Statement of John F. Bovenzi,
Chief Operating Officer and Deputy to the Chairman,
Federal Deposit Insurance Corporation
on Industrial Loan Companies
before the
Committee on Banking, Housing and Urban Affairs; U.S. Senate,
Room 534, Dirksen Senate Office Building
October 4, 2007
Chairman Dodd, Ranking Member Shelby and members of the Committee, I appreciate
the opportunity to testify on behalf of the Federal Deposit Insurance Corporation (FDIC)
concerning industrial loan companies and industrial banks (collectively, ILCs).1
The FDIC welcomes careful consideration by Congress of the issues regarding
commercial ownership of ILCs. These issues are complex and involve key questions of
public policy that are most appropriately determined by Congress. This hearing and
congressional discussions regarding possible legislative actions are encouraging
developments that hopefully will lead to the resolution of key ILC-related issues by the
end of the year. Legislative action that clarifies the role and supervision of ILCs would
be strongly welcomed and carefully implemented by the FDIC.
In July 2006, the FDIC imposed a six-month moratorium on ILC applications for deposit
insurance and notices of change in control. In January 2007, the FDIC Board voted to
extend the moratorium for an additional year for those applications for deposit insurance
and change in control notices for ILCs that would become subsidiaries of companies
engaged in non-financial activities, i.e., commercial activities.2 This moratorium
extension allows the FDIC to carefully weigh the safety and soundness concerns that
have been raised regarding commercially-owned ILCs. At the same time, the extension
of the moratorium provides an opportunity for Congress to consider the important public
policy issues regarding the ownership of ILCs by commercial companies.
Although the FDIC is not endorsing any particular legislative proposal, we are
committed to providing Congress with any technical assistance necessary to assist
passage of legislation that addresses the important issues regarding ILCs. My testimony
will briefly discuss the history and characteristics of ILCs, and the FDIC's recent actions
relative to ILCs.
Background
In existence since 1910, ILCs are state-chartered insured depository institutions that are
supervised by their chartering states and the FDIC. ILCs (also known as industrials,
industrial banks, or thrift and loans) historically operated similar to finance companies,
providing loans to wage earners who could not otherwise obtain credit. The FDIC has
been involved in the supervision of ILCs since 1934 when 29 ILCs received deposit
insurance coverage.
Chief Operating Officer and Deputy to the Chairman,
Federal Deposit Insurance Corporation
on Industrial Loan Companies
before the
Committee on Banking, Housing and Urban Affairs; U.S. Senate,
Room 534, Dirksen Senate Office Building
October 4, 2007
Chairman Dodd, Ranking Member Shelby and members of the Committee, I appreciate
the opportunity to testify on behalf of the Federal Deposit Insurance Corporation (FDIC)
concerning industrial loan companies and industrial banks (collectively, ILCs).1
The FDIC welcomes careful consideration by Congress of the issues regarding
commercial ownership of ILCs. These issues are complex and involve key questions of
public policy that are most appropriately determined by Congress. This hearing and
congressional discussions regarding possible legislative actions are encouraging
developments that hopefully will lead to the resolution of key ILC-related issues by the
end of the year. Legislative action that clarifies the role and supervision of ILCs would
be strongly welcomed and carefully implemented by the FDIC.
In July 2006, the FDIC imposed a six-month moratorium on ILC applications for deposit
insurance and notices of change in control. In January 2007, the FDIC Board voted to
extend the moratorium for an additional year for those applications for deposit insurance
and change in control notices for ILCs that would become subsidiaries of companies
engaged in non-financial activities, i.e., commercial activities.2 This moratorium
extension allows the FDIC to carefully weigh the safety and soundness concerns that
have been raised regarding commercially-owned ILCs. At the same time, the extension
of the moratorium provides an opportunity for Congress to consider the important public
policy issues regarding the ownership of ILCs by commercial companies.
Although the FDIC is not endorsing any particular legislative proposal, we are
committed to providing Congress with any technical assistance necessary to assist
passage of legislation that addresses the important issues regarding ILCs. My testimony
will briefly discuss the history and characteristics of ILCs, and the FDIC's recent actions
relative to ILCs.
Background
In existence since 1910, ILCs are state-chartered insured depository institutions that are
supervised by their chartering states and the FDIC. ILCs (also known as industrials,
industrial banks, or thrift and loans) historically operated similar to finance companies,
providing loans to wage earners who could not otherwise obtain credit. The FDIC has
been involved in the supervision of ILCs since 1934 when 29 ILCs received deposit
insurance coverage.
ILCs have proven to be a strong, responsible part of our nation's banking system and
offered innovative approaches to banking. ILCs have contributed significantly to
community reinvestment and development. For example, a non-profit community
development corporation operates an ILC designed for the express purpose of serving
the credit needs of people in East Los Angeles. Other ILCs serve customers who have
not traditionally been served by other types of financial institutions, such as truckers
who need credit to buy fuel far from home. The record to date demonstrates that the
overall industry has operated in a safe and sound manner, and that the FDIC has been
a vigilant, responsible supervisor of that industry.
