The U.S Government Accountability Office ("GAO")
recently issued a report entitled "Consumer Costs for Debt
Protection Products Can Be Substantial Relative to Benefits but Are
Not a Focus of Regulatory Oversight" (the "Report"),
which analyzed the regulation of debt protection products. The
Report stated that the "financial benefits to consumers may be
limited" because "a relatively small proportion of the
fees consumers pay ... is returned to them in tangible financial
benefits." In addition, the Report concluded that these
products can be difficult for consumers to assess. The GAO found
that "ensuring that these products represent a fair value to
consumers would be consistent with the new agency's
mission." Thus, the Report recommended, and the agency agreed,
that the Consumer Financial Protection Bureau ("CFPB" or
"Bureau") "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." Companies selling debt protection products should
assess their disclosure and pricing practices and prepare for the
CFPB to issue rules that are similar to those proposed, but held,
by the Federal Reserve Board in September 2010.
Costs and Benefits of Debt Protection Products
Debt protection products are sold by credit card issuers to
their customers through phone solicitation, account statement
inserts, and the internet. Generally, these products either pay off
or suspend a customer's balance or monthly minimum payment if a
qualifying event—such as death, disability, or
unemployment—occurs. These products are not uniform,
however, and different issuers may place limitations on the
qualifying events, apply benefit caps (e.g., maximum death
benefit of $10,000), or limit the duration of benefits
(e.g., six months for involuntary unemployment).
Customers are charged a monthly fee based on the cardholder's
monthly outstanding balance. The Report noted that fees charged by
the nine largest credit card issuers ranged from $.85 to $1.35 per
month for every $100 of the outstanding balance. Fees are charged
whether or not the consumer pays the balance in full, but zero
balance accounts are not charged the fee. A number of card issuers
included the cost of the debt protection on the cardholder's
account statement, but it was not a uniform practice across the
industry.
The Report found that, in 2009, customers of the nine largest
credit card issuers paid $2.4 billion in fees and received $518
million in benefits—21 cents for every dollar paid. An
estimated 5.3 percent of customers received a benefit, and the
average value of the benefit was $607. The combined profit for
surveyed issuers from debt protection products was $1.3
billion.
Although the Report found that consumers generally received a
number of tangible and intangible benefits from the products, it
determined that the fees were "substantial in relation to the
aggregate financial benefits consumers receive, and [that]
consumers may have trouble evaluating different products and
deciding whether the product is best for them." The benefits
of the products were limited by their relatively high cost,
eligibility requirements, amount and duration limits, and the
negligible practical benefit of cancelling minimum monthly payments
(typically only $40 per month for the average credit card
balance).
The Report also described a study of debt protection products for
home equity loans that found consumers were often unable to
calculate the monthly total fee correctly, understand the
eligibility requirements or exclusions, or easily obtain full terms
and conditions prior to purchasing the products. The GAO did note,
however, that there were very few consumer complaints regarding
these products to the relevant banking regulators and the
FTC.
Regulation of Debt Protection Products
As detailed in the Report, debt protection products are banking
products governed entirely by federal statutes and regulations. The
Truth-in-Lending Act ("TILA") governs debt protection
products through disclosure requirements implemented under
Regulation Z. Regulation Z imposes such basic requirements as: (1)
expressly disclosing that the protection is optional; (2) expressly
disclosing the fee for the initial term of coverage, and thereafter
on the periodic statement; (3) explaining, if the product includes
debt suspension benefits, that interest will continue to accrue
during the suspension period; and (4) obtaining the consumer's
initials or signature on a written affirmative request for the
product after providing the required disclosures. The Office of
Comptroller of the Currency ("OCC") regulations, which
apply only to national banks, impose additional disclosure
requirements regarding applicable conditions and obligations and
the customer's right to cancel, and they ban misleading
advertisements or practices. The Federal Trade Commission Act
("FTCA") also prohibits unfair or deceptive acts or
practices in the sale or marketing of debt protection
products.
However, neither TILA, the OCC regulations, nor the FTC regulates
the fees charged for debt protection products, nor do they regulate
the costs relative to the benefits of the products. Instead, the
Report noted that bank examinations include consideration of fees
in relation to safety and soundness.
The Report gives a detailed comparison of debt protection products
to the credit insurance products that are regulated by state
insurance law. From a consumer's perspective, credit insurance
products operate in the same manner as debt protection products,
but state insurance laws "establish a reasonable relationship
between the premiums that customers pay and the benefits that they
receive." Thus, the Report attributes the dramatic decrease in
credit insurance products, as compared with the corresponding rise
in debt protection products, at least in part to the regulation of
the insurance product and the ability for issuers to earn
additional profits from the lack of federal price control.
The Bureau's Potential Response
In its Comment on the Report, the CFPB noted that Dodd-Frank
"grants important new authorities to the Bureau to ensure that
the terms and features of consumer financial products and services
are 'fully, accurately and effectively disclosed to consumers
in a manner that permits consumers to understand the costs,
benefits, and risks' and also to protect consumers from
'unfair, deceptive and abusive practices.'" The CFPB
agreed with the GAO's conclusion that it should consider
"consumer awareness and understanding of the costs ... and
benefits" of credit protection products when evaluating the
existing disclosure rules and regulating the products
generally.
Although the GAO report suggests that the Bureau "factor into
its oversight and regulation" of debt protection products the
"financial benefits and costs to consumers," the Bureau
does not appear to have direct power to regulate the cost of these
products. The Bureau could investigate whether the perceived
disparity in cost and benefit to the consumer itself constitutes an
"unfair, deceptive, [or] abusive practice" pursuant to
the guidelines in the Dodd-Frank Act and attempt to regulate
pricing on that basis. Such regulations are not likely, however,
considering the lack of precedent supporting price-based
regulations—without some additional factor—in
cases interpreting Section 5 of the FTC Act.
The more likely result is that the Bureau implements in some
fashion the Regulation Z disclosure revisions proposed by the
Federal Reserve in September 2010, but subsequently held until
authority is transferred to the CFPB. The September 2010 proposals
would require that: (1) all disclosures be in 10-point or larger
font, under appropriate headings, and in some cases presented in
question and answer format; (2) issuers determine that consumers
have met any applicable age or employment criteria before enrolling
them in the products; and (3) issuers disclose the maximum fees
charged for the products. Given the GAO report, the Bureau would
likely consider adding disclosure requirements that encourage the
consumer to assess the costs and benefits of the product
considering, for example, the actual level of minimum monthly
payments that would be avoided.
Next Steps for Credit Card Issuers
The Bureau previously identified credit card disclosures and
enabling consumers to understand the products they purchase as
priorities. The GAO Report will likely result in a consideration of
how debt protection product disclosures could better convey the
actual benefits the products will provide to different types of
consumers. Credit card issuers should prepare for these potential
rule changes by assessing both the quality of their disclosures and
product pricing relative to benefits.
Of short-term concern to issuers is whether the Report will lead to
state attorney general or private plaintiff litigation. Given the
current environment for consumer protection and state autonomy, the
Report may have identified issues related to pricing disparity and
certain practices that an attorney general or plaintiff could test
under their respective state unfair trade practices acts. Issuers
should assess whether their products are implicated by the Report
(e.g., (1) failing to cap the balance on which fees are charged at
the amount of the benefit; (2) allowing ineligible consumers to
purchase the product; or (3) requiring consumers to request refunds
after cancellation).
Jones Day's Consumer Financial Products & Services team
advises clients regarding the issues discussed in this Alert,
including assessing the litigation and compliance risks of
financial products.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.