WASHINGTON - An effort to grant automakers and other commercial firms a waiver from a ban on commercially owned industrial loan companies is facing increasing scrutiny.
Observers on both sides of the debate said the proposed exemption raises several questions, including how far the exception would go and whether retailers like Home Depot Inc. could make the case that they should be covered as well.
"It's very difficult to draw the line between automobiles and other goods and commodities," said Robert C. Gross, a former Utah banking lawyer and one-time director at First Electronic Bank, an ILC owned by the retailer Fry's Electronics Inc. He is now the president and chief executive of Blue HealthCare Bank, a Utah thrift owned by Blue Cross Blue Shield Association.
At issue is a proposal floated May 2 when the House Financial Services Committee voted to approve a bill that would stop any company deriving at least 15% of its revenue from commercial activities from owning an ILC.
Firms generating a majority of their revenue from the manufacture and sale of motor vehicles would be excused from the ban under an amendment offered by Rep. John Campbell, R-Calif.
Though House Financial Services Committee Chairman Barney Frank, who co-authored the bill with Ohio Republican Paul Gillmor, convinced Rep. Campbell to withdraw the amendment, he said he would be open to including similar language in a final bill to win over skeptics in the Senate. The full House is expected to vote on the ILC bill next week.
"If there is a bill, language very similar to this will be in it," Rep. Frank said at the vote.
But the Massachusetts Democrat also made it clear that, rather than targeting just one industry, an exception would cover certain firms meeting "an economic profile." That has left observers to wonder exactly where the line will be drawn on the mixing of banking and commerce. Many speculate that Rep. Frank may allow any parent company that manufactures the goods it finances to own an ILC.
Such an exception could prove extensive, observers said.
"Some department store chains may produce their own clothing lines. Can they finance their own clothing … sales? How is that different than the financing of an automobile that's being sold by an auto company?" said V. Gerard Comizio, a partner at Thacher Proffitt & Wood LLC. "Once you talk about financing one's own products, I am not sure where that line" ends.
The ILC legislation was originally intended to stop companies like Wal-Mart Stores Inc. and Home Depot from owning industrial banks in Utah. Though Wal-Mart, of Bentonville, Ark., has withdrawn its application, Home Depot is still trying to buy a Utah ILC to help consumers finance home improvement projects.
Some said the automaker exception, if written broadly enough, could allow Home Depot to own an ILC.
"The application … was to provide a financing vehicle for customers of Home Depot. That seems to me that that's the same transaction as buying an automobile," said Gil Schwartz, a partner at Schwartz & Ballen LLP in Washington. "You're doing it through a dealer and you're buying a product that is [sold] … by the entity that owns the bank."
A Home Depot spokesman said the Atlanta company "is happy to see members of Congress recognizing that commercially owned industrial banks have a place in society and add value to society without undue risk."
(Separately, Home Depot said Jim Stoddart, who had been leading its ILC efforts and whose job has been eliminated, is leaving the retailer. The ILC bid is being handled now by Dwaine Kimmet, a vice president of financial services for Home Depot.)
Oliver Ireland, a partner at Morrison & Foerster LLP, said just creating a narrow exception for car companies would be seen as a "subsidy" to the auto industry.
"If you have a policy basis for automobile companies, you would tend to think that that same basis ought to apply to other people - that there ought to be other business models that that would fit," Mr. Ireland said. "Depending on what" Rep. Frank is "thinking about, it might be any other number of people."
The ILC charter has already proven popular for car companies.
The Utah ILC application of DaimlerChrysler AG is frozen in a Federal Deposit Insurance Corp. moratorium on commercial firms applying for ILC ownership. (Daimler's announcement this week of a deal to sell Chrysler does not affect its ILC application, a spokesman said.) Ford Motor Co. is also interested in ILC powers; its prior application to the FDIC stalled last year.
U.S. automakers say they need an exemption to compete with foreign manufacturers that already own ILCs, including BMW Group, Volkswagen AG, and Toyota Motor Corp. Deposit funding makes ILCs an attractive option for their financiers, though federal anti-tying restrictions bar their ILCs from making vehicle loans at dealers that get their wholesale funding - known as floor plan loans - from the same financing arm.
Additionally, some auto lenders that already own ILCs support an auto exemption because their banks were chartered after October 2003. That is a key date in the House bill, because ILCs formed after that time would be restricted from certain activities.
"The sympathy comes down to domestic versus foreign manufacturers," said Bill Himpler, the executive vice president of federal government affairs for the American Financial Services Association, which represents several companies that own or want ILCs. "Even in the foreign auto manufacturers category, you have disparity between some that had their charter prior to 2003, and those that had it afterwards."
Banking groups have said they oppose any exemptions at all.
The Independent Community Bankers of America is "not advocating or supporting any exceptions along those lines," said Karen Thomas, the group's director of government relations. Floyd Stoner, the chief lobbyist for the American Bankers Association, said the ABA "would be concerned about any variations to the prohibition on commercial ownership."
But Rep. Frank has said he would probably have to give ground to get any bill passed by the Senate. Domestic automakers have influential lobbying operations that could impede the legislation. Significant exceptions in legislation also may work to soften the stance of Utah Sen. Bob Bennett, the No. 2 Republican on the Banking Committee, who has opposed restrictions that would hamper his state's thriving ILC industry.
"There are all kinds of possibilities," Sen. Bennett said in an interview last week, though he declined to discuss specifics. "The Frank bill virtually freezes the industry as it currently stands, and would make it very, very difficult to have any type of growth. I think the industry fills a significant niche, and we should make sure that it can continue to grow as people legitimately come forward with viable institutions."