The modern evolution of ILCs began in 1982 with the passage of the Garn-St Germain
Depository Institutions Act, which expanded ILCs' eligibility to apply for federal deposit
insurance. In 1987, the Competitive Equality Banking Act (CEBA) excluded certain ILCs
from the definition of "bank" in the Bank Holding Company Act (BHCA). As a result, any
company could control an ILC without necessarily being subject to consolidated
supervision under the BHCA. In order to be excluded from the BHCA, the ILC must
have received a charter from one of the limited number of states issuing them and the
law of the chartering state must have required federal deposit insurance as of March 5,
1987. In addition, the ILC must meet one of three conditions:3 (1) the ILC must not
accept demand deposits; (2) its total assets must be less than $100 million; or (3)
control of the ILC has not been acquired by any company after August 10, 1987. A
company that controls an ILC is not required to be subject to supervision by the Federal
Reserve Board (FRB) and, therefore, can engage in commercial activities. While the
parent companies of ILCs are not required to be supervised by the FRB or the Office of
Thrift Supervision (OTS), several such companies are supervised by these agencies.
Currently, there are 59 insured ILCs, with 46 based in Utah and California. ILCs also
operate in Colorado, Hawaii, Minnesota and Nevada. Because the powers of the ILC
charter are determined by the laws of the chartering state, the authority granted to an
ILC may vary from one state to another and may be different from the authority granted
to commercial banks. Over time, some of the chartering states expanded the powers of
their ILCs to the extent that some ILCs now generally have the same powers as state
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,
except that some states do not permit ILCs to offer demand deposit accounts
regardless of institution size.
Profile
ILCs represent a relatively small share of the banking industry. The current portfolio of
ILCs accounts for less than one percent of the approximately 8,600 insured depository
institutions and approximately 1.8 percent of industry assets. Attachment 1 provides a
list of currently insured ILCs with their asset and deposit data as of June 30, 2007.
At year-end 1995, total ILC assets were approximately $12 billion. Beginning in 1996, a
number of financial services firms that controlled ILCs began offering their clients the
option of holding their uninvested funds in insured deposits in the firms' ILCs through
offered innovative approaches to banking. ILCs have contributed significantly to
community reinvestment and development. For example, a non-profit community
development corporation operates an ILC designed for the express purpose of serving
the credit needs of people in East Los Angeles. Other ILCs serve customers who have
not traditionally been served by other types of financial institutions, such as truckers
who need credit to buy fuel far from home. The record to date demonstrates that the
overall industry has operated in a safe and sound manner, and that the FDIC has been
a vigilant, responsible supervisor of that industry.
The modern evolution of ILCs began in 1982 with the passage of the Garn-St Germain
Depository Institutions Act, which expanded ILCs' eligibility to apply for federal deposit
insurance. In 1987, the Competitive Equality Banking Act (CEBA) excluded certain ILCs
from the definition of "bank" in the Bank Holding Company Act (BHCA). As a result, any
company could control an ILC without necessarily being subject to consolidated
supervision under the BHCA. In order to be excluded from the BHCA, the ILC must
have received a charter from one of the limited number of states issuing them and the
law of the chartering state must have required federal deposit insurance as of March 5,
1987. In addition, the ILC must meet one of three conditions:3 (1) the ILC must not
accept demand deposits; (2) its total assets must be less than $100 million; or (3)
control of the ILC has not been acquired by any company after August 10, 1987. A
company that controls an ILC is not required to be subject to supervision by the Federal
Reserve Board (FRB) and, therefore, can engage in commercial activities. While the
parent companies of ILCs are not required to be supervised by the FRB or the Office of
Thrift Supervision (OTS), several such companies are supervised by these agencies.
Currently, there are 59 insured ILCs, with 46 based in Utah and California. ILCs also
operate in Colorado, Hawaii, Minnesota and Nevada. Because the powers of the ILC
charter are determined by the laws of the chartering state, the authority granted to an
ILC may vary from one state to another and may be different from the authority granted
to commercial banks. Over time, some of the chartering states expanded the powers of
their ILCs to the extent that some ILCs now generally have the same powers as state
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,
except that some states do not permit ILCs to offer demand deposit accounts
regardless of institution size.
Profile
ILCs represent a relatively small share of the banking industry. The current portfolio of
ILCs accounts for less than one percent of the approximately 8,600 insured depository
institutions and approximately 1.8 percent of industry assets. Attachment 1 provides a
list of currently insured ILCs with their asset and deposit data as of June 30, 2007.
At year-end 1995, total ILC assets were approximately $12 billion. Beginning in 1996, a
number of financial services firms that controlled ILCs began offering their clients the
option of holding their uninvested funds in insured deposits in the firms' ILCs through