If you have a credit card, you've probably heard the pitch.
It comes from a telemarketer, or perhaps from a mailer included with your
statement, and warns that "life is unpredictable." Prepare for the worst, the pitch goes on to say, by purchasing a plan that will handle
your credit card debt if you lose your job, become disabled or die.
What it won't tell you is that for years, card issuers have
been making fat profits off these payment protection programs while complaints
from consumers and activists have piled up. But now, a slew of lawsuits and a
federal investigation have put the plans themselves on an unpredictable course.
PAYMENT PROTECTION PLANS DRAW FIRE
Consumer advocates have long complained that credit card payment protection plans cost too much for the protection they offer, but now state and federal agencies are taking a closer look.
Hawaii in April 2012 filed
a suit claiming that Bank of America, Barclays, Capital One, Chase, Citi, Discover and HSBC all billed cardholders for payment protection and other
products that they didn't request or that didn't provide the promised benefits.
The banks are accused of signing up consumers who thought they were simply
requesting information, and of enrolling customers who don't qualify for the
The suit asserts that there is
no easy way for customers to ask questions, file a claim or cancel the product.
"Payment Protection is so confusing as to when coverage is triggered, so
restricted in terms of the benefits it provides to subscribers, and processing
claims is made so difficult by Defendants, that it is essentially worthless,"
states the lawsuit.
On top of the state actions, the
Consumer Finance Protection Bureau (CFPB) and Federal Deposit Insurance Corp.
are jointly investigating Discover for business practices surrounding payment
protection plans and other products. Discover declined to comment for this
story but said in its annual report that it made changes to its fee-based
products and programs before the probe even began and that it "believes its current
business practices substantially address the regulators' concerns."
Outside of the formal complaints,
consumers and advocates voice dismay at how hard it is to get written details of
payment protection plans before enrolling. A 2009 report by the Government Accountability
Office found that seven of the nine largest card issuers refused to mail
out information on the plans until the cardholder signed up.
Jim Wells calls it a
"cart-before-the-horse" approach. A consultant in the financial
services industry himself, he balked recently when a Bank of America
telemarketer called offering payment protection. The sales person insisted that
he sign up for a 30-day free trial before he could receive any written
materials. "Whenever I hear these scenarios I assume in my perhaps cynical
mind that the plan for the program is based on my forgetting to cancel by the
end of the 30-day period," he says. "It's the same way stores do
rebates instead of giving an in-store discount. They hope you'll get busy with
Wells heads up Wellspring
Consulting International, a Fort Lauderdale, Fla., consulting firm that
provides access to alternative financial services for the underbanked
population, which doesn't use traditional financial institutions. He says
marketers prey on low-income people like those his business serves.
"They're likely to have higher outstanding balances on their credit cards
so they bubble to the top of telemarketers' lists on who to call," he
explains. "They're also the most susceptible to the argument that says
this is going to protect you should you lose your job."
They're wildly overpriced for the benefits provided ... You'd be better off just saving for a rainy day.
Center for Economic Justice
High cost, low payout
Even if the banks clean up
their marketing, they'll be hard-pressed to make fans among consumer advocates
and financial planners. Critics say credit card debt protection plans are just
a bad value. The programs charge customers between 85 cents and $1.67 per $100
of outstanding balance. That may not sound like much but it adds up. If you're
paying $1 per $100 of debt, that's equivalent to adding 12 percent a year to
your annual interest rate. On a $2,000 balance, that's $240 a year for the
plan, plus whatever you pay in interest.
Because most plans cover only your
minimum payment, you could end up paying out close to the maximum you'll ever
receive. "There's a rule of thumb in insurance," says Ed Mierzwinski,
consumer program director at the federation of state Public Interest Research
Groups. "You certainly don't pay the same dollar for insurance that the
insurance would pay you back."
The amount of benefits the
plans pay out in relation to the premiums, known as the loss ratio, is very
low. Consumer advocates advise shopping for products with a minimum loss ratio
of 70 percent, and the loss ratio for group life insurance has historically
exceeded 90 percent -- that is, 90 cents of every dollar consumers pay in, is
returned in the form of premiums.
