[Federal Register Volume 71, Number 163 (Wednesday, August 23, 2006)]
[Notices]
[Pages 49456-49459]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-13941]


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FEDERAL DEPOSIT INSURANCE CORPORATION


Industrial Loan Companies and Industrial Banks

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice and Request for Comment.

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SUMMARY: The FDIC is seeking comment on specific issues related to 
industrial

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loan companies and industrial banks (collectively, ILCs), including 
issues regarding the current legal and business framework of ILCs and 
the possible benefits, detrimental effects, risks, and supervisory 
issues associated with the ILC industry. The FDIC believes that public 
input will assist the FDIC in identifying any potential risks to the 
Deposit Insurance Fund, any emerging safety and soundness issues, or 
other policy issues raised by ILCs and, further, will assist the FDIC 
in determining whether statutory, regulatory, or policy changes should 
be made in the FDIC's supervision of ILCs in order to protect the 
Deposit Insurance Fund or other important Congressional objectives.

DATES: Written comments must be received on or before October 10, 2006.

ADDRESSES: You may submit comments by any of the following methods:
     Agency Web Site: http://www.fdic.gov/regulations/laws/federal/notices.html. Follow instructions for submitting comments on 
the Agency Web site.
     E-mail: [email protected].
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW., 
Washington, DC 20429.
     Hand Delivery/Courier: Guard station at rear of the 550 
17th Street Building (located on F Street) on business days between 7 
a.m. and 5 p.m.
    Internet Posting: All comments received will be posted without 
change to http://www.fdic.gov/regulations/laws/federal/notices.html 
including any personal information provided.

FOR FURTHER INFORMATION CONTACT: Thomas Bolt, Counsel, telephone (202) 
898-6750, Federal Deposit Insurance Corporation, Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Background

    Recently, the growth of the ILC industry, the trend toward 
commercial company ownership of ILCs and the nature of some ILC 
business models have raised questions about the risks posed by ILCs to 
the Deposit Insurance Fund, including whether their commercial 
relationships pose any safety and soundness risks. On July 28, 2006 the 
FDIC imposed a six-month moratorium on FDIC action to (i) accept, 
approve, or deny any application for deposit insurance submitted to the 
FDIC by, or on behalf of, an ILC, or (ii) accept, disapprove, or issue 
a letter of intent not to disapprove, any change in bank control notice 
submitted to the FDIC with respect to an ILC. The purpose of the 
moratorium is to preserve the status quo while the FDIC evaluates (i) 
industry developments, (ii) the various issues, facts, and arguments 
raised with respect to the ILC industry, (iii) whether ILCs pose any 
increased risk to the Deposit Insurance Fund, or whether there are 
emerging safety and soundness issues or policy issues involving ILCs, 
and (iv) whether statutory, regulatory, or policy changes should be 
made in the FDIC's oversight of ILCs in order to protect the Deposit 
Insurance Fund or important Congressional objectives. A notice of the 
imposition of the moratorium was published in the Federal Register on 
August 1, 2006 (71 FR 43482, August 1, 2006). The notice expressed the 
FDIC's intent to seek public input on the issues and concerns raised 
with regard to the ILC industry.
    ILCs were first chartered in the early 1900's as small loan 
companies for industrial workers. ILCs are state-chartered banks 
supervised by their chartering states and the FDIC, which is their 
