Credit Cards: Consumer Costs for Debt Protection Products Can Be Substantial Relative to Benefits but Are Not a Focus of Regulatory Oversight
Published: 2011-03-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.
section_title: What GAO Recommends
paragraphs: 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.

section_title: Letter
paragraphs: Credit card issuers often offer debt protection products or, less frequently,  credit insurance to their customers as protection against unexpected  financial hardship that could make meeting monthly payments difficult.  These products may cancel, pay off, or suspend part or all of a consumer’s  credit card debt under specific circumstances. According to industry  estimates, in 2009 consumers paid at least $2.4 billion in fees for debt  protection products and $186 million in premiums for credit insurance on  at least 25 million cards. But publicly available information about these  products is scarce, in part because federal regulators do not routinely  require credit card issuers to report detailed information about the  products and the revenues associated with them.
A mandate in the Credit Card Accountability Responsibility and Disclosure  Act of 2009 required us to conduct a study of the terms, conditions, and  marketing of debt protection products and credit insurance for credit  cards and the value they provide to consumers. In December 2010, we  provided a briefing to you on these issues, and we are subsequently  providing this full report, which addresses (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.
To address these objectives, we obtained data and interviewed  representatives from the nine largest credit card issuers, all of which  offered debt protection products. These nine issuers represented about 85  percent of the general purpose credit card market by outstanding volume  as of December 2010, according to The Nilson Report. We also obtained  data and interviewed representatives from three major insurance  companies that represented approximately 30 percent of the credit  insurance market for open-end credit, which includes credit cards and  home equity and personal lines of credit. We obtained proprietary data  from the issuers and insurers about their credit card-related debt  protection and credit insurance products and had a third-party financial  information services provider collect and aggregate the information. We  also examined marketing materials and terms and conditions for the  products and analyzed the fees charged to consumers and the financial  benefits provided. We compared the fees for debt protection products with  those for comparable products offered by credit unions and the loss  ratios––the relationship of benefits provided to consumers to premiums  earned––for credit insurance to loss ratios for alternative types of  insurance, such as term life and disability. Further, we reviewed applicable  federal and state laws and regulations and the roles of regulatory agencies  in overseeing these products.
We interviewed representatives of, and collected documents and data  from, the Federal Trade Commission (FTC), National Association of  Insurance Commissioners (NAIC), and the federal banking regulators— Board of Governors of the Federal Reserve System (Federal Reserve),  Federal Deposit Insurance Corporation (FDIC), National Credit Union  Administration (NCUA), Office of the Comptroller of the Currency (OCC),  and Office of Thrift Supervision (OTS). We gathered data on consumer  complaints about these products, reviewed the results of regulators’  examinations of credit card issuers, and identified related violations and  enforcement activities. We also collected information on credit insurance  from representatives of insurance departments in three states—California,  Maine, and New York—that were selected to represent differing sizes and  regulatory approaches. Finally, we reviewed studies and reports from  trade associations and consumer organizations and interviewed  representatives of these organizations.
We conducted this performance audit from January 2010 through March  2011, in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives. See appendix I for a more  detailed description of our scope and methodology.
subsections: section_title: Background
paragraphs: Credit cards are widely used in the United States. Seventy-eight percent of  consumers had a credit card in 2008. As of 2009, credit cardholders had  more than $800 billion in outstanding debt on roughly 600 million credit  cards, according to Federal Reserve estimates. More than 6,000  depository institutions issued credit cards as of 2009. However, as seen in  table 1, the great majority of credit cards are concentrated among nine  issuers. These issuers accounted for approximately 85 percent of  outstanding general purpose credit card balances nationwide in 2010. As  of 2010, each of these nine issuers offered debt protection products.
subsections: section_title: Debt Protection Products
paragraphs: Debt protection products suspend or cancel all or part of a consumer’s  obligation to repay an outstanding credit card balance when a qualifying  event occurs. These events may vary across products but generally include  disability or death of the cardholder and may include events such as  unemployment. Depending on the product’s terms and conditions, a  qualifying event may trigger cancellation of the total balance or the  minimum monthly payment, or it may simply suspend the minimum  monthly payment for a period of time. Debt protection products are  banking products that are directly sold by credit card issuers to consumers  who hold a credit card with them. The issuer charges fees for the debt  protection product, typically on a monthly basis. Consumers may buy the  product when they apply for a new credit card or can add it to an existing  credit card account. New credit card applications often contain a box that  consumers can initial or insert a checkmark in if they want debt  protection, and existing account holders can typically purchase the  product by telephone, mail, or through the issuer’s Web site.
Because most major credit card issuers are structured as depository  institutions, federal banking regulators oversee their activities, including  those related to debt protection products. As the national bank regulator,  OCC oversees seven of the largest nine issuers offering debt protection  products––Citibank (South Dakota), N.A.; Bank of America; Chase Bank  USA, N.A.; Capital One; HSBC; Wells Fargo Bank, N.A.; and U.S. Bancorp.  FDIC oversees Discover, which operates as a state-chartered bank.  American Express has two bank subsidiaries that offer debt protection  products to consumers––American Express Centurion Bank, which is a  state-chartered bank and is therefore regulated by FDIC, and American  Express Bank, FSB, which is a federal savings association and is therefore  regulated by OTS. Public information about the debt protection product  industry is relatively scarce. Credit card issuers are not required to report  information about these products in Call Reports and Thrift Financial  Reports, which serve as the primary publicly available sources of financial  information regarding the status of the U.S. banking system.
