Senators Introduce New Bill to Close the Shadow Banking Loophole

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On Tuesday, Sen. Sherrod Brown (D-OH), Chair of the Senate Committee on Banking, Housing, and Urban Affairs, along with Sen. Bob Casey (D-PA) and Sen. Chris Van Hollen (D-MD), introduced the Close the Shadow Banking Loophole Act, legislation to require companies that own an industrial loan company (ILC) to be subject to the same rules and consumer protections as traditional banks.

“Letting Big Tech and commercial companies operate banks without proper oversight will only open doors for predatory lending, invasions of consumer privacy, and broader financial instability,” said Brown. “To protect consumers’ pocketbooks and ensure a strong banking system for Main Street, we need to ensure all banking institutions play by the same rules.”

“Any company that accepts deposits and makes loans like a bank does should follow the same rules as a bank. That’s common sense,” said Casey. “Our bill will make sure loan companies are treated the same way as traditional banks and prevent them from evading the rules that protect consumers and low-income communities.”

ILCs are state-chartered banking institutions whose holding companies are not subject to consolidated supervision by the Federal Reserve, as all other bank holding companies are, due to a loophole in ­­the Bank Holding Company Act. The result is that ILCs owned by tech companies like Square have a leg-up on traditional banks with regulatory safeguards.

The Close the Shadow Banking Loophole Act would close this loophole. The bill requires companies that acquire an ILC to be subject to the same supervision by the Federal Reserve as any other bank holding company under the Bank Holding Company Act. It would also provide a carve-out for existing ILCs. A one-pager of the bill is available here. The bill text is available here.

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“The long-standing policy prohibiting affiliations or combinations between banks and non-financial commercial firms has served our nation well. This legislation would ensure no violations of the U.S. policy of maintaining the separation of banking and commerce can occur. Such a violation would jeopardize the impartial allocation of credit, creating conflicts of interest, a dangerous concentration of commercial and economic power, and unwisely extends the federal safety net to commercial interests,” said Michael Adelman, President and CEO of the Ohio Bankers League.

“The ILC loophole is a distortion of crucial consumer and market protections that does not add value for anyone except corporate insiders – but it does pose real risks to communities in need. ILCs do business nationwide but their community reinvestment obligations are generally located in only a single city, and sometimes that city is thousands of miles away from the company’s headquarters. Naturally, ILCs exploit this absurdity, to the detriment of their neighbors and customers. It is time to close the ILC loophole,” said Jesse Van Tol, President and CEO of the National Community Reinvestment Coalition.

“BPI supports Chairman Brown’s effort to close the ILC loophole and guarantee equal treatment for entities providing indistinguishable products and services under the law. Any entity seeking the benefits of bank ownership must be held to the same rules that apply to banks to prevent unacceptable risks to consumers, taxpayers and the existing financial framework,” said Ed Hill, Senior Vice President and Head of Government Affairs at the Bank Policy Institute.

“History has shown us the consequences of allowing companies to operate like banks without the necessary safeguards,” said Renita Marcellin, Advocacy and Legislative Director at Americans for Financial Reform. “ILCs are a part of that history, as seen during the 2008 financial crisis. Congress should act to close this loophole that allows tech conglomerates and other commercial companies to skirt our banking laws.”

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“ICBA and the nation’s community banks thank Chairman Brown for introducing legislation to permanently close the industrial loan company loophole. The ILC loophole allows large commercial and technology firms to own full-service banks while skirting regulatory oversight—threatening the financial system, endangering consumers and the economy, and creating an uneven regulatory landscape. The Close the Shadow Banking Loophole Act will ensure a safe and sound financial system and protect the longstanding U.S. policy separating banking and commerce,” said Rebeca Romero Rainey, President and CEO of the Independent Community Bankers of America.

“This legislation would end a dangerous loophole in the law that allows non-financial companies engaged in commerce to own a federal deposit insured bank without being subject to federal consolidated supervision and crucial consumer protections.  This is an issue that has brought together the banking industry and consumer advocates out of common concern and a sense of urgency to fix the law before it’s too late,” said David Ferreira, Senior Government Affairs Manager at the Center for Responsible Lending.

The legislation has been endorsed by the National Community Reinvestment Coalition, the Independent Community Bankers of America, Americans for Financial Reform, the Bank Policy Institute, the Center for Responsible Lending, the Credit Union National Association, the National Association of Federally-Insured Credit Unions, the Ohio Credit Union League, PNC Financial Services Group, the Missouri Bankers Association, the Ohio Bankers League, the Pennsylvania Bankers Association, the Georgia Bankers Association, the North Carolina Bankers Association, the Iowa Bankers Association, the Indiana Bankers Association, the New Jersey Bankers Association, the Community Bankers Association of Ohio, the Missouri Independent Bankers Association, the Pennsylvania Association of Community Bankers, the Community Bankers of Iowa, and Art Wilmarth, Professor Emeritus of Law at George Washington University.

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