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More clarity likely coming for ILC banks in 2021

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More clarity likely coming for ILC banks in 2021

Newly formed industrial banks secured charters in 2020 after years of pending applications and withdrawals, but those advancements might not lead to an onslaught of new industrial loan company, or ILC, applications.

In March, the Federal Deposit Insurance Corp. issued a notice of proposed rulemaking seeking to formalize the application process for ILCs. On the same day, the agency approved the first industrial bank charters since before the Great Recession. Once finalized, the FDIC's notice of proposed rulemaking will provide more clarity about the application process, but experts said it is unlikely to bring a flood of new applications.

"This is not just a one-off. I think this is setting the table for the future," Clifford Stanford, a partner with Alston & Bird LLP, said in an interview about the notice of proposed rulemaking and the two approvals. "In terms of looking ahead, whether this will be onslaught of commercial firms seeking ILC charters, I don't know that that's the case. I think this is going to be a unique option for some unique players."

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ILC banks can be owned by companies that are not bank holding companies, allowing companies such as auto manufacturers to establish finance units. In recent years, several consumer-facing, technology-focused companies have sought ILC charters. The FDIC approved Square Inc. and Nelnet Inc.'s applications on March 17, marking the first industrial bank application approvals from the regulator in more than a decade. Nelnet's banking unit opened its doors on Nov. 2, becoming the first industrial bank to begin operations in 12 years.

While some companies could be encouraged by the rulemaking and approvals, others could be discouraged by the rigor of the ILC application process once the FDIC finalizes the rule, said Frank Pignanelli, executive director of the National Association of Industrial Bankers.

"You will see companies or organizations who've been interested in the ILCs charter, they see that there's an actual process in place and will be encouraged, but also you're going to see some companies discouraged and say, 'Well, we don't want to do this or comply with this,'" he said in an interview.

Three companies seeking an industrial bank charter with the FDIC withdrew their applications during 2020. Interactive Brokers Group Inc. withdrew its application on May 21. A few months later, AmeriNat Bank withdrew its application on Aug. 12. Rakuten Inc. withdrew its application twice during the year, in March and July.

Rakuten Bank America plans to refile its application with the FDIC in the coming months after responding to FDIC requests and concerns, Lee Carter, CEO of Rakuten Bank America, said in an interview. In addition to addressing the FDIC's requests and concerns, Rakuten Bank America added some adjustments for the potential impact of COVID-19 on the bank, he said.

"Rakuten Bank looks forward to refiling an application and looks forward to continuing the journey with the FDIC to meet the requirements for an ILC charter," Carter said.

And there are two industrial bank applications pending with the FDIC: Edward Jones Bank and GreatAmerica Bank. "The application process has been going well, and we are continuing to have constructive dialogue with the FDIC," a spokesperson for GreatAmerica wrote in an email.

In addition to what exactly the FDIC will include in its finalized rule on ILCs, players in the industrial bank space are eyeing the potential impact of a new administration.

"People who are interested in an ILC charter are looking at not just the rule implementation, they're also looking at the political situation. Does that make any potential changes in how the FDIC views things?" Pignanelli said.

President-elect Joe Biden will likely not be able to appoint a new FDIC chair until Jelena McWilliams' term expires in June 2023, but he could influence the agency's policymaking by adding members to the FDIC board of directors. However, Stanford said the new administration will likely not change the progress the FDIC has made this year.

"I don't see it as being a top-of-mind issue like 'we need to put this cat back in the bag' or reverse the direction of the prior administration in this arena," Pignanelli said.

Rakuten Bank America also has an application with the State of Utah Department of Financial Institutions. Currently only seven states allow ILC charters.

Early in the year, the California Department of Financial Protection and Innovation proposed an overhaul of the state's financial regulator, which included potentially making it easier for companies to establish ILCs in the state. The overhaul was approved, but the provisions related to chartering ILCs in the state were removed, wrote a spokesperson for the regulator.

"But interested organizers and others stakeholders have since reached out to the Department, and we will continue to engage them in ways that promote the growth of responsible, emerging financial products in 2021 and beyond," the spokesperson wrote in an email.