Banking Law Prof Blog

Fed Asks Congress to Close ILC Loophole

Federal Reserve Board General Counsel Scott Alvarez testified before the House Banking Committee yesterday.  He discussed the fact that ILCs, as state-chartered banks, have virtually all the powers of any other insured commercial banks, including deposit insurance.  ILCs operate under an exception to the Bank Holding Company Act, which allows a commercial firm to acquire an operate an ILC.  This is an exception to the general separation of commerce and banking.  For safety and soundness concerns as well as competitive equality reasons, the Federal Reserve believes Congress should act to close this loophole.

Link to testimony:  http://www.federalreserve.gov/newsevents/testimony/alvarez20071004a.htm

(ag) Oct. 5, 2007, in ILCs.

The Ever-Expanding Business of Banking

Did you know that disease management and mail-order pharmacy activities are part of the business of banking?  Neither did I -- being of the old school when the test for holding company activities was "so closely related to banking as to be a proper incident thereto".  Now of course after GLBA, the test -- with FRB approval is "complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally."

FDIC requested this ruling to address the erstwhile "Wal*Mart problem" of commercial companies seeking to charter industrial loan company subsidiaries.  Wal*Mart couldn't do it, but WellPoint can.  According to the Federal Reserve Board's Sept. 7, 2007, order, WellPoint, Inc., of Indianapolis, Indiana, filed an application with FDIC to obtain deposit insurance for a proposed de novo industrial loan company (ILC), to be named ARCUS Financial Bank, Salt Lake City, Utah.

WellPoint's primary business is underwriting and selling health insurance.  Pursuant to GLBA, this is "financial in nature".  WellPoint also provides disease management and mail-order pharmacy services through subsidiaries.  The Federal Reserve Board says these activities are complementary to financial services -- so no problem with WellPoint owning an industrial loan company.

Link to Order: http://www.federalreserve.gov/newsevents/press/other/other20070907a1.pdf

(ag) Sept. 10, 2007, in Industrial Loan Companies

New Article on Banking & Commerce

Professor Art Wilmarth has a new article worth checking out:  "Wal-Mart and the Separation of Banking and Commerce", 39 CONNECTICUT LAW REVIEW 1539 (May 2007).

As always, Professor Wilmarth's scholarship is extensively researched and very timely.

(ag) July 20, 2007, in Industrial Loan Companies

Fed Urges Congress to Close the ILC Loophole

Federal Reserve Board Vice-Chairman Donald Kohn certainly didn't stutter.  His April 25, 2007, testimony before the U.S. House Financial Services Committee, was crystal clear.  After presenting a succinct background on Industrial Loan Companies, he delivered the Federal Reserve Board's position regarding H.R. 968:  Close -- and not just narrow -- the loophole under a special exception to the federal Bank Holding Company Act that allows a commercial firm or foreign bank to acquire and operate an ILC chartered in one of a handful of states and to escape consolidated regulation of the bank (ILC) and its parent holding company by the Federal Reserve Board.

Link:  http://www.federalreserve.gov/boarddocs/testimony/2007/20070425/default.htm

(ag) May 1, 2007, in ILCs

Wal-Mart's Gone But the ILC Issue Isn't

Despite the fact that Wal-Mart last week withdrew its highly controversial application for an ILC Charter and FDIC insurance, the issues of the combination of commerce and banking under an ILC Charter have not gone away.  The House Financial Services Committee has a hearing scheduled for March 22nd on "H.R. 698, the Industrial Bank Holding Company Act of 2007".

Here's what Congressman Paul Gillmore (R-OH), ranking minority member of the House Financial Services Committee had to say on March 16, 2007, about Wal-Mart's decision to pull down its application with FDIC: 

“For me, the importance of maintaining the separation between banking and commerce has always been bigger than one company.  This single exception that exists in our bank laws is not a Wal-Mart or a Home Depot loophole, it is an ILC loophole, and it must be closed.  It is critical that we do not create a parallel banking system for commercial firms.  Chairman Frank and I have been working on legislative solutions for more than four years and I am optimistic that we can get the Gillmor-Frank measure to the President’s desk shortly.”

This quote is from the Committee website and Gillmor also has a comprehensive statement on his Congressional website:  http://www.gillmorblog.com/?p=199

(ag) March 20, 2007, in ILCs

No ILC for Wal-Mart

Wal-Mart announced today that it has withdrawn its controversial application for FDIC insurance in connection with a proposed Industrial Loan Company charter.  FDIC Chairman Sheila Bair said, "Wal-Mart made a wise choice."  The American Bankers Association staff were probably turning cartwheels and Wall Street rewarded Wal-Mart with a closing stock price increase.

(ag) March 16, 2007, in Industrial Loan Companies

Only the Shadow Knows . . .

