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Imbroglio Over Industrial Loan Companies Having Impact at Silvergate?

After signing a cease-and-desist order from regulators in December, Dennis Frank , president and chief executive officer of La Jolla-based Silvergate Bank , has been getting his ducks in a row.

Close to finishing his turnaround effort, Frank is finding that the last few pieces of the effort are taking longer than expected.

In particular, Frank is closing in on obtaining more capital to change the bank’s charter to that of a commercial bank, and awaiting regulatory approval on new CEO Tony Ferraro, now a consultant for the bank.

However, Frank said Silvergate has been caught up in the maelstrom surrounding the industrial loan company industry, at the center of which is Wal-Mart’s controversial attempt to acquire an ILC.

According to Frank, the Federal Deposit Insurance Corp. is running Silvergate’s changes through its San Francisco and Washington, D.C., offices, along with the state Department of Financial Institutions in Sacramento.

“The FDIC is doing double the regulation because of no delegated authority back to San Francisco, increasing work for both (offices),” Frank said. “I’m not complaining, I’m just observing.”

In California, there are only 14 so-called industrial banks , four locally.

Industrial banks function like community banks with exceptions, most notably the inability to accept business checking accounts, or demand deposits.

Industrial loan companies differ from traditional banks in that they can be owned by commercial interests or groups of investors, such as GMAC Financial Services, which is owned by General Motors Corp. The unit finances automobile and commercial loans.

David Barr, spokesman with the FDIC, said a recent change in procedure requires industrial bank applications to go to both San Francisco and Washington, D.C.

Observers agree that the industrial bank environment is getting unfriendly, which is one of the reasons why Frank wants to make the switch to a community bank.


Cracking Down

Frank said that his regulatory issues began last summer, when the FDIC prohibited industrial loan companies from being bought or sold.

The FDIC announced the moratorium in July one day after Pasadena-based Wescom Credit Union terminated its acquisition of Silvergate in what would have been a groundbreaking deal , a credit union purchasing an industrial loan company.

In January, the moratorium was amended, allowing financial institutions to purchase ILCs.

Frank had no comment on whether industrywide ILC issues have an impact on Silvergate’s cease-and-desist order.

“We’re wondering if there is a conspiracy out there to kill ILCs,” said Frank. “You don’t know what Congress is thinking or the DFI.”

Industrial banks generally have lending niches. Silvergate’s situation is different from other local ILCs, especially considering the special circumstances with a cease-and-desist order.

Nevertheless, industrial banks everywhere are feeling the pinch from Capitol Hill.

“There are several powerful congressmen interested in eliminating ILCs altogether,” said Michael Johns, CEO of Rancho Santa Fe Thrift & Loan Association, an industrial bank in San Marcos.

If Rep. Barney Frank, D-Mass., who sits on the House Finance Committee, gets his way, Johns said, ILCs may be gone. “He’s not particularly ILC friendly.

“It’s one less license to regulate. They’d like to see that we’d all become uniform banks and I think there is some truth to that,” Johns conceded.


A National Issue

The House Finance Committee recently passed the Industrial Bank Holding Company Act, which seeks to eliminate commercial ownership of industrial banks, which primarily exist in California, Utah and Nevada.

The legislation is seen as a response to recent attempts by Home Depot and Wal-Mart to acquire industrial banks.

American Banking Association spokesman John Hall said there’s reason to be concerned.

“The parent company could possibly pressure the bank to get preferential loan treatment for itself or its customers,” said Hall. “(The industrial bank) would think of the parent company before the safety of the financial institution.”

Byron Webb Jr., CEO of San Diego-based Home Bank of California, says: “I don’t see that (ILCs) do any harm I don’t think we’re any riskier to regulate. Legislators might think it’s simpler not to have them.”

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