UPDATE 1-US Sen. Bennett defends ILCs, sees no bank threat

(Adds bank trade group comments, pending applications)

By John Poirier

WASHINGTON, Oct 4 (Reuters) - Specialty banks called industrial loan companies (ILCs) have a stellar record for safety and soundness and do not threaten the stability of the financial system, Republican Sen. Robert Bennett said on Thursday.

Bennett, a member of the U.S. Senate Banking Committee from Utah, where many ILC banks are chartered, mounted a strong defense of the industry at a committee hearing into the safety and soundness of the industry.

"The ILC charter has a sterling record," he said in support of ILCs, which have come under attack from mainstream banks opposed to retailers such as Wal-Mart Stores Inc (WMT.N) and Home Depot Inc (HD.N) operating such banks.

Home Depot's application is pending before the FDIC and Wal-Mart, the world's largest retailer, withdrew its application earlier this year.

Members of the banking committee have introduced legislation, similar to a bill already approved by the U.S. House of Representatives, that would curtail commercial companies from entering the banking industry.

The Senate committee has not yet formally discussed the legislation, which must be acted on before an 18-month moratorium on applications by commercial companies imposed by the Federal Deposit Insurance Corp (FDIC) expires at the end of January 2008.

"Legislation is usually the solution to a problem," Bennett told the committee. "It seems to me that restrictive legislation on ILCs is a solution in search of a problem."

"It's clear there are differences of opinion on the committee, but we are also going to work with the committee and seek to move legislation through the Senate this fall," Floyd Stoner, an executive director at the American Bankers Association trade group, said.

"Senator Bennett is an advocate for his position," said Camden Fine, president of the Independent Community Bankers of America. "However, several witnesses have shown the need to look to the future and prevent the ILC loophole from changing the essential structure of our financial system."

The FDIC, which reviews ILC applications, said there are 59 deposit-insured ILCs, with 46 of them based in Utah and California. ILCs also operate in a few other states, including Nevada.

From 1995 to June 2007, total ILC assets grew from about $12 billion to $225 billion, the FDIC said. At the moment four applications to open ILC banks are pending.

Three change of control applications also are pending. Home Depot wants to buy EnerBank, U.S. buyout firm JC Flowers Group has made an offer for SLM Corp (SLM.N) and its Sallie Mae Bank unit and Blackstone Group LP (BX.N) is seeking to acquire World Financial Capital Bank, the FDIC said.

The FDIC, which has said ILC banks have proven to be strong and responsible institutions, has not taken a public position on whether retailers should, or should not, be allowed to own banks. But the Federal Reserve said Congress should close the ILC loophole and allow a limited number of existing ILC owners to be "grandfathered" in.

Scott Alvarez, general counsel for the Federal Reserve Board, told Thursday's hearing that state-chartered ILCs allow commercial firms to "evade" key U.S. banking laws and acquire federally insured banks with broad deposit-taking and lending powers. (Additional reporting by David Lawder, editing by Tim Dobbyn and Gerald E. McCormick)