As expected, the House Financial Services Committee approved legislation sponsored by committee Chairman Barney Frank (D-Mass.) and Rep. Paul Gillmor (R-Ohio) to limit — though not entirely prohibit — commercial ownership of industrial loan companies (ILCs). ILCs are a type of bank that is chartered in a few states. Despite the ILC’s bank-like powers, its owner is not necessarily subject to regulation as a bank holding company, opening the way for commercial ownership of ILCs.

The infamous proposal by Wal-Mart to acquire an ILC, albeit for limited purposes, galvanized the banking industry into action. The industry’s pressure is beginning to pay off as bipartisan support builds on Capitol Hill for reining in commercial ownership of ILCs.

Currently, a Wal-Mart-inspired moratorium adopted by the Federal Deposit Insurance Corporation (FDIC) blocks agency consideration of ILC applications from commercial owners until at least next January. The FDIC adopted that moratorium in order to give Congress time to act on the ILC issue, and Congress has now taken the first step.

Terms of the Bill

As amended by the committee, the Industrial Bank Holding Company Act (H.R. 698) would prohibit any company from acquiring an ILC unless the company as a whole earned at least 85 percent of its revenue from financial activities. Commercial firms that owned ILCs before January of this year could keep them, but subject to restrictions on interstate branching or undertaking new activities.

That’s not as strong as the current rule for banks, where holding companies are altogether prohibited from engaging in non-financial activities. Enacting the measure would allow a loophole in the Financial Services Holding Company Act, just a smaller loophole than currently. One might say that the remaining loophole would be 15 percent the size of the current one.

Auto Industry Wants an Exemption

Actually, the exact size of the remaining loophole is still under negotiation. Some on the committee wanted to exempt the auto industry from the new commercial-activity limits. The intention was that DaimlerChrysler and Ford Motor Credit could catch up with several of their competitors who already own ILCs that they will be able to keep under the bill’s grandfather clause. (One committee member wanted to enact a Harley-Davidson exemption for similar reasons.)

Chairman Frank persuaded the members who are worried about auto manufacturers to hold off on any further amendment for now. He promised to work to amend the bill further by adding a provision allowing any commercial firm to own an ILC limited to processing the owner’s bank activities, such as processing loans and handling debit and credit transactions for the parent.

Frank’s proposal would allow big companies, perhaps even Wal-Mart, to own ILCs that are legally limited to providing services to the parent, not offering banking services to the public.