updated 5/22/2007 9:28:38 AM ET 2007-05-22T13:28:38

Legislation barring commercial companies like Wal-Mart and Home Depot from owning a special sort of bank overwhelmingly cleared the House on Monday.

The bill, which passed 371-16, would prohibit non-financial companies from setting up or owning so-called industrial loan companies, federally insured institutions that can issue credit cards, make loans and take deposits.

The industrial loan companies, or ILCs, have been proliferating in recent years: there are now 58 with a total of about $200 billion in assets. Thirty-one are based in Utah, one of only seven states that grant charters for such banks.

Critics say the growth of the industrial banks dangerously blurs the line between banking and commerce, concentrating assets in the hands of a few big companies, stifling competition and hurting consumers.

Those who think retailers and other commercial enterprises should be allowed to own ILCs say they could help reduce fees and costs for consumers and provide much-needed competition.

The application to federal regulators of Wal-Mart Stores Inc., the world’s largest retailer, to establish an ILC stirred a storm of protest from banks, unions, lawmakers, and consumer and community organizations. In January, the Federal Deposit Insurance Corp. extended for one year a moratorium on considering non-financial companies’ applications to establish or acquire industrial banks, and Wal-Mart withdrew its bid in mid-March.

FDIC Chairman Sheila Bair called House passage of the bill “another critical step in moving the process forward.”

“It is my hope that the Senate can find a consensus approach as well, to remove the cloud of uncertainty over the ILC charter and allow the ILC industry to continue as a strong, safe and sound component of the banking sector,” Bair said in a statement.

Proponents of the legislation say it is needed to close a loophole in banking regulation. Current laws prohibit the mixing of banking and commerce, but an exception is made for the ILCs, allowing commercial companies to own a federally insured bank.

Bill sponsor Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, cited a wave of applications for ILCs in recent years by large commercial companies.

“We believe that that does not really reflect what Congress intended,” he said in floor debate before the vote.

The bill would restrict the banking charters to companies with at least 85 percent of their business in financial services. Frank has said he would consider allowing some exceptions when the legislation is negotiated with the Senate, a move that could benefit automakers.

Similar legislation also passed the House overwhelmingly last year, but it has stalled in the Senate. It faces opposition from Sen. Robert Bennett, a Utah Republican and member of the Senate Banking Committee.

Bennett believes that the banks “fill a niche in the marketplace and have done so in a safe and sound way,” his spokeswoman said recently.

Sen. Chris Dodd, D-Conn., the banking panel’s chairman, said Monday he will continue to work with committee members “in a thoughtful, deliberative manner to resolve outstanding issues regarding the ownership and regulation of industrial loan companies.”

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