section_title: Credit Insurance
paragraphs: Credit insurance is insurance coverage sold in connection with a loan,  credit agreement, or credit card account. Credit insurance products  typically bundle together several individual forms of credit insurance, such  as credit life, credit disability, and credit involuntary unemployment  insurance. Unlike debt protection products, which are two-party  arrangements between a credit card issuer and a consumer, credit  insurance is a three-party arrangement involving an insurance company, a  credit card issuer, and a consumer. An insurance company generally sells  credit insurance as a group policy to the credit card company, which in  turn offers the product to its cardholders. A cardholder who enrolls in  credit insurance typically receives a certificate of insurance, which  provides evidence of coverage, rather than an insurance policy. The  consumer typically pays monthly premiums to the insurance company,  and if a covered event occurs, the insurance company takes over the  consumer’s credit card payments for a specific period of time, or if the  cardholder dies, pays part or all of the outstanding credit card balance.  Like other forms of insurance, credit insurance is primarily overseen by  state insurance regulators, and regulations governing it may differ across  states.
section_title: Debt Protection Products Have Displaced Credit Insurance, although the Products Are Similar for Consumers
paragraphs: In recent years, debt protection products sold in conjunction with credit  cards have largely displaced credit card credit insurance. The two  products tend to offer consumers the same benefits, however, canceling or  taking over credit card payments during qualified events such as disability.
subsections: section_title: Debt Protection Products Have Largely Displaced Credit Insurance
paragraphs: 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. The products were associated with approximately 24  million credit card accounts with an estimated $42 billion in outstanding  debt. Overall, about 7 percent of the nine issuers’ credit card accounts  were covered by debt protection products. In 2009, consumers bought  approximately 6 million new debt protection products, 73 percent of them  for existing credit card accounts and 27 percent for newly opened  accounts.
The three insurance companies that provided us with data on credit  insurance represented about 30 percent of the open-end credit insurance  market and maintained approximately 2.7 million credit card credit  insurance packages in 2009. These three companies reported to us that  they sold 44,114 new packages in 2009—about 1 percent of the total. All  other packages were originally sold in earlier years. The three insurers  told us that their earned premiums for credit insurance had declined from  $757 million to $186 million, or by 75 percent, between 2001 and 2009.
Credit card issuers have shifted from credit insurance to debt protection  products largely as a result of differences in the way the two products are  regulated. Federal regulations for debt protection products apply  nationwide, while state laws governing credit insurance can differ across  states. According to representatives of credit card issuers, the credit  insurance industry, some consumer organizations, and two government  regulatory agencies, federal regulation allows for the following:    Uniform regulation and marketing efficiency. Federal regulations for  debt protection products apply nationwide, while credit insurance, like  other insurance products, can be subject to different state regulatory  regimes. As a result, one debt protection product can be offered  nationwide, which issuers’ representatives told us allows the issuers to  offer uniform pricing, terms, and conditions. In addition, the  representatives told us that issuers can offer their products to consumers  through multiple marketing channels more efficiently than they could for  credit insurance.
Flexibility. Issuers can generally structure debt protection products more  easily, consistently, and quickly than they can state-regulated credit  insurance, and can offer a broader array of products. Issuer  representatives cited the desire for more flexible products that meet  cardholder needs as a reason for their decision to shift from credit  insurance to debt protection products.
Potentially higher earnings. Representatives of regulators and one  consumer group noted that debt protection products offer more potential  for earnings than credit insurance. This may be in part because of the  absence of price controls that states generally impose on credit insurance  rates and the nonuniformity of state regulation. In addition, because credit  card issuers sell their debt protection products directly to cardholders,  they do not have to share product earnings with an insurance company  and can retain more of the fees.
section_title: Debt Protection Products Cancel or Suspend Part or All of a Debt when Specific Events Occur
paragraphs: Debt protection products cancel or suspend some or all of a cardholder’s  debt after the occurrence of certain qualifying events (see fig. 1). All of the  nine largest issuers’ primary debt protection products include a  cancellation benefit, and four of these products also include a suspension  benefit:    Cancellation benefits forgive some or all of a cardholder’s debt. These  benefits may cancel the total credit card balance if the cardholder dies or  may cancel the minimum monthly payment for a specific time during a  period of unemployment, for example. As a result, debt cancellation  benefits reduce the cardholder’s account balance by the amount of debt  being canceled.
Suspension benefits allow a cardholder to skip the minimum monthly  payment without penalty and without accruing interest for a specified time  period. Debt suspension does not reduce the cardholder’s account  balance.
These cancellation and suspension benefits are triggered by certain events.  Benefits vary among products, with most debt protection products  covering loss of life, disability, involuntary unemployment, and leave of  absence from employment. Some products also cover other events, such  as the birth or adoption of a child, marriage, relocation, divorce,  hospitalization, call to active U.S. military duty, retirement, loss of a  spouse or child, or natural disaster. At least one issuer also includes an  emergency payment benefit, which cancels the minimum monthly  payment once per year for any reason. Another issuer includes a benefit  that allows cardholders to suspend one monthly payment per year in  months that include specific federal holidays. Each product offered by the  nine issuers covers a different number of events, ranging from 4 to 21  events. Some products allow benefits to be triggered by events affecting  individuals other than the primary cardholder, such as the cardholder’s  spouse or domestic partner, other authorized users of the card, or the  highest wage earner in the cardholder’s household. For example, benefits  could be triggered by the involuntary unemployment of the cardholder’s  spouse.
Debt protection product fees are generally charged monthly and are based  on the cardholder’s outstanding balance. Fees for the nine largest credit  card issuers’ debt protection products range from $0.85 to $1.35 per month  for every $100 of the outstanding balance. For example, if the product fee  was $0.90 per $100 of the outstanding balance, a cardholder with an  outstanding balance of $500 in a given month would pay $4.50 ($0.90 x  $500/$100) for the debt protection product that month. Because the fee  depends on the card balance, the fee for the product can vary from month  to month (see fig. 2). The debt protection product fee is charged whether  or not the cardholder pays the card balance in full, but accounts with a  zero balance are not charged a fee.
