BPI and Coalition of Trades Support the Close the Shadow Banking Loophole Act

Dear Chairman Brown and Senator Kennedy,

The undersigned organizations, which together represent a broad cross-section of regulated banks, credit unions, and consumer protection organizations, write today to thank you, as well as Senators Braun, Casey, Van Hollen and Wicker, for introducing the Close the Shadow Banking Loophole Act, and to express our support for this critical legislation which would close the industrial loan company (ILC) loophole in current law.

ILCs operate under a special exemption in federal law that permits any type of organization – including a large technology company or commercial firm – to control a full-service FDIC-insured bank without being subject to the same oversight and prudential standards or limitations on the mixing of banking and commerce that Congress has established for the U.S. financial system.

When this exception was initially created, ILCs were typically small financial institutions, and companies used the charter for the limited purpose of providing small loans to industrial workers who could not otherwise obtain credit. However, since that time, large commercial companies have used the ILC charter to gain access to the U.S. financial system and control entities that have essentially all of the powers of a full-service commercial bank, including the ability to accept deposits, make consumer and commercial loans and effectuate payments.

Although ILCs have the powers of a commercial bank, their corporate owners — unlike the owners of commercial banks — are not subject to consolidated supervision and regulation by a federal banking agency, which can allow risks to build up in the organization outside the view of any federal supervisor. Simply put, this regulatory loophole creates safety and soundness risks for the institution,

risks to the financial system and additional risks for consumers and taxpayers. Currently, ILCs of any size can collect FDIC-insured savings from retail customers and offer mortgages, credit cards and consumer loans, which enable them to operate as full-service banks.

The risks to consumers and the financial system from ILCs are not theoretical. It should come as no surprise that several large companies that used the loophole to acquire ILCs evaded the type of consolidated supervision meant to ensure soundness and regulatory compliance. Subsequently, these companies required public bailouts during the 2007-2008 financial crisis.

To read the full congressional letter, click here or the download button below.