Regulatory hoopla stirred by Wal-Mart Stores Inc.’s push to launch banking services has shined a spotlight on a niche part of the banking industry: industrial loan companies.
Orange County has several of the bank-like operations, which can lend money and process credit card transactions, but are barred from offering non-interest bearing accounts, among other services.
The Federal Deposit Insurance Corp. recently put a six-month moratorium on applications for deposit insurance by industrial loan companies,effectively nixing the formation of new companies or acquisitions by others.
The move came in response to Wal-Mart’s bid to set up an industrial loan company.
Banks see Wal-Mart’s move as a threat to their operations.
While industrial loan companies can’t offer all the services of a bank, they can process debit and credit card transactions. A Wal-Mart operation could cut fees banks earned from processing the transactions.
Another quirk of industrial loan companies: They can be owned by non-banks or thrifts.
Ford Motor Co., Toyota Motor Co., General Electric Co. and General Motors Corp. all operate industrial loan companies.
The FDIC decision affects at least five industrial loan companies with headquarters in OC.
Those include: Brea-based Fremont Investment & Loan, a unit of Fremont General Corp. of Santa Monica, with $12.8 billion in assets; Fountain Valley-based Centennial Bank, a unit of title insurer LandAmerica Financial Group Inc., with $690 million; Newport Beach-based Independence Bank, a unit of Independence Financial Group Inc., with $225 million; Orange-based First Security Thrift Co., a unit of Santa Ana title insurer First American Corp., with $137.2 million; and Tustin-based Tustin Community Bank, a unit of Saddleback Bancorp, with $48.4 million.
Seven states allow industrial loan companies: California, Colorado, Hawaii, Indiana, Minnesota, Nevada and Utah, where Wal-Mart applied for a charter.
In all, there are 61 industrial loan companies with $155 billion in assets.
U.S. Independence Bank and Tustin Community Bank recently started the process of converting to commercial banks. They want to offer more services, such as non-interest bearing accounts, to businesses, officials said.
“We want the flexibility to expand,” said Chuck Thomas, president and chief executive of Newport Beach-based Independence Bank.
His motivation to seek the charter change had little to do with the FDIC moratorium.
“It’s unfortunate that a great deal of attention was brought to these (industrial loan companies) due to the Wal-Mart situation. But that’s business,” Thomas said.
Gene Micco, chief executive of Tustin Community Bank, said he doesn’t think the moratorium will spur a wave of conversions to bank charters.
“It’s all about big banks putting pressure on Congress to stop Wal-Mart from getting into their business,” he said. “They are worried that the same thing that happened with supermarkets putting corner markets out of business, will happen to them. It’ll change the footprint.”
California Action
California passed legislation three years ago to bar non-financial institutions from buying or setting up industrial banks. The law came about after Wal-Mart unsuccessfully tried to buy Franklin Industrial Bank of Orange.
But the FDIC’s move to place a moratorium on industrial loan companies could spur those left behind to change their charters to banks or thrifts, said Ed Carpenter, chairman and chief executive of Irvine-based banking consultancy Carpenter & Co.
“The effect of this moratorium is that it is very likely that (industrial loan companies) as we know them today will become much more like banks in terms of the companies that own them,” Carpenter said. “Their parents in the future will have to be qualified to own financial service companies.”
The FDIC moratorium has slowed at least one company with expansion plans in OC.
Pasadena-based Wescom Credit Union, which is set to open a major administration center in Anaheim in October, has withdrawn plans to establish a credit card bank in California to compete against commercial bank rivals.
Wescom recently scuttled plans to buy La Jolla-based Silvergate Capital Corp., an industrial loan company with more than $412 million in assets and a credit card operation, because the moratorium delayed the acquisition.
A year ago, Wescom boosted its presence in OC when it bought a four-story, 117,500-square-foot office building at 5601 E. La Palma Ave.
The credit union is renovating the site following the departure of title insurer First American Corp., which moved operations to its Santa Ana headquarters.
Wescom, the 14th largest credit union in the U.S. with more than $3 billion in assets, stands to be the second biggest in OC by employees when it opens in the fall.
Initially, Wescom will employ up to 300 people at the building, with plans to expand to 500 workers.
