Industrial Loan Corporations:

Recent Asset Growth and Commercial Interest Highlight Differences in Regulatory Authority

GAO-05-621: Published: Sep 15, 2005. Publicly Released: Sep 22, 2005.

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Industrial loan corporations (ILC) emerged in the early 1900s as small niche lenders that provided consumer credit to low and moderate income workers who were generally unable to obtain consumer loans from commercial banks. Since then, some ILCs have grown significantly in size, and some have expressed concern that ILCs may have expanded beyond the original scope and purpose intended by Congress. Others have questioned whether the current regulatory structure for overseeing ILCs is adequate. This report (1) discusses the growth and permissible activities of ILCs and other insured depository institutions, (2) compares the supervisory authority of the Federal Deposit Insurance Corporation (FDIC) with consolidated supervisors, and (3) describes ILC parents' ability to mix banking and commerce.

The ILC industry has experienced significant asset growth and has evolved from one-time, small, limited purpose institutions to a diverse industry that includes some of the nation's largest and more complex financial institutions. Between 1987 and 2004, ILC assets grew over 3,500 percent from $3.8 billion to over $140 billion. In most respects, ILCs may engage in the same activities as other depository institutions insured by the FDIC and thus may offer a full range of loans, including consumer, commercial and residential real estate, small business, and subprime. ILCs are also subject to the same federal safety and soundness safeguards and consumer protection laws that apply to other FDIC-insured institutions. Therefore, from an operations standpoint, ILCs pose similar risks to the bank insurance fund as other types of insured depository institutions. Parents of insured depository institutions that provide similar risks to the bank insurance fund are not, however, being overseen by bank supervisors that possess similar powers. ILCs typically are owned or controlled by a holding company that may also own other entities. Although FDIC has supervisory authority over an insured ILC, it has less extensive authority to supervise ILC holding companies than the consolidated supervisors of bank and thrift holding companies. Therefore, from a regulatory standpoint, these ILCs may pose more risk of loss to the bank insurance fund than other insured depository institutions operating in a holding company. For example, FDIC's authority to examine ILC affiliates and take certain enforcement actions against them is more limited than a consolidated supervisor. While FDIC asserted that its authority may achieve many of the same results as consolidated supervision, and that its supervisory model has mitigated losses to the bank insurance fund in some instances, FDIC's authority is limited to a particular set of circumstances and may not be used at all times. Further, FDIC's authority has not been tested by a large ILC parent during times of economic stress. An exemption in federal banking law currently allows ILC parents to mix banking and commerce more than the parents of other depository institutions. Three of the six new ILC charters approved during 2004 were for commercial firms, and one of the largest retail firms recently applied for an ILC charter. While some industry participants assert that mixing banking and commerce may offer benefits from operational efficiencies, empirical evidence documenting these benefits is mixed. Federal policy separating banking and commerce focuses on the potential risks from integrating these functions, such as the potential expansion of the federal safety net provided for banks to their commercial entities. GAO finds it unusual that a limited ILC exemption would be the primary means for mixing banking and commerce on a broader scale and sees merit in Congress more broadly considering the advantages and disadvantages of a greater mixing of banking and commerce.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: GAO testified on the report, which was issued in September 2005, before the Subcommittee on Financial Institutions and Consumer Credit, Committee on Financial Services on July 12, 2006 (GAO-06-961T). At the hearing, GAO presented its views for the panel to consider. The Senate Banking Committee also held a hearing on Industrial Loan Corporations on October 4, 2007 at which relevant issues were discussed.

    Matter: Consolidated supervision is a recognized method of supervising an insured institution, its holding company, and affiliates. While FDIC has developed an alternative approach that it claims has mitigated losses to the bank insurance fund, it does not have some of the explicit authorities that other consolidated supervisors possess, and its oversight over nonbank holding companies may be disadvantaged by its lack of explicit authority to supervise these entities, including companies that own large and complex ILCs. To better ensure that supervisors of institutions with similar risks have similar authorities, Congress may wish to consider various options such as eliminating the current exclusion for ILCs and their holding companies from consolidated supervision, granting FDIC similar examination and enforcement authority as a consolidated supervisor, or leaving the oversight responsibility of small, less complex ILCs with the FDIC, and transferring oversight of large, more complex ILCs to a consolidated supervisor.

  2. Status: Closed - Implemented

    Comments: GAO testified on the report, which was issued in September 2005, before the Subcommittee on Financial Institutions and Consumer Credit, Committee on Financial Services on July 12, 2006 (GAO-06-961T). At the hearing, GAO presented its views for the panel to consider. The Senate Banking Committee also held a hearing on Industrial Loan Corporations on October 4, 2007 at which relevant issues were discussed.

    Matter: The long-standing policy of separating banking and commerce has been based primarily on mitigating the potential risk that combining these operations may pose to the Fund and the taxpayers. The Gramm-Leach-Bliley Act reaffirmed the general separation of banking from commerce and providing financial services from nonfinancial commercial firms. However, under federal banking law, the ILC charter offers commercial holding companies more opportunity to mix banking and commerce than other insured depository institution charters. Congress should also be aware of the potential for continued expansion of large commercial firms into the ILC industry--especially if ILCs are granted the ability to de novo branch and offer interest bearing business checking accounts. In recent years, this policy issue has been addressed primarily through exemptions and provisions to existing laws rather than assessed on a comprehensive basis. Thus, Congress may wish to more broadly consider the advantages and disadvantages of mixing banking and commerce to determine whether continuing to allow ILC holding companies to engage in this activity more than the holding companies of other types of financial institutions is warranted or whether other financial or bank holding companies should be permitted to engage in this level of activity.

 

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