The U.S. Government Accountability Office concludes in a recently issued report to Congress that debt protection products, while offering potential advantages to consumers, carry substantial fees and may be sold to consumers without the benefit of sufficient information.
The GAO, mandated by the Credit CARD Act to study such products, focused its report on debt suspension and debt cancellation contracts sold in connection with credit cards. In what might be viewed as a “charge” to the Bureau of Consumer Financial Protection (CFPB), whose future role will include overseeing credit card debt protection products, the GAO states that “the increased popularity of debt protection products raises the importance of effective regulatory oversight of these products.”
The GAO recommends that the CFPB (1) factor into its oversight of such products, “including its rulemaking and examination processes,” a consideration of the financial benefits and costs to consumers, and (2) direct its consumer financial education efforts toward identifying “ways to improve consumers’ understanding of credit card protection products and their ability to assess whether or not the products represent a good choice for them.” The CFPB agrees with the recommendations and intends to implement them, according to its letter commenting on the report.
In conducting its study, the GAO obtained data from the nation’s nine largest credit card issuers (representing about 85 percent of the general purpose credit card market by volume) and three major insurance companies (representing about 30 percent of the credit insurance market for open-end credit). The GAO’s concerns include the following:
- Federal regulators have generally not addressed the reasonableness of the pricing of debt protection products in their examinations of such products.
- Only a relatively small portion of the fees paid by consumers for debt protection products is returned to them in tangible financial benefit, and such benefits can have modest monetary value, with some issuers even capping the maximum amount of debt that is canceled but charging fees on borrowings above this threshold.
- The “bundling” of coverage for multiple events that is characteristic of debt protection products can result in consumers purchasing coverage that is not applicable to them, such as unemployment coverage for a self-employed individual who cannot make an unemployment claim.
- Consumers may have difficulty obtaining the full terms and conditions of debt protection products before making a purchase. For example, the report notes that the GAO was told by customer representatives of seven of the nine surveyed issuers that they would not provide the terms and conditions before enrollment.
In addition to this regulatory scrutiny, several class action lawsuits have been filed against credit card issuers, challenging various aspects of these debt protection products. Accordingly, credit card issuers should review these products (and how they have been marketed and disclosed) to ensure that they are complying with applicable federal and state laws, including Section 5 of the Federal Trade Commission Act.
Beginning July 21, 2011, when the changes to federal preemption rules made by the Dodd-Frank Wall Street Reform and Consumer Protection Act become effective, national banks and federal thrifts that offer debt protection products may no longer be able to rely on federal preemption to avoid compliance with certain state requirements for such products. Ballard Spahr attorneys are currently conducting multistate surveys for national banks and federal thrifts to identify the state laws that may soon be applicable to all of their products and operations, including credit protection