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.
