GM’s lending arm applies for ILC charter

UPDATE: Dec. 18, 2020: General Motors Financial Company submitted its application for an ILC charter to the FDIC on Dec. 11.

Dive Brief:

GM's lending arm, General Motors Financial Company, is discussing plans to apply for an industrial loan company (ILC) charter as early as this month, The Wall Street Journal reported, citing unnamed sources.
If the application is approved, it would mark a return to the ILC format for the car maker. GM's previous lending arm, GMAC, held an ILC charter until 2008, when the Federal Reserve gave emergency approval for it to become a bank holding company amid a trio of government bailouts worth $17.2 billion.
GM Financial would join a groundswell of nonbanks, including investment company Edward Jones and e-commerce giant Rakuten, that have applied for ILC charters over the past months. The charter has drawn flak from trade groups and lawmakers who say it allows companies a way to provide banking services without Federal Reserve oversight.

Dive Insight:

The Federal Deposit Insurance Corp. (FDIC) and the Utah Department of Financial Institutions would supervise GM Financial if its application is approved. The company now issues debt to fund most of its lending to car buyers and dealers. An ILC charter would give GM Financial the ability to accept deposits — a low-cost capital base upon which to grow its business.

As it stands, GM Financial has grown a great deal over the past decade. Its share of the parent auto maker's revenue has grown from 0.2% in 2010 to 10.6%, or about $14.5 billion, in 2019, The Wall Street Journal reported.

GM's previous financial arm found trouble when it ventured outside auto lending into subprime mortgages and nearly failed. GMAC rebranded itself Ally Financial in 2010. At the height of the bailouts, the federal government owned a 56% stake in the company. GM sold the rest of its stake in Ally in 2013.

This time, GM's financial arm intends to use the charter to support its auto finance business, a source told The Wall Street Journal. It has also considered using the charter to offer high-yield savings accounts and other products, the source said.

GM would not be unique among auto makers with ties to an ILC, if the application is approved. The lending arms of Toyota and BMW have charters, among others. However, they were approved long before the 2007-08 financial crisis. ILC charter applications fell precipitously afterward, but have seen a bit of a renaissance of late. When Square and student loan servicer Nelnet were approved in March, they became the first new ILCs in more than a decade.

Still, the charter's setup doesn't sit well with some lawmakers. Sen. John Kennedy, R-LA, introduced a bill last year aimed at closing the "loophole" that allows ILCs to bypass oversight by the central bank.

"The Rakutens and the Googles of the world shouldn't be able to circumvent the Fed," Kennedy said last year. "If they're allowed to handle your banking services, they're going to turn into continents."

GM Financial grew out of its parent company's acquisition of subprime auto lender AmeriCredit Corp. in 2010. It bought Ally's international auto-lending operations in 2013, essentially doubling in size.