WASHINGTON -- To head off surging credit card defaults, banks and consumer groups are lobbying regulators to make it easier to forgive a portion of struggling consumers' credit card debt.
The proposal — and the unusual partnership by two groups typically at odds with each other — underscores the severity of the economic downturn, and the fear that credit cards could provide the next shock to the financial system.
This year, delinquent credit card accounts hit a six-year high of 4.9%. Meanwhile, charge-offs — when banks give up on collecting debt — have been rising for about two years, hitting 5.47% in the second quarter, the latest data available, according to the Federal Reserve. Credit card and mortgage losses have dragged down banks' earnings.
Banks are proposing that they forgive up to 40% of the credit card debt owed by the most financially stressed consumers, who are close to bankruptcy. These consumers would then get five years to pay off their remaining card debt, interest-free. Banks would pilot this program with 50,000 consumers, in hopes of expanding it to tens of thousands of others.
Banks don't need regulatory approval to forgive credit card debt. But they want the Office of the Comptroller of the Currency to waive a rule that requires them to book losses on forgiven debt the same year.
"Banks don't need more losses right now," says Scott Talbott, a senior vice president at the Financial Services Roundtable, which represents large banks.
In an Oct. 29 letter to the OCC, the Roundtable and the Consumer Federation of America, an advocacy group, said that the new program "would be in the best interest of consumers, lenders and the American economy — especially in the current climate."
OCC spokesman Robert Garsson said the agency has received the letter and is reviewing it.
For banks, the benefit of such a program is that they'd be able to recover a portion of the debt owed, rather than possibly writing off the entire debt because the consumer can't pay.
It's getting harder for banks to collect credit card debt, says David Robertson, publisher of industry newsletter, the Nilson Report. In the next five years, the amount of credit card debt that banks won't be able to collect will grow 47% to $340 billion, he says.