Banking loopholes bill to be voted on by Congress

That’s why we’re calling on Congress to finally close this loophole before it’s further exploited by corporations seeking the full benefits of a Federal Deposit Insurance Corp-backed charter bank. without the necessary supervision and regulation. It is this oversight that ensures banks are managed prudently and responsive to the needs of their communities.

This loophole in our federal banking laws allows any type of organization, including a large tech company like Facebook or a commercial enterprise like Walmart, to control a full-service FDIC-insured bank without being subject to the same standards of oversight and regulatory than a traditional bank. bank. This undermines the banking and commerce mixing protections that Congress established for the US financial system, as well as a host of other consumer and financial protection laws. When this exception was originally created, Industrial Loan Companies – or ILCs – were generally small financial institutions and corporations that used their charter for the limited purpose of making small loans to industrial workers who otherwise could not obtain credit.

Since then, large commercial enterprises, including Facebook and Walmart, have used the ILC charter to gain access to the US financial system and the controlling entities have essentially all the privileges of a full-service commercial bank, including the accepting deposits and supporting consumers and businesses. ready—with little supervision. In response to Walmart’s ILC request in 2006, the primary sponsor of the original ILC loophole, U.S. Sen. Jake Garn, R-Utah, told an FDIC hearing that he never had the l intention that one of these industrial banks be involved in retail operations. Currently, ILCs of any size can collect FDIC-insured savings from retail customers and offer mortgages, credit cards, and consumer loans, allowing them to operate as full-service banks. .

The risks to ILC consumers and the financial system are not theoretical. Several large corporations that used the loophole to acquire ILCs, avoiding regulatory oversight of their entire business operations, later demanded public bailouts during the 2007-2008 financial crisis.

CALs also pose significant threats to consumer protection. ILCs can evade state laws and engage in predatory lending, which some do. Some ILCs, such as First Electronic Bank, lease their bank charters to non-bank lenders who then provide loans with three-digit annual percentage rates, well above Illinois’ 36% interest rate cap. Moreover, their commercial parent companies have access to a vast wealth of consumer financial information and use it completely outside the control of regulators and customers. Not to mention that ILCs are not subject to the same standards that are applied to banks under the Fair Lending Acts and the Community Reinvestment Act.

Garcia’s bill addresses these concerns and is a comprehensive solution to closing the CIT loophole once and for all, and it deserves due consideration. When consumer groups and the banking industry align, something has really gone wrong. It would be shameful to see Congress let this rare moment of bipartisanship go by to address an issue that we believe is hurting our financial system, consumers, and our economy.

Horacio Mendez is President and CEO of Woodstock Institute, a Chicago-based nonprofit organization that focuses on financial access, fair lending, and financial systems reform.

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