GAO Suggests Tougher Oversight Of Industrial Loan Firms.

Navigation: Main page

Author: Peterson, Molly M.

Finance

GAO has urged Congress to consider strengthening the regulatory oversight of commercially owned industrial loan companies, which are a key source of controversy among lawmakers developing legislation to overhaul regulations for banks, thrifts and credit unions. In a report released today, GAO said ILCs owned by non-financial companies could pose a larger risk to the FDIC's Bank Insurance Fund than other depository institutions because they are not subject to the same level of regulatory supervision. GAO, which conducted the study at the request of Rep. Jim Leach, R-Iowa, said Congress should consider subjecting ILCs and their parent companies to consolidated federal supervision under the Bank Holding Company Act. Leach said he plans to introduce legislation today to extend the Bank Holding Company Act to cover ILCs. He also said he will ask the Rules Committee to allow him to offer that bill as an amendment to legislation to overhaul the regulatory structure of the housing government-sponsored enterprises. "This bill is designed to protect taxpayers from unwarranted risk, to hold the line separating commerce and banking, and to preserve competitive equity in financial services," Leach said.

ILCs are state-chartered banks that provide limited financial services such as loans or credit cards in Utah and six other states. The FDIC, but not the Federal Reserve, regulates most ILCs. In addition, ILCs can be owned by commercial businesses that are not allowed to own other types of federally regulated banks. A business checking bill approved by the House in May includes a provision allowing ILCs to pay interest on certain business accounts. The House Financial Services Committee hopes to mark up, within the next month, a regulatory overhaul bill that includes language giving give ILCs new powers to expand into other states. But both those bills include language authored last year by Rep. Paul Gillmor, R-Ohio, and Financial Services ranking member Barney Frank, D-Mass., to limit those new powers to ILCs owned by companies that draw at least 85 percent of their revenue from financial activities.

Critics of ILCs have pointed to Wal-Mart's recent application for an ILC charter in Utah in their push for Congress to make ILCs subject to Bank Holding Company Act restrictions. They argue that, under current law, nothing would prevent Wal-Mart from eventually blurring the line between banking and commerce by using an ILC to offer retail banking services. But an FDIC official today defended the agency's oversight of ILCs. "Our experience with those institutions suggests to us that they present no more safety-and-soundness problems to our insurance fund than do any other sort of institution," FDIC General Counsel William Kroener told the Financial Services Financial Institutions Subcommittee during a hearing on the regulatory bill. Kroener added that FDIC will apply "precisely the same criteria to the pending Wal-Mart application that we apply to all other institutions."

~~~~~~~~

By Molly M. Peterson