WASHINGTON–NAFCU and CUNA have joined with a number of other financial services and consumer organizations in separate letters supporting closure of a loophole related to ILCs and opposing changes the SBA has announced for its loan programs, respectively.
In the former, the CU trade groups joined with others in expressing their support for the “Close the Shadow Banking Loophole Act,” new legislation in the Senate that would close the industrial loan company (ILC) charter loophole that has been used by some providers.
A similar bill passed the House earlier this year.
The legislation, introduced by Senate Banking Committee Chairman Sherrod Brown (D-OH), Sen. Bob Casey (D-PA) and Sen. Chris Van Hollen (D-MD), prohibits shadow banks and nonbank commercial entities from taking advantage of legal loopholes.
Not Subject to Rules
“These loopholes allow these companies to control a full-service FDIC-insured depository institution without being subject to the comprehensive set of rules designed to keep the financial system safe,” the organizations supporting the bill said.
The coalition, which includes, in addition to CUNA and NAFCU, Americans for Financial Reform, Bank Policy Institute, Center for Responsible Lending, Consumer Federation of America, Independent Community Bankers of America, Mid-Size Bank Coalition of America, National Community Reinvestment Coalition, National Consumer Law Center (on behalf of its low-income clients) and U.S. PIRG, stated in the letter:
“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.”
According to the signatories, Congress sought to preserve a competitive economy by establishing a strict separation between banking and commerce.
Additional Points Argued
“The ILC loophole allows commercial entities to undermine the intent of Congress and ignore the protections designed to maintain that separation,” the groups said.
According to the groups, the loophole:
- Creates a riskier financial system and less competitive economy.
- Gives major commercial firms – including Big Tech companies – access to sensitive balance and transaction data, adding to their trove of personal and behavioral data.
- Exempts these nonbanks from many consumer data and privacy protections.
About ILCs
In releasing their joint letter, in a statement the groups explained industrial loan companies offer special exemptions for any type of organization to control a full-service FDIC-insured depository institution without being subject to the same consolidated oversight and prudential standards or limitations applied to traditional financial institutions.
“These charters were established in the early 1900s and have historically been held by small, locally owned institutions,” the groups stated. “The Competitive Equality Banking Act excluded ILCs from the definition of a “bank” in the Bank Holding Company Act in 1987. As a result, the size and number of these companies ballooned until, in 2013, the Dodd-Frank Act imposed a temporary moratorium on new ILCs. That moratorium has been lifted.”
Also Introduced in House
The coalition noted it has also supported H.R. 5912, the “Close the ILC Loophole Act” introduced in the House by Congressman Jesús “Chuy” García (D-IL), Stephen Lynch (D-MA), Lance Gooden (R-TX) and Pete Sessions (R-TX).
The House bill passed through committee earlier this year.
CU Trade Groups Respond to SBA Plan
Separately, both CUNA and NAFCU joined with other organizations in a letter to the House and Senate Small Business Committee leadership that says proposals from the Small Business Administration will not actually help minority and underserved communities, and will instead lead to “detrimental shifts” in the SBA’s 7(a) lending program.
Up to 85% of loans made through the 7(a) program are guaranteed by the federal government, and the guaranteed portion of the loans do not count against a credit union’s member business lending cap.
The proposals would lift the moratorium on the number of non-federally regulated institutions that can make loans under the 7(a) program and loosen or remove the 7(a) program’s requirements for how lenders underwrite loans and how borrowers may use loan funds.
‘Laudable,’ But…
“Both propose removal or modification of long-existing prudent lending standards, which have ensured programmatic integrity for decades,” the letter reads. “It is into this framework of significantly loosened lending standards that the SBLC Proposed Rule also intends to open SBA’s flagship 7(a) program to a potentially unlimited number of SBLC lenders, including non-bank financial technology companies, or fintechs, that would be regulated solely by SBA.”
“SBA’s stated intention for these sweeping changes is to aid traditionally underserved borrowers, a laudable goal which our organizations and our thousands of SBA lending partners fully support,” the letter adds. “However, we believe that the changes, as proposed, will not actually help minority and underserved communities, and could unintentionally harm the very borrowers that SBA is trying to aid.”
Other Points Raised
Other points made in the letter by the groups include:
- The proposals “will not promote missions lending, as the proposal states political appointees will establish participation parameters on a lender-by-lender basis.”
- SBA would assume supervisory responsibilities over the new non-federally regulated lenders, and the organizations believe SBA’s Office of Credit Risk Management (OCRM) lacks the resources to take on additional supervisory responsibility.
- SBA “failed to propose any regulatory requirements that would attempt to mirror, for the new SBLCs, the federal regulatory and compliance requirements imposed on depository institutions that are supervised by a federal regulator.”
- The proposed regulatory language “does not limit SBA’s ability to add an unlimited number of SBLC licenses at any time that the agency sees fit.”
- One proposal would remove the detailed list of factors to be considered when lenders are determining whether a loan applicant is creditworthy. This “wholesale stripping of prudent lending standards” is concerning.
- SBA is acting “rashly” by proposing to expand the number of SBLCs before the numerous investigations relating to fraud in the Paycheck Protection Program (PPP) have been concluded by Congress.
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