As seen in figure 3, debt protection product fees appear as itemized  charges on monthly credit card statements and are added to the new  balance due each month. Debt protection product fees are typically  identified in the account statement using the issuer’s branded product  name in a transaction line item listed in the section labeled “fees.” The  amount of the fee is one component of the “fees/interest charges” category  that appears in a credit card statement.
PAYMENTS, CREDITS, & ADJUSTMENTS FOR ACCOUNT xxxx-xxxx-5555 $9.$9.
INTEREST CHARGED ON CURRENT BALANCE $1.$1.
Cardholders who experience a triggering event can request benefits by  informing the issuer and submitting any necessary information or  documentation. For example, cardholders experiencing involuntary  unemployment may be required to submit evidence that they are  registered for state unemployment benefits. According to data from the  nine largest issuers, approximately 70 percent of all benefit requests were  approved in 2009, while about 24 percent were denied. More than half of  these denials occurred because the cardholder did not provide adequate  documentation of the triggering event. The remainder of requests were  still pending at the end of 2009. Issuers sometimes contract with a third- party administrator to manage their debt protection programs, and in  these cases the administrators interact with cardholders to approve and  process benefits.
The terms and conditions of debt protection products include various  eligibility requirements and may include certain exclusions or restrictions,  which may differ based on the triggering event. For example, some  products restrict hospitalization or disability benefits for customers with  preexisting health conditions. They may also exclude from unemployment  coverage cardholders who are employed part time or seasonally. None of  the debt protection products that we reviewed had maximum age limits. A  few debt protection products require a general waiting period, such as 30  days after enrollment, before customers can request any type of benefit.  Some triggering events may also have specific waiting periods—for  example, a cardholder may need to be unemployed for 30 days before  applying for an unemployment benefit, although the benefit may be  applied retroactively. Debt protection products typically allow one benefit  per billing period, may limit the number of triggering events per year, and  may impose waiting times between benefits for similar events.
Some debt protection products that we reviewed placed a cap on the total  dollar amount cardholders can receive per benefit—from $500 to $25,000.  For example, three of the largest nine issuers limited their loss-of-life  balance cancellation benefit to $10,000 and three limited it to $25,000; the  remaining three had no limit. The products may also place caps on the  duration of the benefit. For example, one issuer’s product suspends  payments for up to 24 billing periods for involuntary unemployment and  temporary disability and for up to 1 billing period for other events, such as  marriage. Three issuers restricted how much cardholders could charge  and the type of transactions they could make during benefit periods, but  the other six large issuers did not. For example, one issuer limited  available credit to $1,500 and prohibited cash advances and balance  transfers when cardholders were receiving debt suspension benefits.
section_title: Debt Protection Products Are Marketed Broadly
paragraphs: Credit card issuers market debt protection products to individuals  applying for new credit cards, as well as to existing cardholders.  According to representatives of the largest credit card issuers and our  analysis of their marketing materials, issuers generally do not target  specific demographic groups when marketing these products but advertise  them broadly to all new and existing cardholders. Issuers indicated that  they sometimes focus marketing efforts on cardholders with certain  characteristics that might make them more likely to enroll in the product,  such as consumers who routinely carry a balance. The characteristics of  cardholders who enrolled in debt protection products in 2009 were similar  to those of cardholders in general, according to issuer representatives.
Credit card issuers promote debt protection products in a variety of ways,  according to issuer representatives and aggregate data provided to us by  the nine largest issuers. Customer service representatives responding to  inquiries or requests via issuers’ toll-free telephone numbers often also  promote ancillary credit card products, and such calls accounted for  nearly half of the nine largest issuers’ debt protection product sales in  2009. Most issuers also market debt protection products at bank branches,  through telemarketing, and via direct mail, methods that collectively  accounted for more than 40 percent of product enrollments that year.  Telemarketing calls can be conducted by the issuers themselves or by  third-party contractors. Mail marketing can include mailings aimed solely  at marketing debt protection products or promotional inserts included  with cardholders’ statements or new credit cards. Internet marketing  accounted for another 4 percent of product sales in 2009, according to  issuer data. Our review of marketing materials found that they typically  highlighted the products’ ability to potentially protect a cardholder’s credit  rating and provide relief during life-changing events. Some issuers also  offered a gift card or cash-back certificate to customers as an incentive for  enrolling in debt protection products. Purchasers receive a packet of  product information, known as a welcome or fulfillment kit, which usually  includes a letter to the consumer, the product’s terms and conditions,  instructions on how to request benefits, and cancellation information  stating that cardholders can cancel the debt protection product at any  time. New enrollees have at least 30 days to review the product  information mailed to them and cancel for a full refund.
section_title: Credit Insurance and Debt Protection Products Function Similarly from a Consumer’s Perspective
paragraphs: 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. Both products  cover similar events, offer like benefits for consumers, and assess fees in a  similar manner, monthly based on account balance. The three insurance  companies that provided us with data reported that the majority of the  credit insurance packages in 2009 included credit life, disability, and  involuntary unemployment insurance coverage (94, 91, and 95 percent,  respectively), and 17 percent also covered credit leave of absence. With  credit insurance, the insurance company makes the cardholder’s monthly  payments or pays off the entire balance. Premiums for credit insurance,  like fees for debt protection products, are assessed monthly based on the  outstanding balance and appear as a separate line item on cardholders’  monthly statements. Consumers covered by either debt protection  products or credit insurance must meet certain eligibility requirements  and may be excluded from coverage under specific conditions. As with  debt protection products, credit insurance products typically provide a  review period that allows the cardholder to cancel with a full refund, and  cardholders can cancel at any time. Further, the processes for making a  claim for credit insurance and for requesting a benefit from a debt  protection product are generally similar.
