Retailer-owned credit card banks, already an endangered species, would become extinct under the Obama administration's plan to overhaul financial regulation.
So, for that matter, would depositories owned by automakers and other nonfinancial companies. Industry experts said the proposals could also affect General Electric Co., whose sprawling finance operations include the $20.6 billion-asset GE Money Bank.
The plan calls for eliminating various loopholes and "grandfather" provisions that have allowed such ownership — putting to rest much of the long-running debate over separating banking from commerce.
"It appears as though those specialty charters will no longer be available," said Brian W. Smith, a partner in Latham & Watkins LLP and a former chief counsel at the Office of the Comptroller of the Currency.
He and others interviewed Wednesday stressed that it remained early to understand the proposed reforms' full implications. But they agreed that, if the proposals are enacted as written, the days when retailers could issue their own credit cards would end — forcing the few remaining players to sell or close down their lending arms.
"What this would probably end up doing would be to cause a lot of these entities to unload their credit card banks," said Duncan Douglass, a partner at Alston & Bird LLP. "I would think the retailers would first try to sell their portfolios before winding down."
Though most retailers have already sold their private-label and cobranded credit card portfolios to partner financial institutions, a handful have retained ownership of credit card banks and continued to issue their cards directly, under an exception in the Bank Holding Company Act.
The portfolios are valuable, if increasingly troublesome, assets for retailers like Target Corp., Nordstrom Inc., Cabela's Inc. and Charming Shoppes Inc.
Target, which sold a minority stake in its receivables to JPMorgan Chase & Co. a year ago, has seen its chargeoffs mount to an annual rate of 15.73% in April.
It has said it is "interested in selling the balance of our credit card business, given the right macroeconomic environment and the right economic proposition." But card portfolios — and especially store card portfolios, which tend to have higher loss rates — are a hard sell in the current environment.
The administration's proposal, unveiled Wednesday, said: "The policy of separating banking from commerce should be reaffirmed and strengthened. We must close loopholes in" the Bank Holding Company Act "for thrift holding companies, industrial loan companies, credit card banks, trust companies and grandfathered 'nonbank' banks."
The proposal continued: "The loophole for special-purpose credit card banks creates an unwarranted gap in the separation of banking and commerce and creates a supervisory 'blind spot' because Federal Reserve supervision does not extend to the credit card bank holding company. Under our plan, holding companies of credit card banks would become" bank holding companies.
Converting to such a company seems unlikely to be an option for manufacturers or retailers, since the proposal says any entity that controls a depository should be "subject to the nonbanking activity restrictions" of the Bank Holding Company Act.
However, even if GE were to divest its bank, it would not necessarily have to get out of commercial or consumer finance altogether. "GE is in the same position as owners of nonbank credit card banks" when it comes to GE Money Bank, but "the rest of its [financial] operations are not run through a depository institution … , so they wouldn't be affected by that provision," said Joseph Vitale, a partner in Schulte, Roth & Zabel LLP.
A spokesman for GE said, "It's very early in the process, we're going to review the proposal in detail and work with Congress as it makes its way through. … Many of the elements of the administration's proposals are new and bear further scrutiny."
The proposals address what Douglass called a "conflict of interest notion: 'Maybe that's what contributed to the mess where consumers got underwater with debt, in part due to these types of arrangements' " made with retailers that used industrial loan companies or credit card banks to encourage more spending.
"What the proposal seems to indicate is that we really want to drive a wedge between folks operating in nonbanking industries from also operating banks," Douglass said, "particularly when there's a potential conflict of interest so that consumers are loaned money that they shouldn't be loaned, with perhaps unrealistic underwriting criteria and standards, because the entity owning the lender is also the entity that has a chance to benefit from the purchase of the goods."
For example, he said, "an automobile manufacturer or retailer that also provides the loan to facilitate the purchase of the car may have a conflict of interest, according to the proposal."
Smith, the Latham & Watkins partner, said such segregation efforts could go too far.
"This is kind of an exercise in intellectual purity, trying to get a common definition of 'bank,' but it could result in throwing the baby out with the bathwater," he said.
As both the companies and industry observers pointed out, however, the affected companies have time to consider their options before the proposals are enacted. And once enacted, implementation could take years.
Most of the companies contacted for this article, including Target, Nordstrom, Cabela's and Charming Shoppes, said that they were still evaluating the proposals and that it was "too soon" to comment.
And consultants who specialize in store cards said their clients had not started to panic.
Steven Jacowitz of Auriemma Consulting Group Inc., for example, said early Wednesday afternoon that none of his clients had called him. "People aren't jumping up and down just yet," he said. "It's still early stages."