Wal-Mart not backing off Utah industrial Bank and Leasing

The controversy over Wal-Mart, the world's largest retailer, to open a small state-chartered bank in Utah continues to grow, and may affect other industrial banks.

Wal-Mart says it wants to use its Utah bank to cut credit and debit card processing costs and is not seeking permission for an interstate branch network. They also have in the works a “rental” and “lease-to-own” plans.

Other Industrial Banks in the equipment finance and leasing business include CapitalSource with commercial loans. Daimler Chrysler automobile loans and LCA Bank Corporation: equipment leasing.

Lehman Bros. Bank was set up to provide commercial real estate loans and warehouse lines of credit. "We'll have no retail presence," Julie Boyle, the bank's president, told the Salt Lake Tribune. "Our smallest loan will be in the $5 million range."

SLM Corp., better known as Sallie Mae, plans to offer student and education loans through its bank. "The industrial bank will allow us to fund and originate, in our own name, private credit education loans that we offer nationwide to students and families," said a statement from Sallie Mae executive vice president Marianne Keler.

The status over the state-chartered industrial loan companies (ILCs), described by Alan Greenspan, former head of the Federal Reserve, as a “loophole” in US bank regulation, and now opposed by his succcessor, Ben Bernanke, is causing quite a bit of fury in Washington, DC.

Utah currently licenses more than 35 such industrial banks, run by investment banks, carmakers and finance companies, as well as by Fry's Electronics and Wal-Mart's discount store rival, Target.

Target uses its Utah bank to issue its business credit card. Volvo, BMW and General Motors use the banks to operate car financing. Volkswagen's bank also operates online and offers interest bearing certificates of deposit and mortgage lending. Merrill and others are also interested in leasing opportunities.

The bold fact is The Federal Reserve has never liked the state industrial banks, which by the way, exists in other states. These industrial banks are exempt from the federal legislation prohibiting commercial companies from engaging in banking activities. The leading credit card companies oppose the creation of industrial credit cards, formerly having to "partner" relationships and control the profits made via charges to the cards from both users, the buyer and seller.

Senator Hillary Clinton has joined the bandwagon that has demanded the Federal Deposit Insurance Corporation (FDIC) hold an unprecedented public hearing on the application.

Spencer Bachus, a Republican who heads the House's banking sub-committee, has also said he intends to hold a hearing on the wider issue of industrial loan and leasing companies.

Wal-Mart is pressing ahead with its application and has said it is looking forward to a public hearing at the FDIC. The company yesterday announced fourth earnings rising 13.4 percent with Net income at $3.6 billion. For the full year ended January 31, Wal-Mart said net sales were up 9.5 percent to $312.4 billion and net income rose 9.4 percent to a record $11.2 billion, or $2.68 per share.

Wal-Mart has previously announced it will remodel 1,800 of its nearly 3,200 U.S. stores in the next 18 months to give them a more open, inviting look and improve the shopping experience.

Ironically, the debate to allow Wal-Mart to issue its own credit cards has also forged an unlikely alliance of interest between Wal-Mart and the Securities Industry Association, which is lobbying to head off attempts to control the industrial banks. The issue also borders on the rights of states versus federal government regulations.

Utah benefits from the added income and fees, plus employment, with industrial banks.

Utah is one of the few states that allows industrial loan corporations. It was created in 1987 by congress that allows brokers and retailers to own a federally insured, deposit-taking financial institution. In California, many banks are located in large grocery stores and drug stores. Many retailers have also gone direct to forming their own banks out of state to be able to issue credit cards direct, plus use their cash flow, cutting out the "middle-man."