CU Trades and Consumer Groups Ask Congress to Regulate Fintech Competition

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NAFCU and CUNA are among 11 banking and consumer groups that have sent a letter to Congress to close a loophole that allows some companies to escape regulation that the groups say is necessary to protect consumers and the financial system.

They’re going after an obscure artefact from the early 1900s called “Industrial Loan Companies” (ILCs) which were originally set up to provide loans to industrial workers who otherwise wouldn’t have access to credit. These noncustodial institutions were allowed to carry FDIC insurance without FDIC regulation after the agency was established in the 1930s.

Today, corporations use these legal shells to contain corporations that do many of the things that banks and credit unions do, but without regulation.

In a three-page letter Sent to the House Financial Services Committee on Tuesday, the groups urged the committee to close the ILC loophole in current law by passing “The Close the ILC Loophole Act” (HR 5912).

Representatives Chuy Garcia (D-Ill.) and Lance Gooden (R-Texas) introduced the bill in the House last November, and it was referred to the Financial Services Committee. Chair Maxine Waters (D-California) held a hearing in April 2021 that included the issue of loopholes.

“Simply put, this regulatory gap creates risks to the security and soundness of the institution, risks to the financial system, and additional risks to consumers and taxpayers,” the groups wrote. “Currently, ILCs of all sizes can collect FDIC-insured savings from retail customers and offer mortgages, credit cards, and consumer loans, allowing them to operate as full-service banks. .”

“It’s no surprise that several large companies that used the loophole to acquire ILCs, escaping the kind of consolidated oversight meant to ensure soundness and regulatory compliance, later demanded public bailouts during the 2007 financial crisis- 2008,” the bands wrote.

Concerns raised by the groups include:

  • Fintechs can offer a wide variety of services similar to those of a full-service bank without being subject to the same information security as regulated bank holding companies.
  • Fintechs can access FDIC-insured deposits and “potentially a vast wealth of consumer financial information, all without being subject to the information security and prudential standards that apply to regulated bank holding companies.” “.
  • Fintechs with an industrial loan company can offer services that mix commerce and banking in ways that Congress has generally prohibited.
  • Because ILC-owning companies are not considered bank holding companies, they also evade Congressional limits on the ability of banking organizations to expand into new business if their insured depository institution subsidiaries have a less than satisfactory performance record under the Community Reinvestment Act.
  • A company may purchase an ILC with the intent of using its legal status as a shell for a company offering entirely different services, but with the same lack of regulation.

“These pre-existing ILCs should not be allowed to essentially sell that status to an unaffiliated third party, thereby allowing a new business to take advantage of the exception after Congress closes the loophole,” the groups wrote. “Allowing existing ILCs to transfer their rights to an unaffiliated party would be the legislative equivalent of trying to close the barn door but leaving the barn side wide open.”

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