The Shadow Financial Regulatory Committee issued four Press Statements today:

1. "The Competitiveness of U.S. Securities Markets"
2. "The FDIC's ILC Moratorium"
3. " The Proposed Merger of Principal U.S. Futures Exchanges"
4. "Facilitating Bank Failure Resolution"

Link:  http://www.aei.org/research/shadow/projectID.15/default.asp

(ag) Feb. 12, 2007, in Economy/ILCs/Bank Regulation

Comptroller Speaks About ILCs

Comptroller of the Currency John Dugan is, of course, one member of the FDIC's Board of Directors.  While Dugan supports the moratorium on commercial company ILC applications that FDIC's Board extended this week, he recognizes that Congress needs to act.

FDIC's legal authority to approve financial company applications and not to approve commercial company applications is shaky -- strictly permissible only on grounds of risk.  By extending the moratorium, at least in part, until Jan. 2008, FDIC clearly gives Congress time to act.

Link:  http://www.occ.treas.gov/ftp/release/2007-9.htm

(ag) Feb. 3, 2007, in ILCs

Pitching the ILC Football to Congress

Rep. Paul Gillmor (R-OH), Ranking Minority member of the House Financial Institutions Subcommittee, and House Financial Services Committee Chairman Barney Frank (D-MA) are co-sponsors of a bill to close the Industrial Loan Company loophole, preserving a distinction between banking and commerce -- and now that FDIC has extended its moratorium on consideration of ILC applications from commercial entities, the playing field shifts to Congress. 

Will Congress have the will to close this loophole?  Well, let's see:  the four commercial entities whose ILC applications will be left pending are Wal-Mart, Home Depot, DaimlerChrysler, and Cargill.  We'll get a chance to see their lobbying strength.

Link to Gillmor/Frank Statement about FDIC's decision to extend the moratorium:  http://www.house.gov/apps/list/press/financialsvcs_dem/pr070131.shtml

(ag) Feb. 1, 2007, in ILCs

No ILC for WAL*MART -- at least for another year

FDIC's Board of Directors voted today to extend the moratorium on certain Industrial Loan Company applications for another year.  Applications by financial companies can go forward; applications from commercial companies -- like Wal-Mart and Home Depot -- are still subject to a moratorium which now extends until Jan. 31, 2008.

Link:  http://www.fdic.gov/news/board/07Jan31FRnotice.pdf

(ag) Jan. 31, 2007, in ILCs

ILCs Up for Consideration Jan. 31

FDIC's Board of Directors has posted the agenda for its Jan. 31, 2007, meeting.  The Moratorium on Industrial Loan Company Applications, which has been in effect for six months, is the key focus of this meeting.  The Board may go on to consider applications which have been pending.  Stay tuned.

Link:  http://www.fdic.gov/news/board/notice31jan2007.html

(ag) Jan. 24, 2007, in ILCs

More Wal-Mart Comments

A new comment received from Shannon Phillips reminds me that the post should be captioned "Will Your Customers Be Banking WITH Wal-Mart?" 

I should have stressed that banking customers are already banking AT Wal-Mart -- through other banks that lease space within the Wal-Mart Stores.  The Article explains that in its deposit insurance application, Wal-Mart claims that it will continue this business model of leasing space to other banks.  The problem with that claim is that Wal-Mart is already showing its hand with a strategy in Mexico to use its own bank charter to offer retail banking services within the Wal-Mart stores. 

Thanks, Shannon!

(ag) Dec. 2, 2006, in ILCs

Provocative Questions About Wal-Mart

This comment from Trey Reeme about my article "Will Your Customers Be Banking at Wal-Mart":

"I'm wondering how you'd answer the question with a "yes" or "no". Will bank customers be banking at Wal-Mart?

If I had to give such an answer, I'd say "yes" sometime in the next ten years, but "no" for 2007.  Chalk it up to the bank lobbyists fighting against it and the public backlash it would cause.  After all, being anti-anything-Wal-Mart is the new hottest thing - for now."

Trey:  My practical assessment about timing is similar to yours.  The public hue and cry has been overwhelming.  FDIC has been swamped with negative comments.  BUT in terms of legal objections, there's only the separation of banking & commerce argument.  Congress could close this ILC loophole.  I suppose you could make a CRA-like objection to this application, too -- although Wal-Mart certainly argues that it does serve low- to moderate-income people with its low prices (despite the counter-argument based on part-time, low paid, no-benefits workers) & might do the same with low priced financial services if they did adopt a retail model, which for the moment they are denying.

An easy dodge for FDIC, despite Sheila Bair's desire to act on this application when the moratorium expires, is to acquiesce to Barney Frank's request that FDIC delay until Congress has an opportunity to act.  How the new Congress will be able to function is another question, but that's the right forum to address objections to this competitor. --Ann

(ag) Dec. 1, 2006, in ILCs

Will Your Customers Be Banking at Wal-Mart?

