Bill introduced by Chris Dodd

The chairman of the Senate Banking Committee would forbid commercial companies from opening their own banks, known as industrial loan corporations.

A bill introduced today by Sen. Christopher Dodd (D-Conn.) would severely curtail which companies can apply for ILC charters and specifically forbid commercial companies such as Wal-Mart from owning an ILC.

It seems that only large institutions would be able to apply for an ILC, as well, under the bill, as only companies subject to consolidated supervision by the Federal Reserve and the Securities and Exchange Commission would be permitted to own an ILC. Applications approved before October 2007 would be allowed.

The Federal Deposit Insurance Corporation would be the primary regulator overseeing ILCs, and would be granted enforcement and examination authority over ILCs, as well as the ability to set capital reserve requirements. Such authority would be modeled on the Federal Reserve’s jurisdiction over bank holding companies.

At last count there were 59 ILCs operating in six states, though most are based in Utah and California. Although the FDIC has fielded ILC applications for years, the issue became controversial after Wal-Mart applied for an ILC in 2005. In 2006 the FDIC extended its moratorium on new ILC applications from non-financial companies, which is set to expire at the end of January. It’s expected the FDIC will not renew it.

A similar but ultimately less restrictive bill in the House would require ILCs owned by companies with at least 15% of gross revenues from non-financial activity to register with the Federal Deposit Insurance Corp. That bill is currently in the banking committee.

The Senate bill, however, considers a company to be “commercial” if it engages in any act that is not financial in nature. That means ILCs owned by retail outlets and perhaps insurance companies would be restricted under the bill. Vehicle manufacturers would be exempted from this, leaving the door open for new ILCs at organizations such as GMAC.

In September, the FDIC approved an application by health insurer WellPoint, deeming the company to be a financial institution.

At a hearing in October, Democratic senators on Mr. Dodd’s committee said they would support increasing federal oversight of ILCs and would favor the SEC taking the lead regulatory role. While the SEC has remained silent on the issue, Erik Sirri, director of the agency’s division of trading and markets, testified during the hearing that any legislative changes should not duplicate existing regulations.

Sen. Robert Bennett (R-Utah) has been one of the most strident opponents of curbing ILC applications, saying there has been no crisis resulting from ILC ownership by commercial companies. Utah is home to 33 ILCs.