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 new 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.

It would have been nice if they’d come around to this way of thinking three years ago, but any relief is welcome, I guess.

Incidentally, if you’re wondering why the banks can’t just institute this program themselves without asking the government to get involved, it’s because they can’t:

Current government rules don’t allow lenders to offer repayment plans that reduce the amount of principal owed and borrowers to repay the balance over a period of several years. In cases where the principal can be reduced, under credit card settlements, borrowers normally are required to pay off the remainder over months rather than years.

The comments file is public information and can be accessed here. It’s sobering to pick a few at random and read the individual stories of ordinary, fiscally responsible Americans who’ve gotten fed up at the capricious and punitive way they’re treated by these companies. With this kind of response, these new regulations seem all but certain to be approved. Democracy in action!

It’s not a perfect bill, but it’s a good start. See this February post at Credit Slips for a good overview of the bill.

Barack Obama (Issues Page)

Senator Obama has two major planks that address abusive credit card issuer practices. The first of these is a “Credit Card Bill of Rights,” which would ban unilateral changes, apply interest rate increases to future debt only, prohibit interest on fees, prohibit universal default (a controversial practice in which a lender can change the terms of your debt if you default with a different lender), and require prompt and fair crediting of payments.

Obama also proposes a five-star rating system that would give consumers an easy-to-understand metric of the risk involved in different credit cards. He charges credit card issuers with making their terms too difficult for the average consumer to understand, which makes it difficult or impossible to make an educated, rational decision. Credit card companies would be required to display this rating on all application and contract materials, “enabling consumers to quickly understand all of the major provisions of a credit card without having to rely exclusively on fine print in lengthy documents.”

In a January debate, Senator Hillary Clinton criticized Obama for voting against an amendment to the 2005 bankruptcy bill proposed by Sen. Mark Dayton (D-Minn.) that would have imposed a ceiling of 30 percent on interest rates for credit cards and other consumer debt. “I thought 30 percent potentially was too high of a ceiling,” Obama explained. The amendment failed, and there is still no federally-imposed ceiling on interest rates to this day. Obama did vote against the harshly punitive bankruptcy bill as a whole, as covered here two weeks ago.

Obama talked about credit card issues in his July 8 economic speech in Georgia, starting at about the 12 minute mark:

John McCain

Senator McCain has taken no position on credit card issues during the presidential campaign, and apparently does not intend to. Obama charges that McCain “sides with the credit card companies,” citing his opposition to a 1998 effort to require to require credit card companies to affirmatively determine that borrowers under 21 could handle any debts they might incur before issuing them cards, and to a 2005 bill to require issuers to inform borrowers on their monthly statement that making the minimum payment would increase the interest they’d have to pay and the time it would take to pay their debt off. McCain criticizes Obama for his vote on the Dayton amendment discussed above, but that criticism is more than a little bit disingenuous, because McCain also voted against the amendment.

Then again, considering the $1.37 million debt on the McCain campaign’s American Express card—a card that apparently carries a 17 percent annual percentage rate—maybe a McCain administration would bring some needed perspective to the issue of abusive credit card practices. And then there’s the personal credit card with a 25.99 percent APR…

Coming next week: The Candidates on Predatory Lending

“Borrowers and Bankers: A Great Divide” is an analysis of the differences in how the federal government has responded to the financial woes of lenders and investors like Bear Stearns, Fannie Mae, and Freddie Mac (bailouts) vs. those of ordinary borrowers (you’re on your own), and explains some of the reasons behind the discrepancy.

“Work Out Problems with Lenders? Try to Find Them” talks about something I’ve written about in the past: mortgages are sliced and diced into securities and traded among big investors so much that people who want to work out payment terms with their lender are having difficulty even figuring out who they should be contacting. (I would be remiss if I did not point out that a good bankruptcy attorney can help you with this!)

In fact, as Sunday’s front-pager notes, it’s not just mortgage lenders who have been securitizing and trading consumer debt in recent years: credit card issuers have gotten into the act as well. The result has been the creation of a system in which lenders increasingly don’t even care if borrowers will ever be able to pay their debts in full. Securitization allows lenders to see an immediate return on investment (ROI) for issued debt instead of waiting years for the borrowers to pay it off, but it also means that they’re far less concerned with ensuring that borrowers can pay their debts off in full over the long run—as long as borrowers remain current until the lender unloads their promissory note onto someone else, the theory goes, all is well.

The lending industry has become a huge, nationwide game of Hot Potato, which worked well enough in good economic times, but as the economy has faltered we’ve started to see some of the huge problems that exist with a lot of these loans, and the so-called subprime mortgage crisis is looking more and more like it’s just the tip of the proverbial iceberg.

[T]he lucrative lending practices of America’s merchants of debt have led millions of Americans — young and old, native and immigrant, affluent and poor — to the brink. More and more, Americans can identify with miners of old: in debt to the company store with little chance of paying up.

It is not just individuals but the entire economy that is now suffering. Practices that produced record profits for many banks have shaken the nation’s financial system to its foundation. As a growing number of Americans default, banks are recording hundreds of billions in losses, devastating their shareholders.

A must-read article in Sunday’s New York Times evokes Merle Travis’ “Sixteen Tons” to shine a light on the practices that credit-card issuers, mortgage banks, and other issuers have used in recent years to more than triple  the amount of debt carried by the average household (in today’s dollars) over the past 25 years, even as the national household savings rate has dwindled to nothing. I deal with these issues every day in my practice, and yet it still takes me by surprise sometimes to realize how successful the lending industry has been at tilting the playing field in their favor, even at the cost of the economy as a whole.

Gretchen Morgenson’s front-page article is part of a package of stories and interactive features called “The Debt Trap,” about which I hope to write more later.

Tip: whenever you receive a credit card solicitation, look for the “Schumer Box,” a prominent table that gives you important information such as the APR, finance charges, and payment terms. It won’t protect you from all the fees, but it’ll help you weed out the worst cards.

The agents of destruction are many. State governments have played a role. They aggressively hawk their lottery products…

Payday lenders have also played a role. They seductively offer fast cash — at absurd interest rates — to 15 million people every month.

Credit card companies have played a role. Instead of targeting the financially astute, who pay off their debts, they’ve found that they can make money off the young and vulnerable…..

Congress and the White House have played a role. The nation’s leaders have always had an incentive to shove costs for current promises onto the backs of future generations. It’s only now become respectable to do so.

A timely reminder that issues involving the indebtedness and financial health of the American taxpayer cut across political boundaries. Consider reading the whole thing.