primary Federal regulator. ILCs were first insured on January 1, 1934. 
As of March 31, 2006, 61 insured ILCs operating from California, 
Colorado, Hawaii, Indiana, Minnesota, Nevada, and Utah reported total 
assets approximating $155 billion.
    Under current law, certain ILCs may affiliate with, or be owned by, 
a company whose activities are generally considered to be commercial in 
nature. This ability of certain ILCs to be owned by or affiliated with 
commercial entities results from the Competitive Equality Banking Act 
of 1987 (CEBA). The CEBA generally exempts from the definition of 
``bank'' in the Bank Holding Company Act (BHCA) any ILC that meets 
certain requirements. As a result, the parent companies of ILCs that 
qualify for the exemption from the BHCA, unlike companies that are 
subject to the BHCA, are not prohibited from engaging in commercial 
activities, and are not required to be supervised by the Federal 
Reserve Board (FRB) and may not be subject to any other form of 
consolidated supervision. Nevertheless, the majority of companies that 
own ILCs are financial entities. Eleven are under some form of 
consolidated supervision by either the FRB or the Office of Thrift 
Supervision (OTS). OTS-supervised holding companies currently control 
approximately 65% of the total ILC assets nationwide. Many other 
companies that own ILCs are subject to primary supervision by state or 
Federal regulators.
    Since ILCs are insured state nonmember banks, they are subject to 
FDIC Rules and Regulations, restrictions under the Federal Reserve Act 
governing transactions with affiliates and anti-tying provisions of the 
BHCA, various consumer protection laws and regulations, and the 
Community Reinvestment Act. ILCs are also subject to regular 
examinations, including examinations focusing on safety and soundness, 
consumer protection, community reinvestment, information technology and 
trust activities.
    FDIC supervisory policies regarding an institution, including an 
ILC owned by a parent company, consider the organizational 
relationships of the institution. The FDIC has the authority to examine 
an ILC's relationships with its parent company and any other affiliate. 
Also, the FDIC's enforcement authority extends beyond the ILC itself 
and includes institution-affiliated parties. This includes the 
authority to require such action as the agency determines to be 
appropriate, which may include divestiture of the ILC. However, since 
the FDIC is not a consolidated supervisor, it does not have the 
authority to examine affiliates that do not have a relationship with 
the ILC or to impose capital requirements on the parent company of an 
ILC.
    The FDIC generally follows the same review process for ILC 
applications and notices as it does for such filings from other 
applicants. In the case of applications for deposit insurance, the FDIC 
has the authority to impose reasonable conditions through its order 
approving the application. In the case of a change in bank control 
filed with the FDIC, the FDIC can impose requirements and restrictions 
through a formal agreement among the FDIC, the institution and the 
parent company. Decisions regarding specific conditions or provisions 
are based upon the totality of the filing and investigation, and may 
consider the complexity and perceived risk of the proposal, adequacy of 
capital and management, relationships with affiliated entities, and 
sufficiency of risk management programs, among other considerations. 
Conditions or provisions may be time-specific or may impose continuing 
requirements or restrictions that must be satisfied on an ongoing 
basis. Conditions may be modified or discarded at the request of the 
institution or at the FDIC's own initiative if circumstances change in 
the future.

