Statement of Douglas H. Jones Acting General Counsel Federal Deposit
Insurance Corporation on Industrial Loan Companies: A Review of Charter,
Ownership, and Supervision Issues Before the Committee on Financial Services
U.S. House of Representatives
July 12, 2006
Room 2128 Rayburn House Office Building
Chairman Bachus, Representative Sanders and members of the Subcommittee, I
appreciate the opportunity to testify on behalf of the Federal Deposit Insurance
Corporation (FDIC) concerning industrial loan companies (ILCs). As the primary federal
supervisor for ILCs, the FDIC has considerable experience with these entities. Although
I cannot comment on specific pending applications, my testimony this morning will
discuss the history and characteristics, current industry profile and supervision of ILCs.
History and Characteristics
Industrial loan companies and industrial banks are state-chartered banks supervised by
their chartering states and the FDIC, which is their primary federal regulator. The ILC
charter has existed since 1910, when Arthur J. Morris established the Fidelity Savings
and Trust Company of Norfolk, Virginia. This was the first of the Morris Plan
Companies, which were also known as industrials, industrial banks, or thrift and loans.
These institutions were chartered and supervised by the states and operated more or
less like finance companies, providing loans to wage earners who could not otherwise
obtain credit.
The FDIC has been involved in the supervision of ILCs since its inception when twenty-
nine Morris Plan (industrial) banks were insured by the FDIC on January 1, 1934.
However, the modern evolution of ILCs began in 1982 with the passage of the Garn-St
Germain Depository Institutions Act. Garn-St Germain expanded ILCs' eligibility to apply
for federal deposit insurance, subjecting more ILCs to federal supervision. Shortly
thereafter, in 1987, the Competitive Equality Banking Act (CEBA) clarified which
institutions would be subject to the Bank Holding Company Act (BHCA), exempting any
company that controls one or more ILCs from the BHCA generally if the ILC received a
charter from one of the limited number of states issuing them and the state required
federal deposit insurance at that time, as long as one of three conditions are met:1 (1)
the ILC does not accept demand deposits; (2) its total assets are less than $100 million;
or (3) control of the ILC has not been acquired by any company after August 10, 1987.
Like other insured institutions, ILCs are subject to examinations and other supervisory
activities and generally operate under the same banking and consumer protection
requirements, responsibilities, and limitations, as other state chartered banks and
savings associations.
The parent companies of ILCs that qualify for the exemption under the BHCA are not
required to be supervised by the Federal Reserve or the Office of Thrift Supervision
(OTS). Nevertheless, several holding companies supervised by the Federal Reserve or
OTS own ILCs.
Insurance Corporation on Industrial Loan Companies: A Review of Charter,
Ownership, and Supervision Issues Before the Committee on Financial Services
U.S. House of Representatives
July 12, 2006
Room 2128 Rayburn House Office Building
Chairman Bachus, Representative Sanders and members of the Subcommittee, I
appreciate the opportunity to testify on behalf of the Federal Deposit Insurance
Corporation (FDIC) concerning industrial loan companies (ILCs). As the primary federal
supervisor for ILCs, the FDIC has considerable experience with these entities. Although
I cannot comment on specific pending applications, my testimony this morning will
discuss the history and characteristics, current industry profile and supervision of ILCs.
History and Characteristics
Industrial loan companies and industrial banks are state-chartered banks supervised by
their chartering states and the FDIC, which is their primary federal regulator. The ILC
charter has existed since 1910, when Arthur J. Morris established the Fidelity Savings
and Trust Company of Norfolk, Virginia. This was the first of the Morris Plan
Companies, which were also known as industrials, industrial banks, or thrift and loans.
These institutions were chartered and supervised by the states and operated more or
less like finance companies, providing loans to wage earners who could not otherwise
obtain credit.
The FDIC has been involved in the supervision of ILCs since its inception when twenty-
nine Morris Plan (industrial) banks were insured by the FDIC on January 1, 1934.
However, the modern evolution of ILCs began in 1982 with the passage of the Garn-St
Germain Depository Institutions Act. Garn-St Germain expanded ILCs' eligibility to apply
for federal deposit insurance, subjecting more ILCs to federal supervision. Shortly
thereafter, in 1987, the Competitive Equality Banking Act (CEBA) clarified which
institutions would be subject to the Bank Holding Company Act (BHCA), exempting any
company that controls one or more ILCs from the BHCA generally if the ILC received a
charter from one of the limited number of states issuing them and the state required
federal deposit insurance at that time, as long as one of three conditions are met:1 (1)
the ILC does not accept demand deposits; (2) its total assets are less than $100 million;
or (3) control of the ILC has not been acquired by any company after August 10, 1987.
Like other insured institutions, ILCs are subject to examinations and other supervisory
activities and generally operate under the same banking and consumer protection
requirements, responsibilities, and limitations, as other state chartered banks and
savings associations.
The parent companies of ILCs that qualify for the exemption under the BHCA are not
required to be supervised by the Federal Reserve or the Office of Thrift Supervision
(OTS). Nevertheless, several holding companies supervised by the Federal Reserve or
OTS own ILCs.
