One of my favorite blogs, the Consumer Law & Policy Blog announced this morning that the GAO has completed their report on credit and debt protection products sold to consumers by credit card companies.
You know, these are the credit protection plans that are sold to cover you in case you can’t pay the bill or are injured or laid off. The irony is that maybe on face value they sound like a good investment but I have never seen one of those protection plans pay in the last 17 years. Certainly a few get some benefit but the majority would probably be better off putting what they pay for debt protection into their own emergency fund each month and self-insuring against an unexpected event.
Hooray for some regulatory examination of those credit protection plans and hopefully we’ll see some upcoming justice in the debt protection products sold. I’m not advocating they should be eliminated, just that they should actually cover something meaningful. It’s just that it seems those policies only payoff when two moons align with a duck that flies backwards over an orange grove.
Here is what the GAO found:
In 2009, consumers paid about $2.4 billion on 24 million accounts for debt protection products, according to data from the nine largest credit card issuers. Debt protection products have largely displaced credit insurance in the credit card market, although the two products are similar from a
consumer’s perspective. Issuers market debt protection products when consumers call their customer services lines, by direct mail, e-mail, and telemarketing, and with new credit card applications, and market the products broadly rather than to specific subpopulations.
Debt protection products are banking products that are largely federally regulated, while credit insurance is an insurance product regulated by the states. Unlike state oversight of credit insurance, federal banking oversight of debt protection products does not directly address the relative financial benefits and costs of the products to consumers; instead, it focuses on compliance with disclosure requirements and prohibitions of unfair or deceptive acts or practices. The new Bureau of Consumer Financial Protection will soon assume supervisory and enforcement authority for financial products, including credit card debt protection products. Ensuring that these products represent a fair value to consumers would be consistent with the new agency’s mission.
Debt protection products and credit insurance can offer consumers several advantages. The products can protect a cardholder’s credit rating in times of financial distress, can provide peace of mind, and are widely available and easy to purchase. Regulators have reported relatively few consumer complaints and have cited few formal violations related to debt protection products. However, fees for these products can be substantial, with the annual cost often exceeding 10 percent of the cardholder’s average monthly balance.
In the aggregate, cardholders received 21 cents in tangible financial benefits for every dollar spent in debt protection product fees among the nine largest issuers in 2009 (see fig.). These products can be difficult for consumers to understand, but federal agencies offer few educational resources to aid consumers in assessing them.
Credit Insurance Becomes Debt Protection
Ten years ago, the largest credit card issuers rarely offered debt protection products and instead offered credit insurance, but today most issuers sell primarily debt protection products and rarely offer credit insurance to new customers.
Debt protection products have the same benefit as the credit insurance policies many of us remember. They are supposed to suspend or cancel the debt owed by the cardholder in certain situations. The debt protection products are not the old insurance based products they used to offer.
Interestingly, debt protection products offered by the bank are under little to no regulator control while credit insurance, like all other insurance products is supervised by state insurance regulators. Gee, I wonder why the switch away from insurance?
In the past few years there has been a growing unhappiness with credit card issuers selling debt protection products to cardholder that are just not eligible for the coverage from day one. These include people that are self-employed, retired, have pre-existing medical conditions, etc. The has appeared to be no effort to screen who is even appropriate for the product but just to sell, sell, sell.