Credit insurance and debt protection products do differ in some respects.  First, debt protection products are nationwide products with uniform  pricing, terms, and conditions, while credit insurance products vary across  states because of differences in insurance regulation among states.  Second, credit insurance does not cover certain events that debt  protection products may allow, such as marriage, relocation, or birth of a  child. Third, credit insurance products only include debt cancellation,  whereas some debt protection products include both debt cancellation  and suspension. Fourth, credit insurers may restrict coverage for  cardholders who are over a certain age, in accordance with state  regulations, whereas few, if any, debt protection products have age  limitations. Finally, the disclosures for the two types of products differ as  a result of differing regulatory requirements.
section_title: Debt Protection Products Are Regulated Primarily at the Federal Level, and Credit Insurance Is Regulated by the States
paragraphs: Although no federal law governs debt protection products specifically,  they are subject to federal regulation and are primarily overseen by the  federal banking regulators. In contrast, credit insurance, like most  insurance products, is generally regulated at the state level, and is  primarily overseen by state regulators.
subsections: section_title: Several Federal Regulations Apply to Debt Protection Products
subsections: section_title: Regulation Z
paragraphs: The generally applicable federal law that pertains to debt protection  products is the Truth in Lending Act (TILA), which covers the extension of  consumer credit. The Federal Reserve, under TILA, is responsible for  prescribing regulations relating to the disclosure of terms and conditions  of consumer credit, including those applicable to credit cards and ancillary  credit card products such as debt protection products. The regulation that  implements TILA’s requirements is the Federal Reserve’s Regulation Z,  several provisions of which apply to debt protection products.
Regulation Z includes disclosure requirements for several types of loan  products, including credit card debt protection products, and all creditors  must comply with these requirements. The five federal banking regulators  assess the institutions they supervise for compliance with Regulation Z’s  disclosure requirements. According to Federal Reserve staff, Regulation Z  focuses on ensuring that debt protection product disclosures are clear and  understandable to consumers. For voluntary debt protection products,  creditors must    disclose in writing that the protection is optional;    disclose in writing the fee for the initial term of coverage, and thereafter  on the periodic statement;    explain, if the product includes debt suspension benefits, that interest will  continue to accrue during the suspension period; and    obtain the consumer’s initials or signature on a written affirmative request  for the product after providing the required disclosures.
The regulation does not require that fees for voluntary debt protection  products be included with the credit card application or account-opening  documents, although some issuers do include fee information within these  documents. The regulation permits telephone sales of credit card debt  protection products. Oral disclosures are permitted for telephone  purchases, but a written disclosure must be mailed within 3 business days  after the product is purchased. For telephone sales, the creditor must  maintain evidence that the consumer affirmatively elected to purchase the  product after the disclosures were provided orally, so credit card issuers  typically record telephone purchases.
In September 2010, the Federal Reserve proposed several revisions to  Regulation Z that it said were intended to improve disclosures and help  consumers decide whether they can afford a debt protection product. In  February 2011, the Federal Reserve announced that it does not expect to  finalize the pending rule prior to the transfer of authority for these  rulemakings to the new Bureau of Consumer Financial Protection. Under  the proposed rule, all disclosures would have to be in 10-point or larger  font, grouped together under appropriate headings, and, in some cases,  presented in question-and-answer format. The proposed rule also includes  model forms and samples for the new disclosure requirements.  Additionally, creditors offering voluntary products would be required to  determine that consumers met any applicable age or employment criteria  before enrolling them in the products. For example, a creditor would not  be permitted to enroll a jobless consumer for protection that requires  employment as a condition of coverage. Creditors offering voluntary  products would also have to disclose the maximum fees charged for the  product, although the proposed regulation would not otherwise regulate  such fees. For example, according to the model forms, the creditor would  have to state as follows: “This product will cost up to (maximum amount  per month) if you borrow the entire credit limit. The cost depends on your  balance and interest rate.”
section_title: OCC Regulation
paragraphs: OCC has a rule specific to debt protection products that applies to all  national banks. The rule establishes standards governing debt protection  products and seeks to ensure appropriate consumer protections. It  includes disclosure requirements that supplement Regulation Z’s  requirements. These include mandatory “short-form” disclosures––which  may be provided orally at the time of solicitation, including telephone  sales––and “long-form” disclosures, which are generally provided in  writing before the consumer completes the purchase. The short-form  disclosures must state that consumers will receive additional information  before they pay for the product and that certain eligibility requirements,  conditions, and exclusions may apply. The long-form disclosures must  provide further information regarding these requirements, conditions, and  exclusions and state, among other things, that consumers have the right to  cancel the product. OCC’s rule includes two samples for the short- and  long-form disclosures.
OCC’s rule also includes a ban on misleading advertisements or practices.  In addition, it prohibits credit card issuers from modifying product  features unilaterally unless the modification benefits the consumer  without additional charge, or the consumer is allowed to cancel the  product without a penalty. The rule also prohibits national banks from  tying the approval of an extension of credit to the consumer’s purchase of  a debt protection product. That is, a national bank cannot make its  approval of a credit card application contingent upon a consumer’s  purchase of a debt protection product.
section_title: Other Applicable Laws and Regulations
paragraphs: Other federal laws and regulations may apply to debt protection products.  The Federal Trade Commission Act prohibits unfair or deceptive acts or  practices—for example, engaging in deceptive marketing practices. The  act applies to financial institutions, and federal banking regulators have  the authority to issue and enforce additional rules of their own.