ILCs comprise a relatively small share of the banking industry—numbering less than
one percent of the total 8,790 insured depository institutions and 1.4 percent of the
assets. As of March 31, 2006, there were 61 insured ILCs, with 48 of the 61 operated
from Utah and California. ILCs also operate in Colorado, Hawaii, Indiana, Minnesota
and Nevada. California, Nevada and Utah are the most active in chartering ILCs.
Attachment 1 is a list of all ILCs with their asset and deposit data.
The powers of the ILC charter are determined by the laws of the chartering state. Thus,
the authority granted to an ILC may vary from one state to another and may be different
from the authority granted to commercial banks. Typically, an ILC may engage in all
types of consumer and commercial lending activities and all other activities permissible
for insured state banks.
ILCs can generally be grouped according to one of four broadly defined categories. One
category includes ILCs that are community-focused. An example of an ILC in this
category is Golden Security Bank, a California community bank with $124 million in
assets that was organized in 1982. Institutions in this category often provide credit to
consumers and small to medium sized businesses.
A second category includes ILCs that focus on specialty lending programs, including
leasing, factoring (i.e., the process of purchasing commercial accounts receivable
(invoices) from a business at a discount), and real estate lending. This category
includes institutions such as Merrill Lynch Bank USA, which conducts syndicated and
bridge financing, asset-based lending, commercial real estate lending and equipment
financing, as well as providing standby credit for institutional clients' commercial paper
programs. Merrill Lynch Bank USA currently funds its activities through wholesale
deposits and sweep balances from retail brokerage and security accounts. Morgan
Stanley Bank, Goldman Sachs Bank USA, UBS Bank USA and Lehman Brothers
Commercial Bank also are included in this category.
A third category includes ILCs that are part of financial services units that are, in turn,
part of larger corporate organizations that are not necessarily financial in nature. These
institutions may serve a particular lending, funding or processing function within the
organization. Lending strategies can vary greatly within a specific institution, but are
often focused on a limited range of products, such as credit cards, real estate
mortgages or commercial loans. Escrow Bank USA, GMAC Automotive Bank and
GMAC Commercial Mortgage Bank, all of which are subsidiaries of General
Motors,2 are included in this category, as is General Electric's GE Capital Financial, Inc.
A fourth category includes ILCs that directly support the parent organizations'
commercial activities. These institutions largely finance retail purchases of parent
company products, ranging from general merchandise to automobiles, corporate
purchasing activities, fuel for rental car operations, and home improvements. Loan
products include credit cards, lines of credit, and term loans. This category includes
institutions such as Toyota Financial Savings Bank and Volkswagen Bank USA, which
one percent of the total 8,790 insured depository institutions and 1.4 percent of the
assets. As of March 31, 2006, there were 61 insured ILCs, with 48 of the 61 operated
from Utah and California. ILCs also operate in Colorado, Hawaii, Indiana, Minnesota
and Nevada. California, Nevada and Utah are the most active in chartering ILCs.
Attachment 1 is a list of all ILCs with their asset and deposit data.
The powers of the ILC charter are determined by the laws of the chartering state. Thus,
the authority granted to an ILC may vary from one state to another and may be different
from the authority granted to commercial banks. Typically, an ILC may engage in all
types of consumer and commercial lending activities and all other activities permissible
for insured state banks.
ILCs can generally be grouped according to one of four broadly defined categories. One
category includes ILCs that are community-focused. An example of an ILC in this
category is Golden Security Bank, a California community bank with $124 million in
assets that was organized in 1982. Institutions in this category often provide credit to
consumers and small to medium sized businesses.
A second category includes ILCs that focus on specialty lending programs, including
leasing, factoring (i.e., the process of purchasing commercial accounts receivable
(invoices) from a business at a discount), and real estate lending. This category
includes institutions such as Merrill Lynch Bank USA, which conducts syndicated and
bridge financing, asset-based lending, commercial real estate lending and equipment
financing, as well as providing standby credit for institutional clients' commercial paper
programs. Merrill Lynch Bank USA currently funds its activities through wholesale
deposits and sweep balances from retail brokerage and security accounts. Morgan
Stanley Bank, Goldman Sachs Bank USA, UBS Bank USA and Lehman Brothers
Commercial Bank also are included in this category.
A third category includes ILCs that are part of financial services units that are, in turn,
part of larger corporate organizations that are not necessarily financial in nature. These
institutions may serve a particular lending, funding or processing function within the
organization. Lending strategies can vary greatly within a specific institution, but are
often focused on a limited range of products, such as credit cards, real estate
mortgages or commercial loans. Escrow Bank USA, GMAC Automotive Bank and
GMAC Commercial Mortgage Bank, all of which are subsidiaries of General
Motors,2 are included in this category, as is General Electric's GE Capital Financial, Inc.
A fourth category includes ILCs that directly support the parent organizations'
commercial activities. These institutions largely finance retail purchases of parent
company products, ranging from general merchandise to automobiles, corporate
purchasing activities, fuel for rental car operations, and home improvements. Loan
products include credit cards, lines of credit, and term loans. This category includes
institutions such as Toyota Financial Savings Bank and Volkswagen Bank USA, which