• What are ILC's?
  • July 19, 2006
  • Law Firm: Bricker & Eckler LLP - Columbus Office
  • The application of Wal-Mart to charter an Industrial Loan Company (“ILC”), the proposed acquisition by Home Depot of a Utah ILC, and the media coverage of the industry firestorm surrounding those proposals, has resulted in a focus on the once-quiet world of the ILC and it’s role in the banking and financial services arena. The fact of the matter is that ILC’s have been operating quietly in the background for years and have grown, according to government statistics, from approximately $3 billion in assets to over $160 billion in assets from 1987 to 2004. Six ILC’s have in excess of $3 billion in assets, and one has in excess of $66 billion in assets (and deposits in excess of $50 billion) according to government figures.

    The proposals have generated significant industry and consumer advocate interest and commentary, and are the genesis for an extensive GAO study and report on ILC’s and their impact on the financial services industry (GAO-05-621, September 15, 2005; “Industrial Loan Corporations-Recent Asset Growth and Commercial Interest Highlight Differences in Regulatory Authority”). The GAO report was in response to a request by Congressman Jim Leach in consideration of the Wal-Mart application, and has brought a new focus and prominence to the ILC issue as a whole.

    So just what are ILC’s, how are they different from banks and thrifts, and what is their future in the financial services market?


    The mix of banking and commerce in the U.S. has been severely restricted for decades. ILC’s represent one of the few remaining “loopholes” to entering the banking business without being classified as a “bank” for Bank Holding Company Act (“BHCA”) purposes. In other words, large industrial and commercial companies can (and do) own and operate ILC’s without being classified as a “bank holding company” for BHCA purposes, thereby avoiding Federal Reserve supervision and regulation and the restrictions on commercial activities that being a bank holding company bring.

    ILC’s are cut from the same basic cloth as other “non-bank banks” which resulted primarily from certain specific exceptions to the definition of “bank” contained in the Competitive Equality Banking Act of 1987. Those exceptions spawned a variety of “limited purpose” institutions, including “credit card banks” and pure trust companies. ILC’s also successfully escaped the banking and commerce “loophole” closings contained in the Gramm-Leach-Bliley Act in 1999, and continue to represent one of the few remaining exceptions to the general prohibition on combining commerce and banking.

    How are ILC’s Structured?

    Despite the name, ILC’s are basically state-chartered “banks” which secure FDIC insurance for deposits. Presently a number of states charter ILC’s, the most prominent of which are Utah, Colorado, Nevada and California. ILC’s have branching rights similar to federal thrifts, subject to state law constraints. Both pending proposals involve FDIC-insured Utah ILC’s.

    What Products do ILC’s Offer?

    ILC’s may engage in traditional banking activities and offer virtually all kinds of traditional bank products including commercial, mortgage, credit card, and consumer lending products; payment-related services (including fedwire and ACH); and FDIC-insured time and savings deposits (subject to the limitation that they may not offer checking accounts if the ILC is larger than $100 million in assets), all with no restriction on type or location of customer.

    Who Owns and Operates ILC’s Today?

    It often comes as a surprise to learn that, according to government reports, such large and well-known multinational companies as General Electric, General Motors, Pitney-Bowes, Morgan Stanley, Goldman Sachs, Volkswagen, BMW, and Volvo own and operate ILC’s. Again, ILC’s have grown quietly with little fanfare, becoming significant potential competitors in the financial services market.

    What Does This Mean to Banks and Thrifts?

    The primary issues of concern to banks are those of competitive equality and safety. While bank holding companies are subject to extensive Federal Reserve oversight and significant restrictions on the activities which may be engaged in by the holding company and affiliates, ILC’s and their affiliates are not subject to the same restrictions although their financial products and services are similar if not identical. Some argue that the failure to implement the same restrictions and regulatory safeguards for ILC’s make them inherently more risky to the insurance fund than other FDIC-insured institutions. Other issues raised by opponents include the potential for excessive concentration of resources resulting from combining banking and commerce, the potential for expansion of the federal bank “safety net” to ILC affiliates, and potential unfair allocation of credit by ILC’s to related organizations.

    What Happens Now?

    FDIC consideration of the Wal-Mart application continues, and multiple hearings have been conducted by the FDIC as a result of unprecedented commentary on the proposal by industry participants, trade associations, consumer advocates, and regulatory agencies. Wal-Mart has committed to limit its activities to those specifically referenced in the application and not to seek expanded banking powers. The Home Depot application process has just begun, and involves broader lending activities. Against this backdrop, there are legislative proposals at the federal level to expand, not restrict, ILC powers to include more commercial bank authority and nationwide de novo branching authority, while maintaining the BHCA exemption. Former Federal Reserve Chairman Alan Greenspan authored a letter to Congressman Leach dated January 20, 2006, citing the GAO report and urging Congress to carefully consider the ongoing appropriateness of the ILC “loophole”.

    While Congress is likely to continue to debate whether ILC’s are properly outside of the restrictions of the BHCA, states are still able to charter ILC’s without restriction (subject to the FDIC process). The public policy and industry implications are significant, and whether (and for how long) ILC’s will continue to be able to operate outside of the BHCA, and Federal Reserve supervision, remains to be seen.