delivery/Courier: Guard station at rear of the 550
17th Street Building (located on F Street) on business days between 7
a.m. and 5 p.m.
    Internet Posting: All comments received will be posted without
change to http://www.FDIC.gov/regulations/laws/federal/notices.html
including any personal information provided.

FOR FURTHER INFORMATION CONTACT: Thomas Bolt, Counsel, telephone (202)
898-6750, Federal Deposit Insurance Corporation, Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Background

    Recently, the growth of the ILC industry, the trend toward
commercial company ownership of ILCs and the nature of some ILC
business models have raised questions about the risks posed by ILCs to
the Deposit Insurance Fund, including whether their commercial
relationships pose any safety and soundness risks. On July 28, 2006 the
FDIC imposed a six-month moratorium on FDIC action to (i) accept,
approve, or deny any application for deposit insurance submitted to the
FDIC by, or on behalf of, an ILC, or (ii) accept, disapprove, or issue
a letter of intent not to disapprove, any change in bank control notice
submitted to the FDIC with respect to an ILC. The purpose of the
moratorium is to preserve the status quo while the FDIC evaluates (i)
industry developments, (ii) the various issues, facts, and arguments
raised with respect to the ILC industry, (iii) whether ILCs pose any
increased risk to the Deposit Insurance Fund, or whether there are
emerging safety and soundness issues or policy issues involving ILCs,
and (iv) whether statutory, regulatory, or policy changes should be
made in the FDIC's oversight of ILCs in order to protect the Deposit
Insurance Fund or important Congressional objectives. A notice of the
imposition of the moratorium was published in the Federal Register on
August 1, 2006 (71 FR 43482, August 1, 2006). The notice expressed the
FDIC's intent to seek public input on the issues and concerns raised
with regard to the ILC industry.
    ILCs were first chartered in the early 1900's as small loan
companies for industrial workers. ILCs are state-chartered banks
supervised by their chartering states and the FDIC, which is their
primary Federal regulator. ILCs were first insured on January 1, 1934.
As of March 31, 2006, 61 insured ILCs operating from California,
Colorado, Hawaii, Indiana, Minnesota, Nevada, and Utah reported total
assets approximating $155 billion.
    Under current law, certain ILCs may affiliate with, or be owned by,
a company whose activities are generally considered to be commercial in
nature. This ability of certain ILCs to be owned by or affiliated with
commercial entities results from the Competitive Equality Banking Act
of 1987 (CEBA). The CEBA generally exempts from the definition of
``bank'' in the Bank Holding Company Act (BHCA) any ILC that meets
certain requirements. As a result, the parent companies of ILCs that
qualify for the exemption from the BHCA, unlike companies that are
subject to the BHCA, are not prohibited from engaging in commercial
activities, and are not required to be supervised by the Federal
Reserve Board (FRB) and may not be subject to any other form of
consolidated supervision. Nevertheless, the majority of companies that
own ILCs are financial entities. Eleven are under some form of
consolidated supervision by either the FRB or the Office of Thrift
Supervision (OTS). OTS-supervised holding companies currently control
approximately 65% of the total ILC assets nationwide. Many other
companies that own ILCs are subject to primary supervision by state or
Federal regulators.
    Since ILCs are insured state nonmember banks, they are subject to
FDIC Rules and Regulations, restrictions under the Federal Reserve Act
governing transactions with affiliates and anti-tying provisions of the
BHCA, various consumer protection laws and regulations, and the
Community Reinvestment Act. ILCs are also subject to regular
examinations, including examinations focusing on safety and soundness,
consumer protection, community reinvestment, information technology and
trust activities.
    FDIC supervisory policies regarding an institution, including an
ILC owned by a parent company, consider the organizational
relationships of the institution. The FDIC has the authority to examine
an ILC's relationships with its parent company and any other affiliate.
Also, the FDIC's enforcement authority extends beyond the ILC itself
and includes institution-affiliated parties. This includes the
authority to require such action as the agency determines to be
appropriate, which may include divestiture of the ILC. However, since
the FDIC is not a consolidated supervisor, it does not have the
authority to examine affiliates that do not have a relationship with
the ILC or to impose capital requirements on the parent company of an
ILC.
    The FDIC generally follows the same review process for ILC
applications and notices as it does for such filings from other
applicants. In the case of applications for deposit insurance, the FDIC
has the authority to impose reasonable conditions through its order
approving the application. In the case of a change in bank control
filed with the FDIC, the FDIC can impose requirements and restrictions
through a formal agreement among the FDIC, the institution and the
parent company. Decisions regarding specific conditions or provisions
are based upon the totality of the filing and investigation, and may
consider the complexity and perceived risk of the proposal, adequacy of
capital and management, relationships with affiliated entities, and
sufficiency of risk management programs, among other considerations.
Conditions or provisions may be time-specific or may impose continuing
requirements or restrictions that must be satisfied on an ongoing
basis. Conditions may be modified or discarded at the request of the
institution or at the FDIC's own initiative if circumstances change in
the future.

Concerns Expressed Regarding ILCs

    A variety of concerns have been raised regarding ILCs. These
primarily focus on whether ILCs in a holding company structure that is
not subject to some form of consolidated supervision pose greater
safety and soundness issues or risks to the Deposit Insurance Fund than
do insured depository institutionsin a holding company structure which is subject
to consolidated Federal supervision. These concerns include the absence of consolidated
supervisory requirements for the parent companies of ILCs; the absence
of an obligation by the ILC parent company to keep the ILC well
capitalized; and differences in authority to examine affiliate
relationships. General concerns have also been raised about the
potential mixing of banking and commerce that might be presented by an
ILC.

