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Congress May End Wal-Mart's Banking Dreams

By Martin H. Bosworth
ConsumerAffairs.com

July 13, 2006

Wal-Mart • General Complaints • Auto Service & Lube • Black Friday • Customer Service • Dangerous Products, Conditions • Grocery/SuperCenters • Lawn & Garden • Monogram Credit Card Bank • Pet Department • Pharmacy • Photos • Pricing Disputes, Errors • Returns • Sporting Goods • Tire Centers • Vision Center • WalMart.com --- • Employees Complaints --- News • Wal-Mart Employees Going Checkless • Wal-Mart Dominates Christmas Shopping • California Consumers to Get $3 Refunds from Wal-Mart • Wal-Mart Selling Bassinets Blamed for Killing Two Babies • Wal-Mart Gaining On Grocery Chains • Black Friday Ads Target Wal-Mart • Wal-Mart Era Is Over, Wall Street Journal Declares • Consumers Respond to Toxic Wal-Mart Pet Toy Stories • Wal-Mart Expands $4 Generic Program • Lab Tests Find Lead, Other Toxins in Pet Toys Sold at Wal-Mart • Wal-Mart Plans Its Own Debit Card • Wal-Mart To Open In-Store Health Clinics • Wal-Mart Gives Up Bank Plans • Congressman Challenges Wal-Mart Banking Plans • Wal-Mart Expands Generic Drug Plan • Christmas Returns to Wal-Mart • Wal-Mart Jump-Starts the Holiday Shopping Season • Wal-Mart Cuts Generic Rx Prices To $4 In Florida • Wal-Mart Ending Its Layaway Program • FDIC Puts Retailers' Banking Plans on Hold • Wal-Mart/Sam's Club Settle with Connecticut on Pricing Violations • Congress May End Wal-Mart's Banking Dreams • Arizona Charges Wal-Mart, AutoZone with Consumer Fraud • Michigan Fines Wal-Mart $1.5 Million for Item Pricing Violations • Opposition Grows as FDIC Examines Wal-Mart Banking Bid • Wal-Mart's Banking Plans Draw Critics • Michigan Challenges Wal-Mart on Item Pricing • Wal-Mart May Stock "Emergency" Contraceptives • Black Friday Gives Wal-Mart a Black Eye • Connecticut Probes Wal-Mart Pricing • Wal-Mart Pushing Extended Warranties on Electronics • Bankers Oppose Wal-Mart's Entry into Banking • Wal-Mart Target Of Union-Led Boycott • Wal-Mart to Pay $14.5 Million for California Gun Law Violations • Wal-Mart Target Of Union-Led Boycott • Wal-Mart Tries to Buff Its Image

The loophole in banking laws that Wal-Mart and other retail giants are using to charter their own banks may soon be closed, thanks to a new bill drafted in part by Congressman Barney Frank (D-MA).

Frank, along with Rep. Paul Gilmor (R-OH), introduced the "Industrial Bank Holding Company Act of 2006" on July 10th. it would prohibit the purchase of industrial loan companies (ILCs) by commercial entities, and would grant the FDIC greater ability to oversee and regulate ILCs.

Frank said that "the proliferation of new ILC applications is creating a situation where Congress must set appropriate policy to preserve the integrity of the banking system."

"With a historic number of pending ILC applications, Congress and the FDIC must work together to craft regulations which retain the wall between banking and commerce."

Retailers such as Wal-Mart and Target have been pushing to purchase ILCs, which perform many of the functions of a traditional bank, such as payment processing capability, but operate under much less scrutiny from banking authorities.

Consumer groups and local banks oppose the move, out of fear that retailer-owned banks will undercut community banks with lower prices and loan rates, and drive them out of business.

Home Depot recently announced plans to buy home improvement lender EnerBank, an industrial bank based in Utah, in order to use its loan services to offer customers money for remodeling projects.

The majority of American ILCs are based in Utah, due to its lenient laws on chartering banks. Utah has an agreement with 20 states that enables ILCs based there to expand, but the remaining 29 states would require additional negotiations.

Opponents of retail banks fear that a retail company located in all 50 states could circumvent the negotiations and open branches everywhere it had stores.

GAO Findings

The Government Accountability Office (GAO) issued a new report on July 12th discussing the growth of ILCs, following a previous report issued in September 2005.

The GAO study found that as of March 2006, "6 ILCs owned over 80 percent of the total assets for the ILC industry, with aggregate assets totaling over $125 billion and collectively controlled about $68 billion in FDIC-insured deposits…most of the growth occurred in the state of Utah while the portion of ILC assets in other states declined."

The GAO investigation also found that ILCs that offered instruments such as credit cards would be able to charge the maximum interest rate allowable in the ILC's home state, much as credit card companies base in states with lenient lending laws, such as South Dakota and Delaware.

The report warned against the excessive mixing of "banking and commerce" that a bank chartered for a retail store might bring.

"[To] foster the prospects of their commercial affiliates, banks may restrict credit to their affiliates' competitors, or tie the provision of credit to the sale of products by their commercial affiliates," said the report. "Commercially affiliated banks may also extend credit to their commercial affiliates or affiliate partners, when they would not have done so otherwise."

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