Statement of CFPB Director Rohit Chopra, Member, FDIC Board of Directors, on the Proposed Rulemaking on Industrial Loan Companies

Industrial banks require special attention from the FDIC Board of Directors given the unique risks they pose. U.S. law generally prohibits commercial companies from owning federally insured banks, given the significant inherent risks and conflicts of interest of this ownership structure.¹

Pursuant to the FDIC’s procedures, actions related to deposit insurance for industrial loan companies are not delegated to staff. Final agency actions are determined by the Board in accordance with the statutory factors set forth in Section 6 of the Federal Deposit Insurance Act. Importantly, the Board may deny an application if any of the factors are not satisfied.

In addition, the FDIC requires the parent company of approved industrial banks to enter into certain written agreements with the agency to help mitigate some of the risks posed by the ownership structure.²

Today’s proposed rule provides the public and potential applicants with additional transparency as to how the agency applies the statutory factors for deposit insurance applications, especially as it relates to the observed uptick in unlawful shell bank applications.

Proposed Rulemaking

The Federal Deposit Insurance Act requires the Board to consider the following factors for deposit insurance applications: the financial history and condition of the bank, the adequacy of its capital structure, its future earnings prospects, the general character and fitness of its management, the convenience and needs of the community to be served, the risk presented to the Deposit Insurance Fund, and whether or not its corporate powers are consistent with the purposes of the Act.

The Board has observed a concerning increase in applications that deploy a shell bank model. Essentially, the proposed bank is unable to function on a standalone basis, is highly reliant on the parent company for customers or operational support, and/or the bank serves as a publicly subsidized funding channel for the parent company’s business lines.

These applications pose a series of concerns against multiple statutory factors. For example, these applications tend to pose significant risks to the Deposit Insurance Fund. If the bank is inextricably linked to the parent company, there will be no bidders in a resolution. The bank is structured to be valuable only when it is tied to the parent. It is generally more costly to the Deposit Insurance Fund to liquidate a bank compared to finding a buyer. In addition, the liquidation would likely occur during a downturn in the underlying industry to which the bank and parent company are both exposed, further exacerbating losses. These highly risky characteristics can also violate the statutory factors related to financial history and condition, future earnings prospects, and adequacy of the capital structure.

The shell bank model also tends to exclusively serve the clients of the parent company. For example, the bank may only lend to or take deposits from clients of the parent company. They generally prohibit the public from accessing the bank’s products and services. These facts tend to violate the statutory factor related to the convenience and needs of the community. This model meets the convenience and needs of the parent company and its clients, not the community. Often, the parent company already has an existing nonbank affiliate that engages in this captive financing model. The proposed bank is simply a way to have the public subsidize the existing business model with federal deposit insurance.

The proposed rule would establish a rebuttable presumption against approving these shell bank applications, given that the fact pattern tends to violate multiple statutory factors.

The proposed rule also makes clear that the Board of Directors may issue a public statement following the withdrawal of an industrial bank’s deposit insurance application in lieu of a denial order to provide the public with transparency as to the reasons behind the withdrawal. In the future, I hope we can issue more public orders, including denials, to give market participants greater clarity about how the Board applies the factors outlined in the law.

In the spirit of transparency, I’ll provide a brief overview of my own concerns with two recent applications that were withdrawn: General Motors Financial and Edward Jones.

Application from General Motors Financial Withdrawn in June 2024

General Motors (GM) is a global automaker. GM controls GM Financial, which currently operates a large auto finance company.³ GM Financial, among other things, supplies financing to the public for the purposes of stimulating purchases of GM vehicles. GM Financial Bank, the proposed subsidiary of GM Financial, applied for federal deposit insurance. Federal deposit insurance would have allowed GM Financial Bank to pay less to raise funding for lending, as the cost of compensating depositors would be lower than the costs of compensating other investors.

I had concerns that the application failed to satisfy three of the statutory factors: (1) the financial history and condition of the bank; (2) risk to the Deposit Insurance Fund; and (3) convenience and needs of the community to be served.

Financial History and Condition of the Bank and Risk to the Deposit Insurance Fund

General Motors previously owned several poor performing depository institutions, including GMAC bank, a firm that required a $17 billion bailout in the 2008 financial crisis. The specific details of the agency’s supervisory history with the banks owned by GM remains confidential, but it raised a host of concerns.

