FDIC Approves ILC With Traditional Bank Business Model (But Don’t Rush To Submit Your Application Just Yet)

An industrial bank or industrial loan company (each, an ILC) charter can be an attractive option for a financial technology company (fintech) or other company seeking to enter the banking space. In June 2024, the Federal Deposit Insurance Corporation (FDIC) approved a de novo deposit insurance application for a Utah-chartered ILC submitted by Thrivent Bank. This was the FDIC’s first approval of such an application from an ILC since March 2020, when it approved two separate applications for Utah-chartered ILCs submitted by fintech companies Nelnet and Square, respectively. The FDIC’s approval of Thrivent Bank’s application suggests that it may be open to approving deposit insurance for ILCs involving traditional bank business models, but questions remain about whether the FDIC is open to approving deposit insurance applications for ILCs more generally.

Thrivent and GM

Thrivent Financial for Lutherans is a fraternal benefit society whose common bond is based on religious affiliation. Thrivent Financial for Lutherans offers a variety of financial services, including financial advice, investments, and insurance. Thrivent Bank is a direct subsidiary of Thrivent Financial Holdings, Inc. (Thrivent Holdings), and was formed to grow the existing business of Thrivent Federal Credit Union (TFCU), which is restricted to a field of membership and lacks the formal financial or capital support of a parent company. After TFCU merges with and into Thrivent Bank, the surviving bank will incorporate TFCU’s existing products, customers, infrastructure, and personnel. The surviving bank will be positioned to attract customers nationwide without regard to customers’ religious affiliations. Additionally, Thrivent Financial for Lutherans and Thrivent Holdings will enter into agreements to serve as a source of financial strength for the bank and to consent to certain examination, reporting, recordkeeping, and other safeguards. The bank will operate exclusively online under a traditional bank business model. At the FDIC’s board meeting regarding the application, Acting Comptroller of the Currency Michael J. Hsu stated that Thrivent Bank “would look a lot like a community bank.”

The FDIC’s approval of Thrivent Bank’s deposit insurance application contrasts with the withdrawal, days later, of another Utah-chartered ILC’s deposit insurance application. GM Financial Bank, an indirect subsidiary of General Motors, had applied to the FDIC for deposit insurance in late 2020. GM Financial Bank would have supported the automaker’s captive finance operations. Shortly before withdrawing its deposit insurance application, GM Financial Bank had received charter approval from the Utah Department of Financial Institutions. GM Financial Bank’s withdrawal of its long-pending deposit insurance application at this late stage suggests the applicant did not see a path to approval by the FDIC. 

The outcomes of the deposit insurance applications of Thrivent Bank and GM Financial Bank suggest that the FDIC may see fewer risks in applications from ILCs that operate traditional bank business models and that are controlled by financial services organizations, as opposed to those that operate specialty or novel business models or that are controlled by commercial firms. 

ILCs: What Are They?

ILCs are state-chartered institutions that may be formed under the laws of certain states, including California, Colorado, Nevada, and Utah. ILCs are regulated by state banking authorities and the FDIC, and they are empowered to make loans and accept certain types of deposits. As insured depository institutions, ILCs may avail themselves of interest rate exportation under the Federal Deposit Insurance Act. They are also exempt from regulation under most state money transmission laws. These benefits are particularly attractive for fintechs or other companies with lending or payments operations, which otherwise are subject to a hodgepodge of state rules or must conduct business through a bank partnership arrangement.

A company may own an ILC without becoming a bank holding company if the ILC qualifies under an exception in the Bank Holding Company Act of 1956, as amended (BHC Act) for certain ILCs. To qualify, the ILC must be organized in a state that, on March 5, 1987, had in effect or under consideration in its legislature a statute requiring such an institution to obtain FDIC insurance. In addition, it either (1) must not have assets exceeding $100 million, or (2) must not accept demand deposits. While the limitation on accepting demand deposits is significant, it does not preclude an ILC from providing negotiable order of withdrawal accounts (NOW accounts) to consumers and other eligible depositors, as well as money market deposit accounts and other deposit accounts that are not considered demand deposits but that still provide check-writing and other transactional capabilities. Since qualifying ILCs are not “banks” for purposes of the BHC Act, acquiring control of an ILC will not cause the acquiring company to become a bank holding company subject to regulation under the BHC Act, including its limitations on activities and investments.

The ILC exemption from the BHC Act comes with limitations. In particular, any company that directly or indirectly controls an ILC will be considered a “banking entity” subject to the Volcker rule, unless exempted under the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). The EGRRCPA provides an exemption from the Volcker rule for community banks, which are institutions that do not have, and are not controlled by, a company that has more than $10 billion in total consolidated assets, and total trading assets and trading liabilities exceeding 5% of total consolidated assets. Some states may impose additional limitations. For example, a company that directly or indirectly controls a California ILC may engage only in activities that are considered financial in nature.

