Banking regulators on Monday formally proposed to tighten credit card issuers' timetable for charging off delinquent debts, saying risks have mounted since the rule was established in 1980.
The proposal is part of an effort by the Federal Financial Institutions Examination Council to establish a uniform 150-day chargeoff requirement for consumer loans of any type. Currently banks have up to 180 days to charge off credit cards in arrears, but only 120 days to write off installment loans.
Maintaining the status quo is also an option, the exam council stressed. But regulators-who got a taste of the banking industry's objections to the proposed change when they floated the idea last November-say there is a case for tightening the rules.
"Credit cards have become more important as a portion of total lending and that warrants a look at how lenders are dealing with problems in their portfolios," said David D. Gibbons, deputy comptroller for credit risk at the Office of the Comptroller of the Currency.
In the past 18 years, he said, competition for credit card customers has increased dramatically, leading to less stringent underwriting criteria, lower minimum payment requirements, and reduced recovery rates for delinquent accounts.
Charles M. Hegarty, president of Wachovia Bank Card Services Inc., said his institution already charges off delinquent credit card debts after 150 days, but predicted the shorter period would be a hardship for most banks.
"This would increase incremental losses within the industry at a time when there is already a fair amount concern about the overall level of chargeoffs," he said.
Mr. Gibbons acknowledged that the idea of overhauling the chargeoff timetable met with strong objections last fall.
"Industry opinions were fundamentally divided into two camps-those who want uniform rules and those who want to keep the current standards," he said. "Now that we have specific proposals we felt it was appropriate to re-air the issue and go with the alternative that makes the most sense for the industry."
James D. McLaughlin, director of regulatory and trust affairs at the American Bankers Association, complained that lenders would incur great expenses to revise collection policies and upgrade computer systems to accommodate the change.
"The current system has worked well and doesn't need to be fixed," he said.
In comment letters last fall, several bankers also complained that loan recovery rates would plummet if the 150-day requirement is instituted because loans that are charged off are turned over to credit bureaus for collection.
But the discrepancies between credit card and installment debt are unwarranted, said Brian Smith, director of policy and economics research for America's Community Bankers. "We think it makes sense to look at uniformity," he said. "Right now it's bizarre because secured installment debt is subject to tighter standards."
Regulators said they do not know the effect of the 150-day requirement on chargeoff rates. As of yearend 1997, installment loans at thrifts and commercial banks stood at $367 billion and credit card loans at $260 billion.
Mr. Hegarty predicted chargeoffs would increase. "Credit cards are a much larger portion of overall chargeoffs, so they would probably not be offset by gains on installment loans."
Regulators also are considering new guidelines for charging off loans to borrowers who have declared bankruptcy and credits that lenders discover to be fraudulent.
For instance, lenders would generally be required to charge off unsecured loans by the end of the month in which they receiving notification of a borrowers' bankruptcy filing. For secured loans, any expected loss should be charged off within 30 days of notification from a bankruptcy court.
Fraudulent loans would be charged off within 90 days of discovery.