Concerns Expressed Regarding ILCs

    A variety of concerns have been raised regarding ILCs. These 
primarily focus on whether ILCs in a holding company structure that is 
not subject to some form of consolidated supervision pose greater 
safety and soundness issues or risks to the Deposit Insurance Fund than 
do insured depository institutions

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in a holding company structure which is subject to consolidated Federal 
supervision. These concerns include the absence of consolidated 
supervisory requirements for the parent companies of ILCs; the absence 
of an obligation by the ILC parent company to keep the ILC well 
capitalized; and differences in authority to examine affiliate 
relationships. General concerns have also been raised about the 
potential mixing of banking and commerce that might be presented by an 
ILC.

II. Questions Posed by the FDIC

    In imposing the six-month moratorium on actions relative to 
applications for deposit insurance and notices of change in bank 
control, the FDIC indicated its intent to evaluate (i) industry 
developments; (ii) the various facts, issues, and arguments raised with 
respect to the ILC industry; (iii) whether there are emerging safety 
and soundness issues or other risks to the Deposit Insurance Fund or 
other policy issues involving ILCs; and (iv) whether statutory, 
regulatory, or policy changes should be made in the FDIC's oversight of 
ILCs in order to protect the Deposit Insurance Fund or other important 
Congressional objectives. The FDIC believes that public participation 
will provide valuable insight into the issues presented by recent 
trends and changes in the ILC industry, and will assist the FDIC in 
deciding how to respond to those issues. In order to obtain public 
input, the FDIC invites comments in response to the following 
questions. To aid our analysis, we encourage commenters to identify, by 
number, the question to which each section of their comment 
corresponds.
    1. Have developments in the ILC industry in recent years altered 
the relative risk profile of ILCs compared to other insured depository 
institutions? What specific effects have there been on the ILC 
industry, safety and soundness, risks to the Deposit Insurance Fund, 
and other insured depository institutions? What modifications, if any, 
to its supervisory programs or regulations should the FDIC consider in 
light of the evolution of the ILC industry?
    2. Do the risks posed by ILCs to safety and soundness or to the 
Deposit Insurance Fund differ based upon whether the owner is a 
financial entity or a commercial entity? If so, how and why? Should the 
FDIC apply its supervisory or regulatory authority differently based 
upon whether the owner is a financial entity or a commercial entity? If 
so, how should the FDIC determine when an entity is ``financial'' and 
in what way should it apply its authority differently?
    3. Do the risks posed by ILCs to safety and soundness or to the 
Deposit Insurance Fund differ based on whether the owner is subject to 
some form of consolidated Federal supervision? If so, how and why? 
Should the FDIC assess differently the potential risks associated with 
ILCs owned by companies that (i) are subject to some form of 
consolidated Federal supervision, (ii) are financial in nature but not 
currently subject to some form of consolidated Federal supervision, or 
(iii) cannot qualify for some form of consolidated Federal supervision? 
How and why should the consideration of these factors be affected?
    4. What features or aspects of a parent of an ILC (not already 
discussed in Questions 2 and 3) should affect the FDIC's evaluation of 
applications for deposit insurance or other notices or applications? 
What would be the basis for the FDIC to consider those features or 
aspects?
    5. The FDIC must consider certain statutory factors when evaluating 
an application for deposit insurance (see 12 U.S.C. 1816), and certain 
largely similar statutory factors when evaluating a change in control 
notice (see 12 U.S.C. 1817(j)(7)). Are these the only factors FDIC may 
consider in making such evaluations? Should the consideration of these 
factors be affected based on the nature of the ILC's proposed owner? 
Where an ILC is to be owned by a company that is not subject to some 
form of consolidated Federal supervision, how would the consideration 
of these factors be affected?
    6. Should the FDIC routinely place certain restrictions or 
requirements on all or certain categories of ILCs that would not 
necessarily be imposed on other institutions (for example, on the 
institution's growth, ability to establish branches and other offices, 
ability to implement changes in the business plan, or capital 
maintenance obligations)? If so, which restrictions or requirements 
should be imposed and why? Should the FDIC routinely place different 
restrictions or requirements on ILCs based on whether they are owned by 
commercial companies or companies not subject to some form of 
consolidated Federal supervision? If such conditions are believed 
appropriate, should the FDIC seek to establish the underlying 
requirements and restrictions through a regulation rather than relying 
upon conditions imposed in the order approving deposit insurance?
    7. Can there be conditions or regulations imposed on deposit 
insurance applications or changes of control of ILCs that are adequate 
to protect an ILC from any risks to safety and soundness or to the 
Deposit Insurance Fund that exist if an ILC is owned by a financial 
company or a commercial company? In the interest of safety and 
soundness, should the FDIC consider limiting ownership of ILCs to 
financial companies?
    8. Is there a greater likelihood that conflicts of interest or 
tying between an ILC, its parent, and affiliates will occur if the ILC 
parent is a commercial company or a company not subject to some form of 
consolidated Federal supervision? If so, please describe those 
conflicts of interest or tying and indicate whether or to what extent 
such conflicts of interest or tying are controllable under current laws 
and regulations. What regulatory or supervisory steps can reduce or 
eliminate such risks? Does the FDIC have authority to address such 
risks in acting on applications and notices? What additional regulatory 
or supervisory authority would help reduce or eliminate such risks?
    9. Do ILCs owned by commercial entities have a competitive 
advantage over other insured depository institutions? If so, what 
factors account for that advantage? To what extent can or should the 
FDIC consider this competitive environment in acting on applications 
and notices? Can those elements be addressed through supervisory 
processes or regulatory authority? If so, how?
    10. Are there potential public benefits when a bank is affiliated 
with a commercial concern? Could those benefits include, for example, 
providing greater access to banking services for consumers? To what 
extent can or should the FDIC consider those benefits if they exist?
    11. In addition to the information requested by the above 
questions, are there other issues or facts that the FDIC should 
consider that might assist the FDIC in determining whether statutory, 
regulatory, or policy changes should be made in the FDIC's oversight of 
ILCs?
    12. Given that Congress has expressly excepted owners of ILCs from 
consolidated bank holding company regulation under the Bank Holding 
Company Act, what are the limits on the FDIC's authority to impose such 
regulation absent further Congressional action?

    By order of the Board of Directors.
* * * * *
    Dated at Washington, DC, this 17th day of August, 2006.


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    Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
 [FR Doc. E6-13941 Filed 8-22-06; 8:45 am]
BILLING CODE 6714-01-P