Under title X of the Dodd-Frank Wall Street Reform and Consumer  Protection Act (Dodd-Frank Act), the primary rulemaking authority and  some enforcement authority will shift from the federal banking regulators  to the newly created Bureau of Consumer Financial Protection. Some of  these authorities are newly created by the Dodd-Frank Act, while others  are to be transferred from other federal regulators to the new bureau. For  example, the Dodd-Frank Act transfers to the bureau the rulemaking  authority for TILA. Additionally, the new bureau will be the primary  rulemaker, supervisor, and enforcer of consumer protection laws and  regulations for depository institutions with more than $10 billion in assets.  As a result, the Bureau of Consumer Financial Protection will have a role  in overseeing credit cards and their ancillary products, including debt  protection products. The date for transferring consumer protection  functions to the new bureau is July 21, 2011.
section_title: Bank Examiners Review Issuers’ Compliance with Disclosure Requirements but Do Not Address Costs and Benefits to Consumers
paragraphs: Federal banking regulators told us that their examinations could include,  as necessary, a review of an institution’s debt protection products. The  regulators said that such a review could be triggered by, among other  things, consumer complaints. In addition, OCC’s examination procedures  note that OCC examiners should review debt protection products if the  volume of such products is significant or has grown substantially.  According to the federal banking regulators, between 2006 and 2010  approximately 24 bank examinations included specific reviews of  institutions’ credit card debt protection products—23 by OCC and 1 by the  Federal Reserve. OCC is the only federal banking regulator that has  supplemental examination procedures specific to debt protection  products, and these procedures focus on compliance with OCC’s rule  about these products. The other federal banking regulators’ examinations  include procedures for a review of the products under Regulation Z and  the Federal Trade Commission Act.
The primary focus of federal bank examiners’ reviews of debt protection  products is ensuring that the products comply with disclosure requirements  and that no unfair or deceptive acts or practices are being used to offer or  market them. 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. For example, OCC  examinations may review telemarketing scripts to determine whether they  are fair, objective, and free of undue pressure. The examinations also seek  to determine whether the institution may be engaging in prohibited  practices, such as requiring consumers to purchase the products. Further,  OCC examiners review the adequacy of issuers’ internal policies and  processes for offering and administering the debt protection products to  consumers. Examiners may sample canceled accounts to ensure that banks  correctly follow their own internal policies in refunding fees to consumers.  In addition, examiners look at any potential impact of the products on  institutional safety and soundness, including whether issuers maintain  adequate reserves to cover potential losses associated with benefit payouts.  The examiners evaluate the accounting and profitability of debt protection  products compared with the banks’ total income to evaluate the products’  income sustainability in view of program volume, number of benefit  requests, and cancellation rates.
Federal regulators’ reviews have generally not addressed the  reasonableness of the pricing of debt protection products, although we did  identify two cases in which regulators commented on the price. In one  case, the regulator noted that debt protection product fees appeared high  and recommended that the bank continue reviewing the appropriateness  of the fees it charged. Because no regulatory guidance existed on the  appropriateness of prices, no formal violations could be cited. In the  second case, the regulator noted that the debt protection products’ payout  rate to consumers was low compared with the fees collected, but no  formal violation was cited.
Banking regulators noted to us that no laws or regulations set the price of  debt protection products or govern the costs relative to the benefits for  these products. 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. Our review of 24 completed examinations of debt protection  products confirmed that the products’ price was generally considered in  relation to safety and soundness issues. The Dodd-Frank Act requires that  the new Bureau of Consumer Financial Protection’s disclosure rules shall  contemplate consumer awareness and understanding of, and the risks,  costs, and benefits of, financial products and services. Also under the  Dodd-Frank Act, the bureau may find a practice to be unfair under the  conditions set forth in the act. The increased popularity of debt  protection products raises the importance of effective regulatory oversight  of these products.
section_title: State Regulation of Credit Insurance Takes Steps to Establish a Relationship between Consumer Costs and Benefits
paragraphs: As an insurance product, credit insurance that is offered in connection  with credit cards is largely regulated under state insurance law, as shown  in table 2. As with other types of insurance, state insurance regulators  generally approve credit insurance products and premium rates and  examine insurance companies’ financial solvency and market conduct.  Because state laws and regulations governing credit insurance differ, the  products vary across states. Most states include chapters in their  insurance codes devoted specifically to credit insurance. Many states have  adopted the Consumer Credit Insurance Model Act and the Consumer  Credit Insurance Model Regulation, both of which were initially adopted  by NAIC in 1958 and 1973, respectively. Additionally, according to NAIC,  state laws about disclosure requirements and laws prohibiting unfair or  deceptive acts or practices concerning insurance apply to credit  insurance. For example, many states have adopted some version of an  “unfair trade practices act” that addresses marketing abuses involved in  the sale of insurance products, including credit insurance. State insurance  regulators may carry out examinations to investigate complaints or review  insurance company practices, including credit insurance practices. As  with other insurance products, attorneys general may take action in cases  where insurance companies violate state laws and regulations regarding  credit insurance.
Although credit insurance is primarily regulated at the state level, federal  laws and regulations also can apply. Creditors offering credit insurance  must comply with applicable federal regulations, such as Regulation Z. In  addition, the Federal Trade Commission Act’s prohibition of unfair or  deceptive acts or practices also can apply to credit insurance. Further, as  part of their examination and oversight activities, federal banking  regulators can review credit insurance products that an institution may  offer in connection with credit cards.
In contrast to requirements for debt protection products, state insurance  regulations establish a reasonable relationship between the premiums that  consumers pay and the benefits they receive and govern the design and  structure of the products. For instance, states set the premium rates by  law or regulation that insurance companies can charge for credit  insurance. Additionally, states can establish limits on components of  premium rates, such as compensation that insurers may pay third parties,  including credit card issuers, in exchange for services related to credit  insurance. Further, some states establish a loss ratio—that is, the ratio of  benefits paid out divided by premiums collected. NAIC’s Consumer Credit  Insurance Model Regulation specifies that benefits provided must be  reasonable in relation to the premiums charged and notes that the  requirement is met if the loss ratio is 60 percent or more. Because states  set rates, price components differently, and establish loss ratios, the  premiums consumers pay for credit insurance vary depending on their  state of residence. Additionally, NAIC’s model regulation states that  companies offering credit insurance are required to submit “experience  reports” documenting written and earned premiums. In contrast, federal  agencies do not routinely require credit card issuers to report detailed  information about debt protection products.
