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A group representing most of the nation's large banks has teamed with the Consumer Federation of America to pitch a plan to credit card-industry regulators that would enable banks to forgive up to 40% of heavily indebted credit card borrowers' debt. The Washington, D.C.-based Financial Services Roundtable, a policy and lobbying group representing 100 major U.S. banks, and the federation, also based in Washington, D.C., say the plan would give consumers on the brink of bankruptcy a break on their credit card debts. It also would ensure banks get repaid for at least part of the original loan amounts, the groups say. In a letter sent this week, the two organizations urged John Dugan, comptroller of the currency, to approve the plan, which requires a change in an agency rule that regulates most credit card issuers. According to the Financial Services Roundtable, participating consumers would work with credit-counseling agencies to chop their debts to manageable levels based on their incomes. They then would repay the balance to lenders at no interest over five years and any tax-income liability for the write-offs would be deferred to the end of the five-year period. "This program is a win for banks and consumers because it creates an opportunity for consumers to avoid bankruptcy and it gives banks the possibility of collecting something instead of writing off the entire loan," Scott Talbott, Financial Services Roundtable senior vice president, tells CardLine. According to the letter sent to Dugan, current economic conditions prevent many consumers from qualifying for existing debt-relief programs. Virtually all of the largest credit card lenders have agreed to a limited-duration test of the program, Talbott says. The financial services group also says the proposed plan could provide a sound alternative to for-profit debt-settlement firms, some of which the Federal Trade Commission is scrutinizing for alleged deceptive and unfair practices. "Economic conditions have changed, and credit card borrowers who are in trouble need more options," Talbott says.
