SoFi Bank Puts ILC Charter in Spotlight

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is SoFi exploiting a legal loophole?

Chris Cole
Christopher Cole, EVP & Senior Regulatory Counsel, ICBA

Online lender SoFi’s decision to apply for a bank charter has snagged the attention of alternative lenders, big and small banks and regulators alike. Market participants appear split between cheering the move and drawing a line in the sand. One thing they agree on is that the signs were there all along.

Christopher Cole, executive vice president and senior regulatory counsel at the Independent Community Bankers of America (ICBA) said it was only a matter of time.

“We were expecting the application from a fintech company to come eventually and it came pretty rapidly,” Cole told deBanked. “What was surprising to me was that they took the ILC route as opposed to the OCC special purpose national bank charter.”

As a Utah-chartered industrial bank SoFi would be subject to the regulation of the FDIC. There have not been any ILC applications for deposit insurance in years in part due to a temporary moratorium that Dodd Frank placed on the ILC loophole following the financial crisis, a roadblock that has since been removed.

Richard Hunt, president and CEO of the Consumer Bankers Association (CBA), said that SoFi’s application was certainly not a shock.

“The whole world is evolving, fintech is evolving. This was inevitable one way or another,” Hunt told deBanked, adding that there will probably be more applications coming down the pike, which he welcomes. “We’re glad more people are getting into banking. SoFi at one time railed against banks and now it wants to get into banking. Welcome to the world of banks and overregulation.”

The CBA is comprised of the country’s largest financial institutions as well as regional banks.


“This is the first true test of the FDIC in a new fintech world,” said Hunt, adding that it’s the duty of the FDIC to ensure that SoFi Bank is well capitalized. “That is part of the application process.”

The ICBA is comprised of approximately 6,000 small banks across $5 trillion in assets.

“This would actually create a risk to the deposit insurance system. An ILC would have deposit insurance from the FDIC. If SoFi Bank fails because parent SoFi can’t maintain it, the rest of the banking system must pay for it. They’re putting the banking industry at risk here,” said Cole.

And while the rise of fintech startups has created more competition for banks, neither trade organization has a problem with this.

“We’re not trying to keep fintech from competing, that’s not the case,” said Cole.

Meanwhile Hunt told of his trip to Silicon Valley in which he visited SoFi as well as many other fintech startups.

“I’ve always been a big fan of SoFi, especially after visiting. I’m head over heels they chose banking as their industry. We’re gloating that they want to join the banking industry. This is good for consumers, to have choices. We are not going to be afraid of SoFi joining the banking world. We welcome them to the banking world,” said Hunt, adding that banks are ready to compete as long as it’s fair.

Fair is precisely what the ICBA is seeking.

Richard Hunt, CBA

Richard Hunt, President & CEO, CBA

Level Playing Field

There are about 30 existing ILCs in existence now and thousands of insured banks. And SoFi’s use of the ILC charter is the ICBA’s main objection.

“It’s the fact that they’re using this loophole so that SoFi, the parent company of SoFi Bank the subsidiary, will not be subject to the same kind of restrictions that the owner of a commercial bank would. And therefore, you don’t have a level playing field,” said Cole.

The ICBA is also concerned that a successful SoFi ILC charter would set a precedent for other fintech firms.

“Who’s next? I could see Amazon trying to do this and waiting for SoFi to do it first. Who knows? I could see maybe Google and PayPal pursuing this. I could see some big commercial companies exploiting this loophole, and that is why we think it should be closed,” said Cole.

Meanwhile CBA’s Hunt sees things somewhat differently. He said SoFi’s application represents an opportunity for bank regulators to review the ILC in a new world environment and possibly make changes.


“No one envisioned when they wrote the ILC charter that we would have fintech companies that finance mortgages and student loans from private equity capital and not deposits. It’s a new world. Like with all rules and regulations, federal regulators should periodically review longstanding policy,” Hunt said.

Either way the influence of the banking sector should not be overlooked.

“We have been fighting the ILC charter for over a decade. When Walmart tried to apply for an ILC charter in 2006 we objected at that point. And that resistance was part of the reason why they never got a charter,” said Cole.

SoFiSoFi Bank

The ICBA is preparing commentary for the FDIC, which is due by July 18. “Our comments will be focused mostly on the use of the ILC charter,” said Cole.

Once the comments are in, the ball is in the FDIC’s court. “We’re anticipating that a decision will be made in the next two to three months. We should know by the end of this year whether or not SoFi Bank gets its charter and deposit insurance,” said Cole.

If SoFi does become a bank, Hunt says he’s pleased that the fintech company has expanded its lending beyond only the elite universities though he’s still not sure they’ve gone far enough. “If they are granted the ILC charter, every student should have fair access to SoFi’s products just as they do with every other bank in this country,” said Hunt.

SoFi declined to comment for this story.

Last modified: June 28, 2017

Category: Online Lending, Regulation

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