Credit card issuers and auto finance companies, traditionally reliant on packaging and selling debt to fund themselves, will see little change in the way they do business under the Obama administration's proposal Wednesday to overhaul financial markets.

Instead, a pending accounting change, slated to kick in at the beginning of fiscal 2010, is expected to have more teeth for such card issuers as JPMorgan Chase & Co. (JPM), Capital One Financial Corp. (COF), Bank of America Corp. (BAC) and American Express Co. (AXP), and auto finance lenders, such as GMAC LLC and Ford Motor Credit.

Both the proposed regulatory overhaul and the pending accounting rule would have the effect of giving consumer lenders more of a stake in the credit quality of the loans they make.

Consumer finance companies have traditionally raised funds by bundling pools of consumer debt, such as credit-card and auto loans, into securities, and selling them to investors in the asset-backed debt market. Selling these securities gets consumer loans off the companies' books, freeing up capital they can use to further their lending activities. Selling has also allowed the companies to worry less about repayment of the loans.

The centerpiece of the administration's reforms, announced Wednesday, for the asset-backed market is to have companies - those who are packing the consumer loans they have extended into debt securities - retain 5% of the credit risk. The proposal is aimed at improving the credit quality of the consumer loans by ensuring that companies have a stake in the loans' performance. That would address one of the key causes of the credit bust: lax underwriting standards - a direct result of lenders being able to pass all risk to investors.

But given the heightened caution on the part of investors, this is a practice already employed in the industry.

"Today, for the most part, issuers retain interest of more than 5% on their securitization activity," says Scott Valentin, an analyst at FBR Capital Markets.

 
   Accounting Change

Instead, analysts point to a pending change to an existing accounting rule, FAS 140, as having a far greater impact on companies tapping the asset-backed debt market.

The change to FAS 140 will force card issuers and auto lenders to bring the off-the-books packaged consumer loans onto their balance sheets -- at a time when losses on these loans are piling up amid rising unemployment.

For instance, American Express said in its annual report that if the amended accounting rule goes through, the company would have to bring onto its books $29 billion of card loans and set aside an additional $1.8 billion in loss reserves, according to figures as of Dec. 31. American Express' loss reserves totaled nearly $3.4 billion at the end of 2008.

Citigroup Inc. (C), using figures as of Dec. 31, would have to take onto its books $98.2 billion of card loans, according to its annual report. The altered accounting standard will have a "significant impact" on its financial statements, the company said in the regulatory filing.

The proposed rule change will force companies to account for the additional loans on their books by setting aside capital to reserve for potential losses on these securities. In addition, it may lower their appetite for risk because the riskier the loans, the more they will have to hold in reserves.

Proponents of the rule change point to the spectacular losses at banks that were able to accumulate huge levels of exposure by housing risky assets in investment vehicles that weren't part of their balance sheets. One of the biggest blind spots in this credit crisis was assets held off-balance-sheet.

The revisions to FAS 140 that will force companies to hold greater reserves will have a "more significant impact" than the government's proposal Wednesday, says Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods. "This is because, prior to the implementation of the changes to the accounting standard, there was a capital benefit of utilizing the securitization market, which gets eliminated with the proposed changes."

Sakhrani adds, "For my coverage universe of credit-card and auto finance companies, the revision of the accounting standard has a larger impact." The impact on these companies from the administration's proposed changes to the asset-backed market is "relatively muted."

-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729; aparajita.saha-bubna@dowjones.com