Mickey Marshall: Let's Close the ILC Loophole

The widening risks tied to the industrial loan company (ILC) loophole have become an increasing concern for community banks. At its core, the loophole lets commercial firms own FDIC-insured institutions without meeting the supervisory standards required of traditional bank holding companies. That structure creates substantial exposure for consumers, community banks and the broader financial system.

For decades, ICBA has sought to ensure U.S. banking policy follows a clear principle: Any company that owns a full-service bank must operate under the same rules and oversight as everyone else. The ILC exemption breaks from that long-standing framework. In a financial landscape where Big Tech is expanding, rapid advances in AI and new entrants seeking to leverage consumer data are reshaping how financial services operate. Those trends only heighten the risks of leaving this loophole in place and further weakening the separation of banking and commerce.

For these and other reasons, ICBA continues to advocate for closing the ILC loophole and urges the FDIC to pause decisions on pending applications until the full impact is understood. Consistent supervision, level requirements and a clear line between commercial activity and banking are essential to protecting consumers, safeguarding the Deposit Insurance Fund (DIF) and ensuring fair competition across the industry.

Preserving the separation of banking and commerce

With the enactment of the Bank Holding Company Act (BHCA) in 1956, Congress decided that it was important to limit bank holding companies to business activities that are financial in nature. Due to their exemption from the BHCA’s definition of a bank, ILCs are the most notable exception to this general rule.

These institutions now operate much like full-service commercial banks. They are primarily chartered in Utah and a handful of other states, enjoy broad consumer and commercial lending authority, and can operate nationwide without limits on size or scale. They qualify for FDIC insurance as state banks, yet remain outside the BHCA and the consolidated supervision required of traditional bank holding companies.

Under this ILC loophole, commercial firms can own federally insured institutions that operate like full-service banks while avoiding Federal Reserve oversight. The only statutory restriction—that ILCs cannot accept demand deposits—offers little real protection, because similar account structures are easy to create. In practice, commercial companies can enter banking without meeting the regulatory expectations that apply to every other bank owner.

A charter built for another era

The separation of banking and commerce has long been a core principle of U.S. financial policy. It guided the BHCA, which created consolidated supervision and limited bank holding companies to activities tied directly to banking. These safeguards were enacted to prevent commercial interests from influencing credit decisions or creating conflicts within insured institutions.

Over time, amendments to the BHCA introduced exceptions, including the one that became today’s ILC loophole. When these exemptions were created, ILCs were small institutions with narrow consumer finance roles, but that is no longer the case. Large commercial and technology firms now seek ILC charters to embed banking functions into broad commercial platforms. This raises significant concerns. Mixing commercial activity with full-service banking can weaken underwriting discipline, create conflicts of interest and erode the regulatory structure that has protected consumers and the financial system for decades.

This is why closing the loophole is essential to preserving a level playing field. Community banks follow rigorous standards that safeguard the DIF and maintain trust in the banking system. Commercial firms that choose to own full-service banks should meet the same requirements.

The path forward

ICBA continues to call for closing the ILC loophole that lets commercial firms own FDIC-insured institutions without the consolidated supervision required of traditional bank holding companies. ILCs have the same lending powers as commercial banks and can expand nationally. Yet, their parent companies remain outside the BHCA. Thanks to the exemption, the restriction on accepting demand deposits is easily sidestepped with similar account structures. This lets commercial firms enter banking without meeting the standards every other bank owner must follow.

ICBA’s position is clear: A carveout created decades ago for small, limited-purpose lenders shouldn’t serve as a pathway for large commercial or technology companies to expand into banking. This structure exposes the DIF to avoidable risk, creates conflicts of interest and undermines the safeguards that protect consumers and the broader financial system.

ICBA is urging Congress to amend the BHCA and close the loophole for good. In the interim, we’re pressing the FDIC to deny applications that pose elevated risk or fail to meet community needs, and to reinstate a moratorium on new ILC insurance approvals until the implications are fully evaluated.

The bottom line is that community banks already meet strict standards to preserve safety and trust. Commercial firms that want to own full-service banks should be held to the same requirements. ICBA will continue to advocate consistent rules and a regulatory framework that keeps banking separate from commercial interests.

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