Legislation that would make it harder for commercial firms like Wal-Mart to get into banking has been approved by the House Financial Services Committee and is headed for a House vote.

The Industrial Bank Holding Company Act of 2007, or HR 698, was introduced Jan. 29 by Ohio Republican Paul Gillmor. The bill’s 139 co-sponsors include Massachusetts Democrat Barney Frank, the committee’s chairman.

The bill would address an exception in federal law that allows commercial firms or foreign banks to acquire and operate industrial loan companies, or ILCs, which are state-chartered banks that have most of the privileges of insured commercial banks.

HR 698 would prevent branch banking by some commercially owned ILCs, and bolster the examination and enforcement authorities of federal regulators.

“As the ILC exception grows in popularity, it is creating a parallel banking system which will continue to be exploited should Congress fail to act,” Gillmor said in a statement. “The committee’s vote demonstrates that Congress does not support the continued expansion of this loophole and I look forward to getting a bill to the president before the end of the FDIC-imposed moratorium.”

The FDIC has stopped approving applications for ILCs until the matter is resolved, and some lawmakers want to allow existing ILCs and those that are far enough along in the application process to be “grandfathered” in.

In testimony before the committee, Federal Reserve Board Governor Donald L. Kohn said the board favors grandfathering existing ILCs, but believes the best way to address the issues raised by the ILC exception is “to close — and not just narrow — the loophole going forward.”

Thomas Stevens, past president of the National Association of Realtors, testified in support of the bill at the committee’s April 25 hearing, saying NAR doesn’t want commercial firms engaged in banking, or banks engaged in commercial activities such as real estate.

Stevens said additional legislation, including the Community Choice in Real Estate Act, or HR 111, is needed to prohibit such intermingling of banking and commerce.

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