In regulating credit insurance, some states take into account the potential  for a concept that has been referred to as “reverse competition.” With  credit insurance, the credit card issuer, rather than the consumer, selects  the insurance company providing the insurance. The credit card company  receives a commission from the insurance company that may be based in  part on the premiums that consumers pay. According to representatives  from NAIC, the New York State Insurance Department, and three  consumer organizations, the result of this is that credit card issuers may  have an incentive to select insurance companies that charge consumers  higher prices for credit insurance in order to earn larger commissions.  Representatives of the credit insurance industry told us that they believe  that the concept of “reverse competition” is speculative and is not a factor  in a credit card issuer’s selection of a carrier for credit insurance.
section_title: Debt Protection Products and Credit Insurance May Offer Some Advantages, but Fees Can Be Substantial
paragraphs: Debt protection products and credit insurance may provide several  advantages, including protection of cardholders’ credit ratings and peace  of mind. Few complaints have been reported about these products,  although federal regulators have identified some areas of concern.  However, fees for the products can be substantial in relation to the  aggregate financial benefits consumers receive, and consumers may have  trouble evaluating different products and deciding whether the product is  best for them.
subsections: section_title: Debt Protection Products and Credit Insurance May Offer Certain Advantages
paragraphs: Debt protection products and credit insurance may offer several  advantages for cardholders seeking to manage the risk associated with  credit card debt, according to credit card issuers, insurance companies,  and some government agencies. The potential advantages of these  products include the following:    Credit rating protection. Missing credit card payments, making payments  late, or otherwise becoming delinquent on credit card debt can damage  consumers’ credit ratings. Because debt protection products and credit  insurance may cover payments that consumers might not otherwise make,  these products can help avoid negative impact on their credit ratings.
Peace of mind. The product may provide cardholders with a sense of  security and comfort because they know that the product can protect  them or their next of kin in the event of certain hardships, disability, or  death. Even if cardholders never experience a protected event, they may  value the security and peace of mind the product can provide.
Ease of purchase. Debt protection products are easy for consumers to  purchase. For example, consumers can typically purchase them when  applying for a new credit card, with no separate application process.  Existing cardholders can readily enroll by telephone or via the issuer’s  Web site. In contrast, purchasing a traditional term life or disability  insurance policy entails a more detailed application process, often  including a medical examination for large amounts of coverage.
Availability to most cardholders. Debt protection products are generally  available to all consumers holding credit cards, according to industry  representatives. Credit card issuers generally do not exclude consumers  from purchasing these products based on their credit history, age, health,  or other criteria.
Coverage of events not available in other products. Many credit card- related debt protection and some credit insurance products cover events  for which coverage is not available through traditional insurance  products—for example, involuntary unemployment, hospitalization,  military duty, and life events such as marriage, divorce, or birth or  adoption of a child. A single debt protection or credit insurance product  offers benefits for several events, while some traditional insurance  products, such as life and disability, protect only against one type of event.
Coverage for small amounts. Debt protection products and credit  insurance cover a cardholder’s credit card balance, no matter how small.  Cardholder balances in 2009 averaged about $2,500, and many were much  smaller. In contrast, term life insurance is often not available for coverage  of less than $25,000. In addition, the amount a consumer pays in fees for  debt protection products or premiums for credit insurance directly  corresponds to the credit card account outstanding balance and adjusts  with the balance.
Representatives of a few credit card issuers provided us with the results of  consumer feedback surveys, which the representatives said indicated that  consumers appeared to be satisfied with these products. For example, one  issuer told us that customer feedback surveys indicated a satisfaction rate  for these products of more than 80 percent. This rate climbed to 90  percent for cardholders who had received a benefit. Another issuer said  that, in commenting on their satisfaction with these products, consumers  often cited the credit rating protection and peace of mind the products can  provide.
section_title: Regulators Have Reported Relatively Few Complaints and Cited Few Formal Violations
paragraphs: Federal agencies have received relatively few complaints related to debt  protection products. As shown in table 3, FDIC, Federal Reserve, FTC,  OCC, and OTS collectively received 245 consumer complaints related to  credit card debt protection products in 2009. This figure represents  approximately 1 complaint for every 100,000 of these products that  consumers held and approximately 0.3 percent of the complaints about  credit cards in general that the agencies received that year. Most of the  complaints asserted either that the consumer had not knowingly enrolled  in the product or that requests for benefits had been denied.
Credit card issuers, which track consumer complaints they receive, also  reported receiving relatively few complaints about debt protection  products. According to the aggregated data we received from the nine  largest issuers, in 2009 the issuers received 2,045 complaints about debt  protection products out of the roughly 24 million accounts with these  products. About 40 percent of these complaints were from customers who  claimed they had not knowingly enrolled in the product and 29 percent  related to denial of benefits; the remaining complaints related to a variety  of other issues. The three insurance companies that provided us with data  reported 361 complaints related to credit insurance for credit cards out of  2.7 million accounts with this type of insurance. Thirty-four percent of  these complaints were classified as “affordability/does not want to pay  fee,” 14 percent as “claim unapproved,” 7 percent as “customer  stated/claimed they were unaware of product terms/conditions,” and the  remaining 45 percent of complaints were related to other issues. While  consumer complaint data can be a useful tool for assessing the extent of  problems, these data also have limitations because consumers may not  always know how to report complaints, the complaints related may not  always be properly recorded, and some complaints may not be valid.
Federal banking regulators identified relatively few violations related to  debt protection products in recent years, none of which resulted in a formal  enforcement action. Among the 24 bank examinations conducted by  federal banking regulators between 2006 and 2010 that included reviews of  debt protection products, three formal violations involving two banks were  reported. Two violations were related to inadequate disclosures. One  involved a violation of the Federal Trade Commission Act’s prohibition of  unfair or deceptive acts or practices. There, rather than automatically  refunding fees to consumers who canceled the product within their 30-day  trial period, the issuer required the customer to request the refund—a  practice that contradicted the process set forth in the long-form disclosures  and that was deemed to be deceptive. In each of these three cases, the bank  was required to take action to remediate these violations.
