Bill Would Bar New Commercial ILCs

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A bill introduced in the House Financial Services Committee last week would ban new industrial loan companies that are owned by non-financial entities, such as the pending controversial pending application by Wal-Mart Stores.

There are more than 60 ILCs, most of which are owned by financial entities like Merrill Lynch or GMAC. There are about a dozen ILCs owned by commercial firms, like Target stores or Wal-Mart, and the number is growing all the time.

But the one being sought by Wal-Mart has generated the most heat because of the long-time fear that commercially owned ILCs-so-called back-door banks-would give some entities like Wal-Mart a foot up on heavily regulated banks, thrifts and credit unions, and because of fears that those kind of entities could cause problems for the federal deposit insurance funds.

The bill, however, would not affect two pending ILC applications by credit union entities, one a group led by CUNA Mutual, and the other by Wescom CU. Both of those ILCs would facilitate the purchase of credit union credit card portfolios.

The bill introduced last week by Reps. Barney Frank (D-MA) and Paul Gilmour (R-OH) would prohibit commercial firms making less than 85% of gross receipts from financial activity from chartering or acquiring an ownership interest in an ILC. This would apply only after June 1, so it would not affect the pending Wal-Mart application, which the FDIC is expected to rule any day.

ILCs are all state-chartered but must obtain approval by the FDIC, which provides them with federal deposit insurance.

The bill would also prohibit all commercially owned ILCs chartered from Oct. 1, 2003, through this June 1 from branching across state lines.

Representatives of the FDIC, Federal Reserve, the Department of Financial Institutions in Utah, where about half the nation's ILCs are chartered, and a variety of trade groups were scheduled to testify at a hearing on the issue last week before a House Financial Institutions Subcommittee hearing on industrial loan companies.

Ed Roberts can be reached at robertscuj (c) 2006 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved.

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