Groups Seek Credit Card Debt Forgiveness
Matt Egan - FOX Business
A coalition representing consumer groups and the financial services industry asked the government on Wednesday to sign off on a pilot project that would allow lenders to dramatically lower credit card debt for some distressed borrowers.
The request came in the form of a letter from the Financial Services Roundtable and the Consumer Federation of America to the Office of the Comptroller of the Currency, the Treasury Department agency overseeing the nation’s banks. The OCC said it has not yet received the letter, which can be viewed here.
The alliance asked the government to remove the regulatory hurdles standing in the way of a pilot program that centers around lenders forgiving up to 40% of the amount distressed borrowers owe. The remaining balance could then be paid back over time.
While nearly all of the largest credit banks have approved the pilot program, the OCC does not currently allow for repayment plans that reduce the principal owed and expand the repayment time, the groups said in a press release.
“It is important that the OCC move quickly to approve this proposal because it will help many consumers in serious debt trouble pay back much of what they owe and avoid bankruptcy,” Travis B. Plunkett, legislative director for the Consumer Federation of America, said in a release.
The request from the alliance comes at a time when consumers have struggled to pay back loans due to the slowing economy, sending delinquencies soaring.
Just last week, credit card leader American Express (AXP: 26.06, +0.85, +3.37%) reported a 5.9% jump in cardholder defaults, forcing the company to set aside $1.37 billion for bad loans. Other credit card firms, such as Visa (V: 54.25, +3.56, +7.02%), MasterCard (MA: 140.06, +4.33, +3.19%) and Discover (DFS: 11.28, +0.14, +1.25%) have seen similar concerns.
“The most important thing right now is to strike a balance between the lender and the consumer,” Steve Bartlett, president and CEO of the Financial Services Roundtable, said in a statement. “We are asking the OCC to provide guidance to lenders that will in turn offer relief and stability to consumers.”
Under current practices, credit card companies can offer assistance to distressed borrowers by lowering rates, payments and penalties but not by significantly reducing the principal owed.
"Working with credit counseling agencies, a group of lenders, including virtually all of the largest national credit card banks, have agreed to a limited duration test to determine whether this class of consumers could benefit from new, more generous concessions and whether such concession increase collections,” the alliance said in the letter.
The groups argued it’s not necessary to apply current accounting practices that create a “financial disincentive for debt forgiveness” for this pilot program. Current rules call for lenders to write off the forgiven amount immediately.
However, the group said it’s more accurate to delay loss recognition until the repayment plan is completed or a borrower defaults since the program will only be available to customers to distressed borrowers.
www.foxbusiness.com/story/markets/economy/groups-seek-credit-card-debt-forgiveness/