Bankers Digest for the week of Nov. 27, 2006, features my article:  "Industrial Loan Companies:  Will Your Customers Be Banking at Wal-Mart?"

Here's a link to my perspective on the current situation with ILCs:  http://www.bankersdigest.com/Features_2006_4Q/112706_feature.html

(ag) Nov. 29, 2006, in ILCs

Wal-Mart in Mexico

Banco Wal-Mart de Mexico Adelante has received approval from Mexico's Finance Ministry, according to a Houston Chronicle article on Nov. 16, 2006.  Although Wal-Mart has assured the FDIC that its business plan in the U.S. does not include using its huge network of stores to create a branch banking system, that apparently is exactly what its business plan in Mexico does include.  Walmex (as Wal-Mart is affectionately known in Mexico) is poised to give the major banking players in Mexico a run for their money.

Link:  http://www.chron.com/disp/story.mpl/business/4341123.html

(ag) Nov. 22, 2006, in Industrial Loan Companies

FDIC Makes an ILC Exception - Approves Change of Control for GMAC Automotive Bank

On Nov. 15, 2006, FDIC announced the change of control approval for GMAC Automotive Bank, a Utah industrial loan company (ILC).  FDIC has a six-month moratorium in place until January 31, 2007, during which time FDIC had said it would suspend approvals on FDIC insurance applications and application for change of control with respect to ILCs. 

Because this change of control results from a corporate restructuring by General Motors, FDIC determined to go ahead with the approval.  FDIC Chairman Sheila Bair cautioned that this approval does not signal the outcome of FDIC policy regarding ILCs when the moratorium ends.

Link:  http://www.fdic.gov/news/news/press/2006/pr06103.html

(ag) Nov. 20, 2006, in ILCs

State Restrictions on ILC Branching

Several states have passed or are considering legislation to restrict interstate de novo branching by industrial loan companies.  This calls for some careful consideration of the Riegle-Neal Interstate Banking & Branching Efficiency Act of 1994.  FDIC, OCC, and the Fed provided CSBS with a legal analysis by letter dated July 28, 2006.  Equal treatment of all types of out-of-state banks seeking to establish a new instate branch is critical.

Link:  http://www.federalreserve.gov/boarddocs/legalint/BHC_ChangeInControl/2006/20060728.pdf

ILCs - More on the Moratorium

On Oct. 26, 2006, John Poirier authored an article in the Boston Globe quoting Rep. Barney Frank (D-MA) as planning to ask FDIC to extend the 6-month moratorium on Industrial Loan Company applications beyond its slated expiration at the end of January, 2007.  Depending on the outcome of November elections, Frank could be a formidable force for Congressional attention to the ILC (read Wal-Mart) debate.

Image is Representative Barney Frank, senior Democrat on the U.S. House Financial Services Committee.

(ag) Oct. 27, 2006, in ILCs

ILCs According to Congressman Jim Leach

Uncomfortable with the Wal-Mart application form a new ILC?  Here's what former House Banking & Financial Services Committee Chairman Jim Leach (R-IA) has to say: 

“The ILC loophole has the potential to change the fabric of American finance.  The issue is far larger than Wal-Mart; it is the question of whether America wants to move to a Japanese-like keiretsu system, merging commerce and banking."

Link:  http://financialservices.house.gov/news.asp?ID=831&formmode=release&newstype=1&view=View

(ag) Oct. 24, 2006, in Industrial Loan Companies

FDIC & the ILC Applications: Decision by January?

FDIC Chairman Sheila Bair indicated in response to questions at Monday's ABA Convention that she hopes to have a decision on the pending Industrial Loan Company applications by the time FDIC's six-month moratorium expires in January 2007.  FDIC continues to be beseiged by comments.  The WalMart application in particular has generated strong opinions.

So, which way is the wind blowing?  The October 2006 issue of Independent Banker, ICBA's monthly magazine, carries an extensive interview of FDIC Chairman Sheila Bair by ICBA's Kelly Pike.  In a wide-ranging discussion of the issues facing FDIC and the banking industry, Chairman Bair identified the ILC applications as one of the most controversial issues her agency faces.  About the pending ILC applications, she said, "I can't guarantee what that decision will be.  It may be a decision they don't like, but we need to move forward and make it."

In the same article, Chairman Bair discussed Deposit Insurance Reform, Regulatory Burden, and Basel II.

Link to a report about Bair's Oct. 16, 2006, remarks:  http://www.nafcu.org/Template.cfm?Section=News&template=/contentManagement/contentDisplay.cfm&contentID=21643

Link to Independent Banker article:  www.icba.org/files/ICBASites/PDFs/coverstory1006.pdf

(ag) Oct. 19, 2006, in Industrial Loan Companies, Deposit Insurance, Basel II, Federal Banking Agencies - FDIC