The Office of the Comptroller of Currency issued a response to a proposal to forgive some borrowers’ credit card debts. No way, OCC says. The plan was supported by the banking industry and consumer groups.
The forgiveness plan was seen by supporters as a way to help bail out Main Street at a time when Wall Street was receiving billions of dollars in federal aid to help distressed banks. But the plan was also controversial and criticized by consumers who paid their credit card balances on time and acted responsibly in borrowing and using credit.
Rejected by the OCC
The Office of the Comptroller of Currency (OCC) issued a statement Wednesday responding to an Oct. 29 request from the Financial Services Roundtable, a banking industry trade group, and the Consumer Federation of America, a consumer advocacy group, to approve a test program to help financially distressed credit cardholders. The groups requested the OCC, which charters, regulates and supervises national banks, approve a test workout program that would have forgiven up to 40 percent of credit card debts for some 50,000 people enrolled in debt management programs.
Credit card issuers currently work out repayment plans with debtors that allow reductions in interest payments, fees and monthly payments. However, the principal balances on those credit card debts are generally not forgiven — unless the borrower files for bankruptcy protection. In recent years, the card issuers have been less generous in repayment plans, but the credit crisis created a new willingness to revisit the issue.
Under current OCC rules, when principal balances on debts are forgiven, the balance must be repaid within three to six months and banks must write off the amounts forgiven and report it to the IRS (See Beware the tax bite that follows debt resolution). Credit counselors and banks argued this was a disincentive for banks to offer concessions on the principal balance of credit card debt. In the current economic climate, many families cannot repay their balances within such a short time period. They asked the OCC to allow credit card borrowers to “repay less than the full amount owed over time, while deferring the loss recognition and income reporting,” according to the OCC.
“The OCC does not consider any plan that defers the timely recognition of loss as prudent, and any such proposal cannot be viewed favorably by us,” wrote Timothy W. Long, the OCC’s senior deputy comptroller for bank supervision policy. “Our long-standing policy is that banks are not allowed to attempt long-term recoveries while assets deemed uncollectible have not been accounted for as charge-offs and reported as losses. To do so compromises the integrity and transparency of financial statement reporting and public confidence in the banking system.”
“The OCC rejected our request,” Scott Talbott, senior vice president of government affairs for the financial services group, wrote in an e-mail. “We will continue to look for ways to help consumers during these extraordinary times.”
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