Letters to Congress: Support for the Close the Shadow Banking Loophole Act 

View or download a PDF of the letter here.

Dec 6, 2022 

The Honorable Sherrod Brown
U.S. Senate Committee on Banking, Housing, and Urban Affairs
534 Dirksen Senate Office Building
Washington, D.C. 20510 

Re: Support for the Close the Shadow Banking Loophole Act 

Dear Chairman Brown, 

The undersigned organizations, which together represent a broad cross-section of regulated banks,  credit unions, and consumer protection organizations, write today to express support for your recently  introduced legislation, the Close the Shadow Banking Loophole Act, which would close the industrial  loan company (ILC) loophole in current law. 

ILCs operate under a special exemption in federal law that permits any type of organization – including a  large technology company or commercial firm – to control a full-service FDIC-insured bank without  being subject to the same oversight and prudential standards or limitations on the mixing of banking  and commerce that Congress has established for the U.S. financial system.  

When this exception was initially created, ILCs were typically small financial institutions, and companies  used the charter for the limited purpose of providing small loans to industrial workers who could not  otherwise obtain credit. However, since that time, large commercial companies have used the ILC  charter to gain access to the U.S. financial system and control entities that have essentially all of the  powers of a full-service commercial bank, including the ability to accept deposits, make consumer and  commercial loans and effectuate payments.  

Although ILCs have the powers of a commercial bank, their corporate owners — unlike the owners of  commercial banks — are not subject to consolidated supervision and regulation by a federal banking  agency, which can allow risks to build up in the organization outside the view of any federal  supervisor. Simply put, this regulatory loophole creates safety and soundness risks for the institution,  risks to the financial system and additional risks for consumers and taxpayers. Currently, ILCs of any size can collect FDIC-insured savings from retail customers and offer mortgages, credit cards and consumer  loans, which enable them to operate as full-service banks. 

The risks to consumers and the financial system from ILCs are not theoretical. It should come as no  surprise that several large companies that used the loophole to acquire ILCs, evading the type of  consolidated supervision meant to ensure soundness and regulatory compliance, then subsequently  required public bailouts during the 2007-2008 financial crisis. 

Moreover, the loophole provides a way for large technology firms offering a wide variety of services to  acquire a full-service bank along with all of the privileges of a bank — even though Congress has  generally prohibited the mixing of banking and commerce. These large technology firms thereby gain  access to FDIC-insured deposits and potentially a vast trove of consumer financial information all  without being subject to the information security and prudential standards that apply to regulated bank  holding companies. In addition, because the corporate owners of ILCs are not considered bank holding  companies, they also evade the limitations imposed by Congress on the ability of banking organizations  to expand into new activities if their insured depository institution subsidiaries have a less than  Satisfactory record of performance under the Community Reinvestment Act. 

Recognizing that some firms have previously acquired an ILC in reliance on the exception and in the  spirit of fairness, the legislation, similar to legislation passed on a bipartisan basis by the House Financial  Services Committee, “grandfathers” existing ILCs to remain supervised by the FDIC while closing the  loophole for the parent companies of any future ILCs, while prohibiting other commercial companies, as  well as other companies not subject to a BHC-equivalent regulatory regime, from acquiring an existing  ILC. We feel that this is a balanced approach and commend the effort to seek a compromise to satisfy  other stakeholders. 

The time is now for Congress to close the ILC loophole before it is further exploited by firms seeking to  gain all of the advantages of an FDIC-insured bank charter without the concomitant supervision and  regulation that Congress has established for the corporate owners of full-service insured banks. As  financial services trades and consumer advocates, we come together to fully support this legislation and  look forward to working with the committee to advance this legislation in the future.  


Americans for Financial Reform 

Bank Policy Institute 

Center for Responsible Lending 

Consumer Federation of America 

Credit Union National Association 

Independent Community Bankers of America 

Mid-Size Bank Coalition of America 

National Association of Federally-Insured Credit Unions 

National Consumer Law Center (on behalf of its low-income clients) 

National Community Reinvestment Coalition