GM Financial Bank would have been almost fully reliant on GM for loan and deposit customers. If GM or GM Financial Bank had experienced stress, there would not have been any acquirers for the bank. It is worth noting that the proposed insured bank would have been a monoline lender, much like the existing nonbank GM Financial, exposed to the same auto market fluctuations as GM. A stress scenario would have likely occurred during a downturn in the auto industry, making it very costly for the FDIC to liquidate the bank and its auto loans.

Convenience and Needs of the Community to be Served

First, as a threshold matter, there must be a meaningful community of sufficient breadth that is to be served. Often, the community is either a geographic area, one or more broad classes of customers (e.g., auto borrowers or mid-market businesses), or a combination of the two. In this case, the applicant did not intend to serve a broad community, such as auto borrowers nationally. The applicant intended to exclusively serve the clients of a third party—the parent company, GM.

Consumers who purchased a Ford or some other automobile, for example, would have been unable to obtain auto financing from GM Financial Bank, even if they were creditworthy and preferred GM Financial Bank’s rates and customer service. The applicant would have also funded the loans predominantly through deposit products offered to customers and other parties affiliated with the parent company.

Second, even if the applicant had proposed to serve a sufficiently broad community, it would not have clearly filled an unmet need by providing a new product or service to customers. It would have simply continued the lending already being conducted by GM Financial, the existing nonbank financial company, and offered standard online deposit products.

Third, the applicant would not have improved upon an existing product or service. It sought to enjoy the lower cost of funding that comes from access to the public safety net. There was nothing in the application that assured that this subsidy would have benefited consumers, as opposed to accruing to the shareholders and executives.

Application from Edward Jones Withdrawn in October 2022

Edward Jones is a financial services company that provides investment and wealth management services, including retail brokerage accounts, retirement accounts, and financial advice. The proposed Edward Jones Bank would have offered a single loan product, security-based loans, to existing clients of Edward Jones. The Edward Jones client’s security portfolio would serve as collateral for the Edward Jones Bank loans. The bank’s funding would have come from deposits offered to clients of Edward Jones.

There were clear indicia that this application failed to satisfy several of the Act’s statutory factors. I will highlight two factors in particular: (1) risk to the Deposit Insurance Fund and (2) convenience and needs of the community to be served.

Risk to the Deposit Insurance Fund

The proposed bank would have been inextricably linked to the parent company Edward Jones. All of the bank’s borrowers and all of the bank’s depositors would have been clients of Edward Jones. If Edward Jones or Edward Jones Bank had experienced stress, there would not have been any acquirers for the bank. In addition, the monoline business model and certain confidential elements of the proposed business plan raised additional concerns related to the Deposit Insurance Fund and other statutory factors.

Convenience and Needs of the Community to be Served

The bank would not have served a sufficiently broad community. It would have exclusively served clients of Edward Jones. People or businesses with a brokerage account at a competitor of Edward Jones who preferred the customer service and rates of Edward Jones Bank would have been prohibited from accessing its security-based loans. Similarly, the deposit funding would have come from Edward Jones customers only.

Even if the applicant was willing to serve a sufficiently broad community, it was not clear that the bank would have filled an unmet need. Edward Jones already offers margin loans to its customers directly and can offer security-based loans through third party bank partnerships. In addition, it already offers deposit products to its customers through a third-party network.

Moreover, the application did not adequately demonstrate that existing products or services would be improved upon. It is totally unclear from the application how lower funding costs supported by the federal safety net would have benefited the community, as opposed to accruing to shareholders and executives.

Conclusion

I strongly favor greater transparency and faster processing when it comes to applications for mergers and deposit insurance, including for industrial loan companies. Notably, the Board of Directors recently approved the application for Thrivent Financial, which submitted an application that was complete and demonstrated how it would meet the factors outlined in the Federal Deposit Insurance Act. However, other applications, including those submitted by GM Financial and Edward Jones, did not come close to meeting the legal criteria.

The proposed rule we are approving today would provide additional transparency to the public and reduce submissions of facially deficient applications.