Bill Would Close Wal-Mart Bank Loophole

A press release issued by the Democratic staff of the House Financial Services Committee said:

Washington, DC– Congressmen Paul E. Gillmor (R-OH) and Barney Frank (D-MA) today introduced bipartisan legislation to close a loophole in the nation’s banking laws that allow retailers and other commercial firms to own industrial loan companies (ILCs), also known as industrial banks.  The legislation is an outgrowth of Frank/Gillmor provisions which passed the House both last year and in 2004 to prohibit commercially-owned ILCs from gaining additional powers, including opening branches nationwide.

The “Industrial Bank Holding Company Act of 2006,” will enhance regulation of the parent companies of industrial banks, restore the traditional separation between banking and commerce, prevent branch banking by some commercially-owned ILCs, prohibit the FDIC from granting new charters to commercial companies seeking to start or acquire ILCs, and bolster the examination and enforcement authorities of the FDIC as an ILC regulator.  ILCs are authorized in fewer than seven states, with most established in Utah.  Due to a loophole in the Bank Holding Company Act, they are eligible for federal deposit insurance from the FDIC, but can be owned by commercial firms, unlike other banks.  Commercial firms are defined as those who derive at least 15 percent of their revenue from activities that are commercial.  In addition, the parent companies are not subject to supervision by the Federal Reserve as are bank holding companies, although they are subject to some supervision by the FDIC.

Congressman Gillmor said, "ILCs are being used by a few commercial companies to expand a loophole big enough to drive a truck through.  It should be obvious by now that a large group of bipartisan Members of Congress has an interest in addressing this growing problem and this bill is an important step towards addressing the safety and soundness of our financial system.  With a historic number of pending ILC applications, Congress and the FDIC must work together to craft regulations which retain the wall between banking and commerce.  We will accomplish this goal while giving the FDIC the tools necessary to regulate the parents of the ILCs already in existence."

"The proliferation of new ILC applications is creating a situation where Congress must set appropriate policy to preserve the integrity of the banking system," said Rep. Barney Frank, the Ranking Democratic Member on the House Financial Services Committee.

On June 8, 2006, 98 Members of Congress wrote to the FDIC asking for a moratorium on new approvals for new commercially-owned ILCs until Congress considers the matter.  To date, the Members have received no response from the FDIC.

In both the 108th and 109th Congress, the House overwhelmingly passed legislation that began to address the ILC issue by restricting nationwide branching and prohibiting certain commercially-owned ILCs from offering interest on business N.O.W. accounts. To date, this approach has received no action in the Senate.  Currently five states have passed legislation that would effectively prohibit commercially-owned ILCs from branching while an additional six states have legislation pending that would address this issue.

Specifically, the Gillmor/Frank legislation will do the following:

• Maintain the necessary historic separation between banking and commerce, most recently re-affirmed in Gramm-Leach-Bliley, by prohibiting new commercially-owned ILCs effective June 1, 2006. This provision would prohibit Wal-Mart, Home Depot and several other commercial firms from chartering or acquiring an industrial bank.
  
• Require all industrial bank holding companies to register with the FDIC and be supervised in a similar fashion to the way holding companies are supervised by the Federal Reserve.
  
• Address the concerns of the Government Accountability Office (GAO), which in September of 2005 advised Congress to consider bolstering the authorities of the FDIC at the consolidated holding company level.
  
• For some commercially-owned ILCs, the bill would restrict expanded business plans and branching across state lines. For example, Target Bank, chartered in Utah in 2004, would be prohibited from branching into Ohio, Massachusetts or some 20 states that would currently allow Target Bank to branch.
  
• The activities of ILCs chartered before October 1, 2003 are unaffected by the legislation. However, this “grandfathered” exemption cannot be transferred to a new owner.