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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
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 FDICs 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 [INSERT DATE THAT IS 45 DAYS AFTER DATE OF PUBLICATION].
ADDRESSES: You may submit comments by any of the following methods:
Internet Posting: All comments received will be posted without change to http://www.fdic.gov/regulations/laws/federal/propose.html including any personal information provided.
FOR FURTHER INFORMATION CONTACT: Thomas Bolt, Counsel, telephone (202) 898-6750, Federal Deposit Insurance Corporation, Washington, D.C. 20429.
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 FDICs 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 FDICs 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 under 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 Bank Holding Company Act, 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 ILCs relationships with its parent company and any other affiliate. Also, the FDICs 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 FDICs 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 institutions in 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 FDICs 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.
By Order of the Board of Directors
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Dated at Washington D.C., this 17th day of August, 2006.
FEDERAL DEPOSIT INSURANCE CORPORATION
Robert E. Feldman
|Last Updated 08/17/2006||Regs@fdic.gov|