Alert June 24, 2008

FDIC Approves ILC Establishment Subject to Numerous Conditions

The FDIC approved the application of CapitalSource Bank, a California industrial loan company, for Federal deposit insurance, the purchase of certain assets and assumption of certain liabilities from Fremont Investment & Loan (“FIL”) and the establishment of 22 of FIL’s branches as branches of CapitalSource Bank. 

Despite the expiration on January 31, 2008 of the FDIC’s moratorium on permitting nonfinancial organizations to charter or acquire industrial loan companies (“ILC”), the FDIC, made the CapitalSource Bank approval subject to numerous conditions.  These conditions include, among several others,: (i) CapitalSource Bank’s parent company, CapitalSource, Inc., divesting its investments in certain non-financial activities prior to the effective date of deposit insurance; (ii) CapitalSource, Inc. executing one or more written agreements that incorporate some or all of the conditions and requirements contained in the FDIC’s recently proposed rules regarding certain ILCs (See 72 Fed. Reg. 5217, February 5, 2007, as discussed in the February 6, 2007 Alert); and (iii) two private equity investors, which own over 10% of CapitalSource, Inc. and engage in commercial activities that are not permissible for a financial holding company or savings and loan holding company, executing passivity agreements that eliminate the investors’ ability to control CapitalSource Bank.

The FDIC’s moratorium was put in place in July 2006 and extended to January 2008, in order to give Congress time to adopt legislation that would prohibit retailers and other nonfinancial companies from acquiring or chartering ILCs, but Congress adjourned without adopting such legislation.  Goodwin Procter wrote an extensive analysis of private equity firms investing in banks more generally in the May 27, 2008 Alert.