The US House of Representatives on May 21 easily passed HR 698, a bill that would impose strict limits on the ownership of industrial loan companies (ILCs) by commercial firms. ILCs are specialized state-chartered banks that can exercise many of the same lending powers as federally insured banks but generally cannot accept demand deposits. The legislation, titled the Industrial Bank Holding Company Act of 2007, generally would prohibit any commercial firm (defined as a firm that derives more than 15 percent of annual consolidated gross revenues from activities that are not financial in nature) from acquiring or establishing an ILC. The bill was adopted by a vote of 371 to 16.

The issue of ownership of ILCs by commercial firms attracted the attention of Congress following applications by large retailers Wal-Mart and Home Depot to acquire ILCs, when critics claimed that ILC ownership by such commercial giants would pose a threat to the integrity of the US banking system and put pressure on the federal deposit insurance safety net. Because of the controversy surrounding these and other applications by commercial firms, the FDIC imposed a moratorium on approving any new ILC applications until January 31, 2008.

H.R. 698 would grandfather certain existing ILCs currently owned by commercial firms, but such ILCs would be subject to restrictions in a number of areas, including interstate branching and expansions of business activities. The bill would also require companies that own ILCs to register with, and be subject to, consolidated supervision and examination by, the FDIC, with exceptions for companies that already are bank holding companies, savings and loan holding companies, or brokerage firms that are regulated on a consolidated basis by the SEC. In addition, the legislation would give the Federal Reserve Board authority to determine if a foreign bank meets comprehensive home-country supervision standards necessary to acquire or establish an ILC. For foreign savings and loan holding companies seeking to form or purchase an ILC, the Federal Reserve Board and the Office of Thrift Supervision would have joint authority to make such determination.

The legislation now moves to the US Senate, where, despite strong support in the House, its fate is far from certain. While a virtually identical ILC bill has been introduced in the Senate, the Senate Banking Committee has not yet taken up the bill, and Senator Christopher Dodd, the committee's chairman, has given no indication as to when the committee might do so. Also, Senator Robert Bennett of Utah, a strong proponent of his home state's ILC industry and second-ranking Republican on the Banking Committee, could oppose the bill. In addition, a number of important issues, including exemptions to permit ILC ownership by US automakers, remain to be resolved.

The text of the HR 698 can be found here (PDF).