The 2009 Government
Accountability Office survey found that the average loss
ratio reported by the nine largest card issuers was just 21 cents to the dollar
for their credit card debt protection plans. Birny Birnbaum, executive director
of the Center for Economic Justice, says
his own analysis shows the figure is closer to 10 cents per dollar. "They're
wildly overpriced for the benefits provided and for some consumers they're
quite costly," says Birnbaum, whose center advocates for the economic
interests of minorities and low-income people. "You'd be better off just
saving for a rainy day." (See "7 questions to ask before you buy credit card payment protection")
Part of the reason loss ratios are
out of line with insurance is that the law does not classify these plans as
insurance. While insurance rates are state regulated, debt protection plans,
which are considered bank products, are overseen at the federal level by the Office
of the Comptroller of the Currency. The OCC gives the banks free rein over
pricing. Left unchecked by the government, prices tend to be high because there
is no market competition. Consumers cannot shop around for different plans. The
only option for a particular card is the program administered by that card's
Good deal, for banks
Complaints aside, the products are tremendously profitable
for the industry. According to the GAO,
in 2009 the nine largest issuers reported that they collected $2.4 billion in
fees for debt protection products. Fifty-five percent of that, or $1.3 billion,
went to profit.
It's no wonder banks continue to pursue the business. More
than half of all credit card mail offers include payment protection offers, according to data from Mintel Comperemedia, a company that provides
direct marketing competitive intelligence. That rate has remained
relatively steady, despite the lawsuits. Chase began reducing its payment
protection marketing in March 2011, and included no mailers in the first
quarter of this year. The bank agreed to pay $20 million in December 2010 to
settle litigation against its plan. But Citibank's mailings doubled from 2010
to 2011, softening the impact of Chase's withdrawal. Those banks, as well as
Bank of America, declined to comment for this story.
Industry representatives defend
the plans, saying they work for a certain market segment. "In terms of the
loss ratio, the question is, is the value of the product equal to the cost?"
says Ken Clayton, executive vice president of legislative affairs for the
American Bankers Association. "And for some people the answer is yes. People
buy these products for a number of reasons. One is peace of mind. The other is
knowing they will be protected if certain untimely life events happen that put
them in a difficult position to repay their bills. And they're doing so for
themselves, but they're also doing so for their family."
They're not for everyone. But you should have the ability to purchase what you want.
If you feel that buying an SUV is what you want, you're the one who's got to pay the insurance and the gas bills.
Consumer Credit Industry Association
Some consumers benefit
Scott Cipinko, executive vice president and chief operating officer for the Consumer Credit Industry
Association, says he does not subscribe to any debt protection products,
but his sister had them in place when she became terminally ill a few years
ago. An unmarried life insurance agent, she also had a term life policy but
kept the debt protection so that her parents could use the life insurance
benefits to settle her outstanding medical bills and funeral costs, rather than
having that money go toward paying off credit cards.
"They're not for everyone,"
says Cipinko, whose association represents companies that underwrite
credit card debt protection plans and other types of debt protection products. "But
you should have the ability to purchase what you want. If you feel that buying
an SUV is what you want, you're the one who's got to pay the insurance and the
There is certainly a market for
debt protection products. The GAO
found that in 2009, consumers paid about $2.4 billion on 24 million accounts
for them. Seven percent of the nine largest issuers' cardholders were covered.
Seventy percent of claims were accepted.
The agency acknowledges the
products provide some benefits, namely that they can help protect a cardholder's
credit score in certain circumstances and that they provide some consumers with
peace of mind. According to the GAO's
report, one issuer found that 80 percent of subscribers were satisfied with the
product, and that figure rose to 90 percent among people who had received
benefits from the programs. "People make a choice that the cost of the
product is worth it for the peace of mind associated with that," says the
ABA's Clayton. "If in fact they need it, it's a great value."
Making informed decisions
The Center for Economic
Justice's Birnbaum would like to see the banks provide data so consumers can see
before they sign up whether the products are a good value. "Right now
consumers don't have any information about how often someone files a claim,
they don't have any information about how often claims are denied," he
says. "The CFPB can improve consumer disclosures to the point where
consumers are actually empowered to make an informed decision." Birnbaum's
organization and several others have supplied the bureau with a proposed
plan disclosure form.
CFPB declined to comment for this story but it has said in the past that it is
reviewing disclosure rules proposed by the Federal Reserve in 2009 and 2010,
before CFPB came into existence.
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