Header graphic for print
MoFo Reenforcement The Enforcement Blog

Financing Fintech: ILC Charters

Posted in Regulatory Developments

An ILC, or industrial loan company, is a form of bank that can be chartered in Utah, Nevada, and a few other states. ILCs are insured by the FDIC and have most traditional banking powers, but they cannot hold corporate checking accounts. Significantly, an ILC is not a bank under the Bank Holding Company Act, and therefore the parent company of an ILC is not a bank holding company subject to supervision and regulation by the Fed or to consolidated capital requirements or to the activity limitations in the Bank Holding Company Act. Consequently, at law a commercial company engaged in manufacturing, retail sales, or other nonfinancial activities can own an ILC.

Because of their exemption from the Bank Holding Company Act, ILCs are controversial. No new ILCs have been established in over a decade and the commercial companies that sought to establish or buy ILCs a decade ago withdrew their applications due to the controversy. Opponents of ILCs argue that ILCs mix banking and commerce in a way that is unsafe or at least unfair to regulated bank holding companies, and that ILCs extend the deposit insurance subsidy to commercial companies. Proponents of ILCs argue that ILCs bring new capital, competition, and innovation to the banking system and that the alleged harms are addressed by Sections 23A and 23B of the Federal Reserve Act, which limit transactions between insured banks and their affiliates.

Recent applications by Fintech companies to form ILCs have rekindled the ILC debate. Some Fintech companies may be more focused on financial activities, such as payments or lending, than on commercial activities. How to address new ILC applications will be up to the FDIC in the first instance. Possible courses of action include: 1) withholding insurance for new ILCs altogether; 2) providing insurance under conditions designed to address the safety and soundness and banking and commerce issues, such as requiring the parent company to guarantee the capital and liquidity of the ILC and limiting ILC ownership to companies that are 85% financial in terms of income or assets, or both; or 3) opening up ILC ownership to commercial companies subject to guarantees of capital and liquidity.

Morrison & Foerster’s Oliver Ireland and Sean Ruff recently discussed ILC charters in this Financing Fintech teleconference. Presentation materials can be accessed here.