Industrial Loan Corporations: Recent Asset Growth and Commercial Interest Highlight Differences in Regulatory Authority
GAO-05-621
Published: Sep 15, 2005. Publicly Released: Sep 22, 2005.
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Highlights
Industrial loan corporations (ILC) emerged in the early 1900s as small niche lenders that provided consumer credit to low and moderate income workers who were generally unable to obtain consumer loans from commercial banks. Since then, some ILCs have grown significantly in size, and some have expressed concern that ILCs may have expanded beyond the original scope and purpose intended by Congress. Others have questioned whether the current regulatory structure for overseeing ILCs is adequate. This report (1) discusses the growth and permissible activities of ILCs and other insured depository institutions, (2) compares the supervisory authority of the Federal Deposit Insurance Corporation (FDIC) with consolidated supervisors, and (3) describes ILC parents' ability to mix banking and commerce.
Recommendations
Matter for Congressional Consideration
| Matter | Status | Comments |
|---|---|---|
| Consolidated supervision is a recognized method of supervising an insured institution, its holding company, and affiliates. While FDIC has developed an alternative approach that it claims has mitigated losses to the bank insurance fund, it does not have some of the explicit authorities that other consolidated supervisors possess, and its oversight over nonbank holding companies may be disadvantaged by its lack of explicit authority to supervise these entities, including companies that own large and complex ILCs. To better ensure that supervisors of institutions with similar risks have similar authorities, Congress may wish to consider various options such as eliminating the current exclusion for ILCs and their holding companies from consolidated supervision, granting FDIC similar examination and enforcement authority as a consolidated supervisor, or leaving the oversight responsibility of small, less complex ILCs with the FDIC, and transferring oversight of large, more complex ILCs to a consolidated supervisor. |
Closed – Implemented
|
GAO testified on the report, which was issued in September 2005, before the Subcommittee on Financial Institutions and Consumer Credit, Committee on Financial Services on July 12, 2006 (GAO-06-961T). At the hearing, GAO presented its views for the panel to consider. The Senate Banking Committee also held a hearing on Industrial Loan Corporations on October 4, 2007 at which relevant issues were discussed. |
| The long-standing policy of separating banking and commerce has been based primarily on mitigating the potential risk that combining these operations may pose to the Fund and the taxpayers. The Gramm-Leach-Bliley Act reaffirmed the general separation of banking from commerce and providing financial services from nonfinancial commercial firms. However, under federal banking law, the ILC charter offers commercial holding companies more opportunity to mix banking and commerce than other insured depository institution charters. Congress should also be aware of the potential for continued expansion of large commercial firms into the ILC industry--especially if ILCs are granted the ability to de novo branch and offer interest bearing business checking accounts. In recent years, this policy issue has been addressed primarily through exemptions and provisions to existing laws rather than assessed on a comprehensive basis. Thus, Congress may wish to more broadly consider the advantages and disadvantages of mixing banking and commerce to determine whether continuing to allow ILC holding companies to engage in this activity more than the holding companies of other types of financial institutions is warranted or whether other financial or bank holding companies should be permitted to engage in this level of activity. |
Closed – Implemented
|
GAO testified on the report, which was issued in September 2005, before the Subcommittee on Financial Institutions and Consumer Credit, Committee on Financial Services on July 12, 2006 (GAO-06-961T). At the hearing, GAO presented its views for the panel to consider. The Senate Banking Committee also held a hearing on Industrial Loan Corporations on October 4, 2007 at which relevant issues were discussed. |
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Bank managementBanking lawBanking regulationComparative analysisFederal regulationsFinancial institutionsLending institutionsRegulatory agenciesHolding companiesSmall business