June 12, 2012
Credit Card Protection Plans Draw State Lawsuits, Federal Scrutiny
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.
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 promised benefits.
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.
Hawaii joins several other states in suing banks over their payment protection plan marketing practices. West Virginia settled with Capital One for $13.5 million in January 2012 in a case involving credit card fees the state said were deceptive. The company admitted no wrongdoing in the settlement. Discover settled with Minnesota for $2 million last year and, according to a report it filed with the Securities and Exchange Commission, is being suied by West Virginia and investigated by Missouri over its marketing of payment protection plans. Hawaii is seeking up to $10,000 per violation from the credit card companies.
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 other things."
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