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 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 percent.
“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. “We absolutely support the proposal.”
In an increasingly tough economic climate, banks and other mortgage lenders already have been agreeing to modify loans of distressed 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 seeing the consumer walk away entirely.
Credit cards look to be the latest domino to drop in a financial crisis that started with subprime mortgages and continually takes new twists.
Amid increasing job losses, even consumers with strong credit records have been defaulting at high levels on their credit cards. Banks already battered by the mortgage and credit crises are bleeding tens of billions in red ink from the losses.
The largest credit-card banks each set aside between $1 billion and $3.5 billion in the third quarter for losses on card loans as their profits plummeted.
Credit-card charge-off rates, balances written off as unpaid, rose to 6.8 percent in August, up 48 percent from a year earlier, according to Moody’s Investors Service.
The new 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 by as much as 40 percent 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 based in Alexandria, Va. “We’re going to see more of these efforts to try to minimize the situation.”
Under the groups’ proposal, a pilot project would allow big credit-card companies to sharply reduce the amounts owed by consumers who are in over their heads and who don’t qualify for the repayment plans now available.
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