A bill introduced yesterday in Congress that would close a loophole in the separation of banking and commerce has the support of a banking industry trade group.

Reps. Paul Gillmor, D-Ohio, and Barney Frank, R-Ohio, on Monday introduced legislation to restrict commercial ownership of banks, an issue that’s been debated since retailers Wal-Mart and Home Depot applied for charters to operate industrial banks.

The bill would create a general rule that commercial firms — defined as those deriving at least 15 percent of their consolidated revenues from non-financial activities — may not own an industrial loan company. Also, companies that currently own an industrial loan company (as of Oct. 1, 2003) may continue to own the lending company but may not sell it to another commercial entity; those that acquired their industrial loan companies after Oct. 1, 2003, also may continue to own it and not sell to another commercial entity and are subject to branching and activity restrictions.

Industrial loan companies are state-chartered, state-regulated, federally insured financial institutions that are owned by both financial and commercial companies. ILCs can offer a full range of loans, such as consumer, commercial and residential real estate, and small-business loans.

An exemption in current banking law permits any type of company, including a commercial firm, to acquire an ILC in a handful of states.

The American Bankers Association said it supports the bill. “It has long been ABA’s position — and the policy of this country — that commercial firms should not own banks,” Edward L. Yingling, president and CEO of the banking trade group, said in a statement.

“Recent ILC applications by commercial firms have focused congressional and public attention on an issue that has concerned our members for many years. We are hopeful that this bill will now spur action,” he added.

The National Association of Realtors also has encouraged Congress to examine the ILC loophole that allows commercial firms to own this type of bank. The trade group has urged federal agencies to oppose both Wal-Mart’s and Home Depot’s applications for industrial loan charters, saying that this could create potential conflicts of interest, pose risk to the nation’s financial system and discourage competition in financial services.

A congressional subcommittee will hold a hearing on Wednesday to review the issues surrounding industrial loan companies.

Rep. Frank said, “The proliferation of new ILC applications is creating a situation where Congress must set appropriate policy to preserve the integrity of the banking system.”

There are currently 61 ILCs in seven states, with $155 billion in assets and $110 billion in deposits, according to a statement from the Congressional Subcommittee on Financial Institutions and Consumer Credit. From 1985 through early 2004, 21 ILCs failed, the committee said.

Former House Banking and Financial Services Committee Chairman James A. Leach said in a statement: “The ILC loophole has the potential to change the fabric of American finance. The issue is far larger than Wal-Mart; it is the question of whether America wants to move to a Japanese-like keiretsu system, merging commerce and banking.”

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