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Forgiving credit card debt for some would benefit all

November 05, 2008|DAVID LAZARUS

When I heard last week that banks want to forgive up to 40% of some customers' credit card debt, my first question was, "What's the catch?"

"There's no catch," answered Scott Talbott, chief lobbyist for the Financial Services Roundtable, an industry group that helped concoct the debt-relief program. "There's no hidden agenda. These are extraordinary times and the industry is aggressively working to help customers."

He's half right. As best as I can tell, the banks' offer comes with no strings attached.

However, this isn't pure altruism. Credit card issuers would enjoy some significant benefits under the plan, making it an act of self-preservation that just so happens to be in the best interests of potentially millions of cardholders.

In a letter to the Office of the Comptroller of the Currency, which regulates national banks, the Financial Services Roundtable and the Consumer Federation of America called for a change in federal rules regarding payment and taxation of credit card debt.

The Financial Services Roundtable represents most of the leading credit card issuers, including JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Capital One Financial Corp.

The banks are proposing that consumers who qualify for partial debt forgiveness be given five years to pay off their remaining balances, rather than the current three to six months.

They're also proposing that consumers not have to pay taxes on any debt forgiven for five years, as opposed to the current requirement that such taxes be paid immediately.

To qualify, a cardholder would first have to see a credit counselor, who would use criteria provided by lenders to determine how much of the consumer's balance could be waived -- anywhere from 10% to 40%, depending on income, assets and other financial considerations.

No interest would be charged on the remaining amount of credit card debt.

The banks want to test the program with 50,000 consumers and, if the feds approve, then expand it to potentially millions of others.

Talbott said each lender represented by his group had signed off on the proposal.

A spokesman for the comptroller's office said the agency was considering the banks' plan.

According to the Federal Reserve, the 158 million U.S. consumers who use plastic will soon be carrying almost $1 trillion in credit card debt.

The percentage of delinquent credit card accounts -- those that are 30 days or more overdue -- hit 4.5% in the second quarter, according to the American Bankers Assn. That's close to the 6.4% of homeowners who missed mortgage payments during the period.

Charge-offs, or those credit card accounts that banks have simply given up on collecting, reached an all-time high of 5.5% in the quarter.

The banks are clearly figuring that the economy is going to get worse before it gets better, and that reducing the number of charge-offs would improve their bottom line (even if they can collect only 60% of some balances).

The banks also would gain an accounting benefit by not having to write off forgiven debt for five years, thus limiting reported losses for what is hoped would be the duration of the economic downturn.

I told Talbott that it's hard not to be skeptical when banks present themselves as the best buddy of consumers.

"Are we really viewed that poorly?" he replied.

Well, yes. These are the guys who helped wreck the housing market by extending loans to millions of people who had no hope of paying them back, and who lobbied fiercely to change the bankruptcy law so it'd be harder for people to crawl out from under their debt.

In September, come to think of it, the banking industry condemned the House of Representatives' approval of a Credit Cardholders' Bill of Rights:h5244rfs.txt.pdf while passing the hat among taxpayers for $700 billion in bailout funds. The bill subsequently stalled in the Senate.

Linda Sherry, a spokeswoman for Consumer Action, said the banks' plan would clearly be a plus for many consumers who might otherwise be forced to seek bankruptcy protection to resolve their debt problems.

But she worries that there could be a backlash from cardholders who pay their bills each month.

"A lot of homeowners weren't happy with plans to renegotiate the mortgages of people who made bad housing decisions," Sherry said. "I wonder if other cardholders will accept forgiving the debt of some people who mishandled their plastic."

This is a valid concern. A lot of us work very hard to pay our bills on time and manage our finances. It certainly doesn't seem fair for banks to bail out those who behaved less responsibly.

Yet these are indeed extraordinary times. And we'll all benefit economically if consumers get back on their feet as quickly as possible.

"What's better for everyone?" Talbott asked. "Is it better for people to go into bankruptcy? No. Is it better for lenders if people go into bankruptcy? No. We're trying to help both sides."

Say what you will about the banks' motives, their proposal would be an undeniable boon to a lot of people at a time when many families can use all the help they can get. Federal regulators should approve the plan as soon as possible.

Now about that Credit Cardholders' Bill of Rights. . . .

David Lazarus' column runs Wednesdays and Sundays.

Send your tips or feedback to david.lazarus@latimes.com.

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latimes.com/lazarus/debt

Discussion

Do you support forgiving the credit card debt of people who can't pay their bills?

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