Regulators also have taken some informal enforcement actions after  identifying areas of concern related to credit card debt protection  products. For example, a federal banking regulator noted that consumers  complained that they were unaware they had purchased a debt protection  product, and the bank’s files did not always properly document  consumers’ authorization to purchase the product. The bank took action  by changing its telemarketing scripts and training materials to ensure that  consumers authorized the purchases.
Our review of the 24 bank examinations that had addressed debt protection  products did not find evidence that issuers engaged in predatory practices  with regard to these products. While there is no universally accepted  definition, “predatory” practices typically characterize a range of activities,  including deception, fraud, or manipulation. Predatory practices also often  involve targeting particular vulnerable demographic groups. As noted  earlier, issuers market these products to all cardholders and did not target  specific demographic groups.
section_title: Fees for Debt Protection Products Can Be Substantial
paragraphs: The fees that major credit card issuers charge for debt protection products  can be substantial. Fees for the primary debt protection product of the  nine largest issuers ranged from $0.85 to $1.35 per month for every $100 in  outstanding balance, with a median fee of $0.89. With this median fee, a  cardholder would pay, on an annual basis, more than 10 percent of his or  her average monthly balance in fees for the product. According to the  aggregated data we received from these issuers, the average monthly fee  paid for a debt protection product in 2009 among cardholders with a  nonzero balance was $16.49, and the median fee was $9.27. This  extrapolates into average fees of about $200 annually in 2009 for debt  protection products.
In general, credit unions charge significantly lower fees than banks for  these products. CUNA Mutual, which administers debt protection  products for many credit unions, provided us with aggregate data for 179  credit unions, which represent approximately 51 percent of the credit  unions offering these products. These data show that the credit unions  charged fees of between $0.30 and $0.67 per month per $100 in  outstanding balance in 2010, with a median fee of $0.45—about half the  median fee of $0.89 charged by the nine banks we reviewed. The credit  union debt protection products were very similar, although not identical,  to the products offered by banks, typically including coverage for loss of  life and disability, often including coverage for involuntary unemployment,  and sometimes including coverage for leave of absence. Several credit  union industry representatives we spoke with said that because credit  unions are nonprofit entities, their prices are not set at levels intended to  maximize profits. Representatives of the large banks told us that credit  unions’ debt protection product prices were lower because credit unions  have different business models, tax obligations, and customer bases than  banks. In addition, they noted that banks’ debt protection products may  cover more events—such as marriage and hospitalization—and that the  terms and conditions of the products might vary.
We did not identify comprehensive data on the price of credit card credit  insurance. One actuarial expert estimated that credit card credit insurance  premiums averaged roughly $0.65 to $0.75 per $100 of the monthly  outstanding balance for products that covered loss of life, disability, and  involuntary unemployment, which is somewhat lower than the cost of debt  protection products. However, this expert told us that comparing the costs  of the two products could be problematic because the products were not  fully comparable. For instance, the benefits offered could vary, with debt  protection products typically covering a wider range of events than credit  insurance. In addition, “average” premium rates for credit card credit  insurance can be misleading because prices can vary significantly state by  state.
section_title: Financial Benefits to Consumers May Be Limited
paragraphs: In the aggregate, a relatively small proportion of the fees consumers pay  for debt protection products is returned to them in tangible financial  benefits. As seen in figure 4, in 2009 the largest nine issuers reported that  they collected $2.4 billion in fees for debt protection products and  provided back to consumers $518 million in monetary benefits. Thus,  consumers received 21 cents in tangible financial benefits for every dollar  paid in fees—that is, a payout ratio of 21 percent. These issuers reported  that the administrative costs and reserves associated with these products  were $574 million, accounting for 24 cents for every dollar in fees  collected. The issuers reported that pretax earnings in 2009 for debt  protection products totaled $1.3 billion, or 55 cents of every dollar in fees  paid. An estimated 5.3 percent of cardholders with a debt protection  product and a nonzero balance received a benefit in 2009. The average  direct financial value of this benefit was $607. (55%) (21%)
The direct monetary value to a cardholder who does receive a debt  protection product benefit can be modest, for a number of reasons:    Cancellation of minimum monthly payment. A credit card’s minimum  monthly payment is typically between 1 and 2 percent of the outstanding  credit card balance. As a result, canceling the minimum payment on a  $2,500 balance would save the cardholder only between $25 and $50.  Further, the cardholder’s remaining card balance continues to accrue  interest during the benefit period.
Suspension of minimum monthly payment. Allowing cardholders to skip  payments can serve to protect their credit ratings and alleviate a cash flow  crisis, but may have limited direct monetary value because it does not pay  down any of the cardholder’s balance. Suspension benefits waive accrual  of interest during the benefit period, and the monetary value of the benefit  in this case varies depending on the cardholder’s balance and interest rate.
Duration of benefits. Most benefits have time limitations. For example,  benefits triggered by involuntary unemployment are usually limited to  between 6 and 24 months, and benefits triggered by life events such as the  birth or adoption of a child, or marriage, typically allow suspension or  cancellation of between one and four minimum monthly payments.
Two issuers’ debt protection products cap the amount of debt that is  canceled but do not cap the fee accordingly. For example, one product  caps loss-of-life coverage at $10,000, but the fees charged for the product  ($0.85 per $100 in outstanding monthly balance) are not similarly capped.  As a result, a cardholder with a balance of $20,000 would pay the fee based  on that amount even though only $10,000 would be canceled in the event  of the cardholder’s death. Four other issuers cap their fees according to  the maximum amount of debt that is canceled by the product. Two issuers  do not cap benefits or fees and one issuer did not provide us information  on whether it caps fees.
