Closing the ILC back door for good

back door of a business

Despite ICBA’s previous victories blocking huge companies from entering the banking industry, the industrial loan corporation loophole still exists. ICBA is taking aim to close it permanently.

By Chris Cole and Paul Merski, ICBA

Fourteen years ago, ICBA celebrated an important victory when Walmart withdrew its FDIC deposit insurance application as a Utah chartered industrial loan corporation (ILC). The association achieved success again in 2008 when Home Depot withdrew its ILC application.

These huge wins prevented the nation’s largest retailers from exploiting the ILC loophole and helped ensure the safety and soundness of the financial system by maintaining the separation of banking and commerce.

But it’s under attack again. Despite several short-term moratoriums by the FDIC and Congress to stop its exploitation, the ILC loophole remains open today, and some big tech and commercial enterprises are looking to take advantage of it. This again poses a serious threat to the personal and economic lives of Americans. Last fall alone, three firms filed ILC applications.

Once more, ICBA is leading the charge to defeat these applications and permanently close the ILC loophole.

The danger of unregulated banks

The FDIC is currently considering deposit insurance applications for several Utah-based ILC charters, including those filed by Square, Nelnet (a student loan company and educational services provider), IBG (a brokerage firm) and Rakuten (Japan’s version of Amazon). With the Office of the Comptroller of the Currency’s (OCC) fintech charter ruled invalid by a district court, the ILC charter is a backdoor way for a fintech company to try to get into banking without partnering with a federally regulated financial institution.

It’s also an attractive option for a fintech looking to avoid the Bank Holding Company Act (BHCA) rules that prohibit companies that own banks from engaging in activities unrelated to banking. For example, if Rakuten owned an ILC, it could engage in banking without having to divest any of its e-commerce, communications and energy companies, including one that owns a baseball team.

While mixing banking and commerce has always been a dangerous combination, today’s era of dominant Big Data, social media and e-commerce conglomerates; artificial intelligence; and financial technology, would give even more reach into the economic lives of Americans, adding privacy concerns on top of existing economic concerns.

An ILC charter would allow these companies to avoid consolidated Federal Reserve supervision. This leaves a dangerous gap in safety and soundness oversight. Commercial firms that want to get into the business of banking through an ILC are trying to take advantage of the federal safety net while avoiding legal restrictions and company oversight, which is counter to the principles upon which the FDIC was founded.

Mixing a company’s banking and commercial activities also jeopardizes the impartial allocation of credit, creates egregious conflicts of interest and results in a dangerous concentration of commercial and economic power.

Halting ILCs for good

ICBA is fighting the ILC battle on both the legislative and regulatory fronts.

Senate Banking Committee member John Kennedy (R-La.) recently introduced the ICBA-backed Eliminating Corporate Shadow Banking Act of 2019 (S.2839). The bill would close the ILC loophole by amending the definition of “bank” under Section 2 of the BHCA so that ILCs would no longer be exempted from the definition of “bank.”

As a result, the parent companies of ILCs would be subject to the BHCA, including provisions requiring entities that own or control banks to only be engaged in activities that are closely related to banking or finance. The bill would grandfather in existing ILCs, therefore permitting them to continue their commercial affiliations. ICBA is working with lawmakers to build bipartisan support for S.2839 and to introduce a companion bill in the House.

On the regulatory front, ICBA has penned letters to the San Francisco office of the FDIC opposing ILC charter applications filed by IBG, Square, Nelnet and Rakuten and requested a temporary moratorium on future ILC deposit insurance applications.

It’s a strategy that’s been successful in the past. Recognizing the dangers of mixing banking and commerce, both the FDIC and Congress have previously placed moratoriums on the use of ILCs following ICBA’s successful campaign against Walmart’s bid for an ILC charter in 2006. Social Finance withdrew its ILC application for SoFi Bank in 2017 after the company was rocked by an internal scandal. Meanwhile, both Square and Nelnet withdrew previous applications in 2017 and 2018, respectively, before refiling them in 2019.

Closing the ILC loophole and leveling the playing field for community banks will remain a top priority for ICBA as an increasing number of nonbank technology companies look to exploit this outdated charter.

How you can help

As ICBA continues to work with all concerned policymakers to close the ILC loophole and maintain the separation of banking and commerce, community bank grassroots advocates across the nation will continue to play an important role in gathering support.

Community bankers should be on the lookout for alerts as ILC legislation moves forward. Seize the opportunity to bring up the ILC loophole and the danger it presents to the financial system when meeting with members of Congress. All concerned community bankers should ensure their members of Congress cosponsor legislation to close the ILC loophole.

Check out the ICBA grassroots action center at where you can sign up for alerts and compose your own message to Congress.

Chris Cole ( is ICBA’s executive vice president and senior regulatory counsel

Paul Merski ( is ICBA’s group executive vice president of congressional relations and strategy