Proposed plan would forgive part of debt

Group of banks, credit-card companies call for program

By: JournalNow Staff | THE ASSOCIATED PRESS
Published: October 31, 2008

WASHINGTON

As defaults on credit-card debt grow amid a financial downturn, banks already reeling from the mortgage crisis are losing billions more from unpaid credit-card bills.

Big banks have formed an unusual alliance with consumer advocates to urge the government to allow enormous portions of credit-card debt to be forgiven, a turnabout from recent years when the banking industry lobbied strenuously to make it harder for consumers to erase their credit-card debts in bankruptcy.

The new pilot program -- which the banks hope will become permanent -- could involve as many as 50,000 people struggling with credit-card debt. On an individual basis, the amount of debt to be forgiven would rise according to the severity of the borrower's financial situation, up to a maximum of 40 percent.

"There's obviously a financial benefit to the financial institutions to step up to the plate right now," said Susan Keating, the president and chief executive of the National Foundation for Credit Counseling, which has 108 member organizations around the country. "We absolutely support the proposal."

In an increasingly tough economic climate, banks and other mortgage lenders have already been agreeing to modify loans of distressed homeowners to help them avoid foreclosure. Now, banks making credit-card loans have reached a point where they can lose less by forgiving part of the debt than seeing the customer walk away entirely.

Amid rising job losses, customers -- even those with strong credit records -- have been defaulting at high levels on their credit cards. Banks already battered by the mortgage and credit crises are loosing tens of billions. The largest credit-card banks each set aside between $1 billion and $3.5 billion in the third quarter for losses on card loans as their profits fell.

The biggest credit-card lenders include Discover Financial Services LLC, Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Capital One Financial Corp., American Express Co. and HSBC Holdings.

Credit-card charge-off rates, balances written off as unpaid, rose to 6.8 percent in August, up 48 percent from a year earlier, according to Moody's Investors Service.

Americans are carrying about $900 billion in credit-card debt, according to the latest available Federal Reserve figures. People who are in credit counseling, on average, have seven cards.

Many of the people now having trouble making their credit-card payments are in a double or triple whammy: their mortgages or car loans may also be under stress.

For many, the torrent of envelopes bearing credit-card offers at low initial rates -- much like the old "teaser" rates on subprime mortgages -- has recently been replaced by more somber notices of crimped credit lines, higher interest rates or even accounts being closed as lenders tighten the reins to reduce their risk.

The new proposal is being pitched to federal regulators by the Financial Services Roundtable, which represents more than 100 big banks and other financial companies, and the Consumer Federation of America.

It recognizes that "there are some critical problems with credit-card debt," said Bert Ely, a banking-industry consultant in Alexandria, Va. "We're going to see more of these efforts to try to minimize the situation."

Under the groups' proposal to U.S. Comptroller of the Currency John Dugan, whose Treasury Department agency oversees national banks, big credit-card companies would be allowed to sharply reduce the amounts owed by consumers in over their heads and who do not qualify for current repayment plans.

Borrowers would have to be in a counseling program for their credit-card debt. The amount of debt to be forgiven would be determined case by case, depending on the borrower's financial condition; those receiving close to the maximum forgiveness level would be nearing a personal bankruptcy filing.

Current government rules do not allow lenders to offer repayment plans that reduce the amount of principal owed and borrowers to repay the balance over a period of several years. In cases where the principal can be reduced, under credit-card settlements, borrowers are usually required to pay off the remainder over months rather than years.