A provision in the Dodd-Frank Act mandates that US federal banking regulators require any company that directly or indirectly controls an insured depository institution that is not a subsidiary of a bank holding company or a savings and loan holding company to serve as a source of financial strength for the institution. This requirement means that a controlling investor could be called upon to provide capital support to a subsidiary depository institution, such as an ILC, at a time when it might prefer not to do so.

The ILC charter is also not without controversy. Because it is the only insured depository institution charter available to firms engaged in commercial activities not otherwise permissible for bank holding companies and non-grandfathered savings and loan holding companies, it has long been viewed by some as a loophole from the BHC Act. Historically, the charter was used primarily by automobile manufacturers and other commercial and industrial firms to conduct specialty finance operations. But Walmart’s application for an ILC charter in 2005 prompted concern among its competitors, the banking industry, and others that the retailer would unfairly enjoy a competitive advantage by avoiding the regulatory oversight and limitations that normally accompany ownership of a depository institution. The FDIC responded by delaying action on ILC filings and ultimately imposed a moratorium on deposit insurance applications by new ILC charters owned by nonfinancial companies. Until its actions in 2020 and 2024, the FDIC had not approved a deposit insurance application for a new ILC charter since 2008, though several applications had been filed and subsequently withdrawn since 2013. The conditions the FDIC imposed on Square and Nelnet, and those it has formalized as a final rule (described below) and imposed on Thrivent Bank’s parent companies, are similar to those imposed as conditions on other applicants in 2008 with the notable exception that the FDIC’s final rule and the conditions imposed on Thrivent Bank’s parent companies do not limit the permissible activities of a company that controls an ILC.

The FDIC’s Regulations for Parent Companies of ILCs

In December 2020, the FDIC finalized a rule (12 C.F.R. Part 354) that requires certain conditions and commitments for approval or non-objection to certain filings involving an ILC whose parent company is not subject to consolidated supervision by the Federal Reserve (covered parent company). Specifically, the final rule prohibits any ILC from becoming a subsidiary of a covered parent company unless the covered parent company enters into one or more written agreements with the FDIC and its subsidiary ILC requiring that the covered parent company agree to do the following:

• Furnish an initial listing, with annual updates, of the covered parent company’s subsidiaries.
• Consent to the examination of the covered parent company and its subsidiaries.
• Submit an annual report on the operations and activities of the covered parent company and its subsidiaries, and other reports as requested.
• Maintain such records as deemed necessary by the FDIC to assess the risks to the ILC or to the Deposit Insurance Fund.
• Cause an independent annual audit of each ILC.
• Limit the covered parent company’s representation on the ILC’s board of directors or board of managers, as the case may be, to less than 50%.
• Maintain the ILC’s capital and liquidity at such levels as deemed appropriate and take such other actions to provide the ILC with a resource for additional capital or liquidity.
• Enter into a tax allocation agreement expressly stating that an agency relationship exists between the covered parent company and the ILC with respect to tax assets generated by the ILC, and that all such tax assets are held in trust by the covered parent company for the benefit of the ILC and will be promptly remitted to it.
• Depending on the facts and circumstances, provide, adopt, and implement a contingency plan that sets forth strategies for recovery actions and the orderly disposition of the ILC without the need for a receiver or conservator. 

In addition, the final rule requires the FDIC’s prior written approval before an ILC that is a subsidiary of a covered parent company may take the following actions:

• Make a material change in its business plan after becoming a subsidiary of a covered parent company.
• Obtain the FDIC’s prior approval to add or replace a member of the board of directors or board of managers or a managing member during the first three years after the ILC becomes a subsidiary of the covered parent company, as the case may be.
• Add or replace a senior executive officer during the first three years after the ILC becomes a subsidiary of the covered parent company.
• Employ a senior executive officer who is, or during the past three years was, associated in any manner with an affiliate of the ILC, such as a director, officer, employee, agent, owner, partner, or consultant of an affiliate of the ILC.
• Enter into any contract for services material to the operations of the ILC with the covered parent company or a subsidiary thereof.

The FDIC could, on a case-by-case basis, impose additional restrictions on the covered parent company or its controlling shareholder if circumstances warrant.

As a result, it is essential that any company considering acquiring control of an ILC evaluate the impact of the final rule’s requirements on the company and its investors.

We Can Help You Evaluate Your Organization’s Options

Whether to form or to acquire an ILC is an important decision requiring careful consideration of your organization’s unique activities and needs. Let our team of experienced banking lawyers help you identify the structure that best suits your organization, formulate a detailed action plan, and navigate through its execution. For additional information, please contact one of the authors or another member of Goodwin’s Banking practice, which is part of the firm’s Financial Services group.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.