Debt Protection Products Have Largely Displaced Credit Insurance

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. In 2009, cardholders paid approximately $2.4 billion in  fees for debt protection products, according to data from the nine largest  credit card issuers. Credit Insurance and Debt Protection Products Function Similarly from a Consumer’s Perspective

Credit card credit insurance and debt protection products are largely  similar from the perspective of the consumer, although, as discussed later  in this report, the two products are regulated differently. OCC’s supplemental examination procedures direct  examiners to also review the products’ features and terms and conditions  and the accuracy of the issuers’ marketing materials. The regulators said that for this reason their  examinations of these products focused on compliance with applicable  laws and regulations, such as those related to disclosure requirements, and  did not address the costs and benefits of the products from a consumer’s  perspective. In  addition, the Federal Trade Commission Act’s prohibition of unfair or  deceptive acts or practices also can apply to credit insurance. Peace of mind. Regulators have reported relatively few consumer complaints and  have cited few formal violations related to these products as a result of  bank examinations. But, as we have seen, the fees associated with these  products can be substantial, with the annual cost often exceeding 10  percent of the cardholder’s average monthly balance. Moreover, among  the nine largest issuers in 2009, consumers got back 21 cents in tangible  financial benefits for every dollar they paid in fees for these products. The Dodd-Frank Act,  however, transfers supervisory and enforcement authority for credit card  debt protection products––among other consumer financial products and  services—from the federal banking regulators to the new Bureau of  Consumer Financial Protection. Taking such steps for credit card debt protection products would be  consistent with the bureau’s mission and would help ensure that the  products represented a fair value to consumers. Credit card debt protection products can be difficult for consumers to  assess. Recommendations for Executive Action

We recommend that the Bureau of Consumer Financial Protection take  the following two actions:  factor into its oversight and regulation of credit card debt protection  products, including its rulemaking and examination processes, a  consideration of the financial benefits and costs to consumers, and  incorporate in its consumer financial education efforts ways to improve  consumers’ understanding of credit card debt protection products and  their ability to assess whether or not the products represent a good choice  for them. Key contributors to this report are listed in appendix V.

Appendix I: Objectives, Scope, and Methodology

Our reporting objectives were to review (1) the market for and key  characteristics of debt protection products and credit insurance for credit  cards, (2) federal and state regulation of these products, and (3) the  advantages and disadvantages of these products for consumers.
Why GAO Did This Study

Debt protection and credit insurance products can cancel or suspend part or all of a credit card debt under specific circumstances, such as loss of life, disability, or involuntary unemployment. In response to a mandate in the Credit Card Accountability Responsibility and Disclosure Act of 2009, this report reviews these products' market share and characteristics, federal and state oversight, and advantages and disadvantages to consumers. For this report, GAO analyzed data it had requested on these products from three major credit insurers and the nine largest credit card issuers. These nine issuers represented 85 percent of the credit card market. GAO also reviewed the products' terms and conditions, related marketing materials, and applicable federal and state regulations.

What 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. These products can be difficult for consumers to understand, but federal agencies offer few educational resources to aid consumers in assessing them.

What GAO Recommends

GAO recommends that the Bureau of Consumer Financial Protection (1) factor into its oversight of credit card debt protection products, including its rulemaking and examination process, a consideration of the financial benefits and costs to consumers, and (2) incorporate into its financial education efforts ways to improve consumers' ability to understand and assess these products. The bureau agreed with GAO's recommendations.