II. Questions Posed by the FDIC

    In imposing the six-month moratorium on actions relative to
applications for deposit insurance and notices of change in bank
control, the FDIC indicated its intent to evaluate (i) industry
developments; (ii) the various facts, issues, and arguments raised with
respect to the ILC industry; (iii) whether there are emerging safety
and soundness issues or other risks to the Deposit Insurance Fund or
other policy issues involving ILCs; and (iv) whether statutory,
regulatory, or policy changes should be made in the FDIC's oversight of
ILCs in order to protect the Deposit Insurance Fund or other important
Congressional objectives. The FDIC believes that public participation
will provide valuable insight into the issues presented by recent
trends and changes in the ILC industry, and will assist the FDIC in
deciding how to respond to those issues. In order to obtain public
input, the FDIC invites comments in response to the following
questions. To aid our analysis, we encourage commenters to identify, by
number, the question to which each section of their comment
corresponds.
   

1. Have developments in the ILC industry in recent years altered
the relative risk profile of ILCs compared to other insured depository
institutions? What specific effects have there been on the ILC
industry, safety and soundness, risks to the Deposit Insurance Fund,
and other insured depository institutions? What modifications, if any,
to its supervisory programs or regulations should the FDIC consider in
light of the evolution of the ILC industry?
    2. Do the risks posed by ILCs to safety and soundness or to the
Deposit Insurance Fund differ based upon whether the owner is a
financial entity or a commercial entity? If so, how and why? Should the
FDIC apply its supervisory or regulatory authority differently based
upon whether the owner is a financial entity or a commercial entity? If
so, how should the FDIC determine when an entity is ``financial'' and
in what way should it apply its authority differently?
    3. Do the risks posed by ILCs to safety and soundness or to the
Deposit Insurance Fund differ based on whether the owner is subject to
some form of consolidated Federal supervision? If so, how and why?
Should the FDIC assess differently the potential risks associated with
ILCs owned by companies that (i) are subject to some form of
consolidated Federal supervision, (ii) are financial in nature but not
currently subject to some form of consolidated Federal supervision, or
(iii) cannot qualify for some form of consolidated Federal supervision?
How and why should the consideration of these factors be affected?
    4. What features or aspects of a parent of an ILC (not already
discussed in Questions 2 and 3) should affect the FDIC's evaluation of
applications for deposit insurance or other notices or applications?
What would be the basis for the FDIC to consider those features or
aspects?
    5. The FDIC must consider certain statutory factors when evaluating
an application for deposit insurance (see 12 U.S.C. 1816), and certain
largely similar statutory factors when evaluating a change in control
notice (see 12 U.S.C. 1817(j)(7)). Are these the only factors FDIC may
consider in making such evaluations? Should the consideration of these
factors be affected based on the nature of the ILC's proposed owner?
Where an ILC is to be owned by a company that is not subject to some
form of consolidated Federal supervision, how would the consideration
of these factors be affected?
    6. Should the FDIC routinely place certain restrictions or
requirements on all or certain categories of ILCs that would not
necessarily be imposed on other institutions (for example, on the
institution's growth, ability to establish branches and other offices,
ability to implement changes in the business plan, or capital
maintenance obligations)? If so, which restrictions or requirements
should be imposed and why? Should the FDIC routinely place different
restrictions or requirements on ILCs based on whether they are owned by
commercial companies or companies not subject to some form of
consolidated Federal supervision? If such conditions are believed
appropriate, should the FDIC seek to establish the underlying
requirements and restrictions through a regulation rather than relying
upon conditions imposed in the order approving deposit insurance?
    7. Can there be conditions or regulations imposed on deposit
insurance applications or changes of control of ILCs that are adequate
to protect an ILC from any risks to safety and soundness or to the
Deposit Insurance Fund that exist if an ILC is owned by a financial
company or a commercial company? In the interest of safety and
soundness, should the FDIC consider limiting ownership of ILCs to
financial companies?
    8. Is there a greater likelihood that conflicts of interest or
tying between an ILC, its parent, and affiliates will occur if the ILC
parent is a commercial company or a company not subject to some form of
consolidated Federal supervision? If so, please describe those
conflicts of interest or tying and indicate whether or to what extent
such conflicts of interest or tying are controllable under current laws
and regulations. What regulatory or supervisory steps can reduce or
eliminate such risks? Does the FDIC have authority to address such
risks in acting on applications and notices? What additional regulatory
or supervisory authority would help reduce or eliminate such risks?
    9. Do ILCs owned by commercial entities have a competitive
advantage over other insured depository institutions? If so, what
factors account for that advantage? To what extent can or should the
FDIC consider this competitive environment in acting on applications
and notices? Can those elements be addressed through supervisory
processes or regulatory authority? If so, how?
    10. Are there potential public benefits when a bank is affiliated
with a commercial concern? Could those benefits include, for example,
providing greater access to banking services for consumers? To what
extent can or should the FDIC consider those benefits if they exist?
    11. In addition to the information requested by the above
questions, are there other issues or facts that the FDIC should
consider that might assist the FDIC in determining whether statutory,
regulatory, or policy changes should be made in the FDIC's oversight of
ILCs?
    12. Given that Congress has expressly excepted owners of ILCs from
consolidated bank holding company regulation under the Bank Holding
Company Act, what are the limits on the FDIC's authority to impose such
regulation absent further Congressional action?

    By order of the Board of Directors.

* * * * *   

Dated at Washington, DC, this 17th day of August, 2006.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.

[FR Doc. E6-13941 Filed 8-22-06; 8:45 am]
BILLING CODE 6714-01-P