WASHINGTON -- — With defaults on credit card debt spiraling amid a global 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 huge 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 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%.
"There's obviously a financial benefit to the financial institutions to step up to the plate right now," said Susan Keating, 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 been agreeing to modify loans of 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 by seeing the consumer walk away entirely.
Credit cards -- now an integral part of American life and the economy -- appear to be the latest domino to fall in a financial crisis that started with subprime mortgages and continually takes new twists.
Credit card charge-offs, balances written off as unpaid, rose to 6.8% in August, up 48% from a year earlier, according to Moody's Investors Service.
Americans are burdened with about $900 billion in credit card debt, according to the latest available Federal Reserve figures.
The proposal 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 would allow lenders to reduce the amount of credit card debt owed by deeply indebted consumers in a pilot program.
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."