Further, the “bundling” that is characteristic of debt protection products— wrapping together in one product coverage for multiple events—can result  in cardholders purchasing coverage not always applicable or valuable to  them. For example, when a cardholder dies and leaves no net assets, the  cardholder’s heirs do not automatically become personally liable for any  outstanding credit card debt. Thus, the loss-of-life benefit of a debt  protection product may be of limited value to cardholders with no net  assets. Similarly, cardholders with certain disabilities would not benefit  from the disability coverage bundled into a product because of the  exclusions in most products’ terms and conditions. Industry  representatives told us they believe consumers can benefit from bundled  products because they cover some events not covered by other products,  are offered to a wider range of customers, and can be priced less than  unbundled products because of economies of scale and reduced  administrative expenses.
Credit card credit insurance typically has lower loss ratios—that is, the  benefits paid out to consumers divided by the premiums collected—than  more traditional forms of insurance, such as group life or individual  disability insurance. In 2009, the aggregate loss ratios for credit card credit  life and credit disability insurance were 61 percent and 24 percent,  respectively, for the three insurance companies that provided us with data.  In contrast, the 2009 aggregate loss ratios for group life insurance and  individual disability insurance among U.S. insurance companies overall  were 83 percent and 51 percent in 2009, according to SNL Financial and  NAIC, respectively. However, there can be significant limitations to  making such comparisons. First, credit insurance and other forms of  insurance are not fully comparable products because their benefit  amounts and coverage terms may differ significantly. Second, the cost of  administering these products may vary, and may be proportionally higher  for credit insurance, which typically covers relatively small loan amounts.  Finally, loss ratios do not incorporate the nonquantifiable benefits of an  insurance product, such as peace of mind.
Representatives from consumer organizations and some government  agencies have advised consumers to consider alternatives to purchasing  debt protection products or credit insurance. They note that consumers  considering purchasing these products might be better off using the  amount they would pay in monthly fees toward paying down their credit  card balance, particularly if they are accruing significant interest. Another  alternative to paying a debt protection product fee can be to accumulate  personal savings that could be used to make credit card payments in the  event of job loss or other unforeseen circumstances. Some consumer and  insurance experts also advise that, in general, insurance is intended to  provide broad financial protection, while these products just cover a single  credit card debt. NAIC representatives told us that term life insurance was  a more cost-effective way to protect one’s heirs because the cost per unit  of coverage for term life insurance is generally much lower than the cost  per unit of coverage for debt protection products or credit insurance.  Moreover, a consumer can comparison shop among traditional insurance  products to seek the best price. In contrast, a consumer holding a specific  credit card can purchase a debt protection product only through the issuer  of that credit card.
section_title: Consumers May Face Challenges in Evaluating Debt Protection Products
paragraphs: Financial markets function best when consumers have information  sufficient to understand and assess financial services and products. Yet  consumer testing conducted by the Federal Reserve suggests that at least  some consumers may be confused about some aspects of debt protection  products. In connection with proposed changes to Regulation Z in 2009,  the Federal Reserve commissioned a private firm to conduct consumer  testing of disclosures for credit insurance and debt protection products  offered in connection with home equity lines of credit. Consumers in these  testing sessions could not correctly calculate the monthly total fee for the  product when given the unit cost per $100 of monthly outstanding balance.  In addition, participants were surprised to learn that, in some cases, they  might not receive certain benefits because of eligibility requirements and  exclusions. Federal Reserve officials told us that although this research  was focused on home equity lines of credit, the findings were applicable to  credit card-related debt protection and credit insurance products.  However, industry representatives have expressed concerns with the small  number of consumers polled and the applicability of the research to credit  card products.
Our analysis of bank examinations that included a review of debt  protection products found that regulators did not identify widespread  problems related to marketing and disclosure materials. However, we  found two cases related to confusing or incomplete disclosures. In one  case, the debt protection product marketing materials contained language  consumers could wrongly interpret to mean that no fee would be charged  when the previous month’s balance was paid in full. In the second case,  the bank’s welcome kit information was not sufficiently understandable  and the product terms and conditions did not include complete eligibility  information.
Further, the full terms and conditions of a debt protection product may be  difficult for consumers to obtain and review prior to purchasing the  product. We called customer service representatives of the nine largest  issuers and requested that the issuers mail us copies of the full terms and  conditions of their credit card debt protection products. The customer  service representatives of seven of the nine issuers told us they would not  provide the terms and conditions unless we enrolled in the product.  Federal regulations do not require full terms and conditions to be provided  prior to purchase in every type of sale. For instance, short-form (oral)  disclosures for telephone sales must include the product’s fee and the fact  that it is optional and require that additional written disclosures be mailed  within 3 business days of purchase. Representatives of the credit card  companies provided a variety of reasons for declining to provide the full  terms and conditions to consumers until after consumers purchased the  product. One issuer stated that providing the full terms and conditions was  impractical in connection with certain marketing channels, such as  telephone calls, and another stated that it could be confusing to provide  the information in advance because consumers might believe they had  already purchased the product. Several issuers also noted to us that  consumers could obtain the information on their Web sites. We reviewed  the nine largest issuers’ Web sites and found that seven included the full  terms and conditions for their debt protection products, while the  remaining two did not.
In general, government agencies have a wide variety of consumer  information that addresses credit insurance—which, as we have seen, is  no longer widely offered with credit cards—but do not have such  materials specifically for debt protection products. At least 10 state  insurance regulators and NAIC have taken steps to educate consumers  about credit insurance, through consumer alerts, press releases, reports,  or Web sites. FTC and the federal banking regulators do not have  consumer education materials specific to debt protection products,  although the Federal Reserve stated in its proposed revisions to  Regulation Z that it planned to dedicate a Web site for consumers about  debt protection products. OCC staff told us that their consumer education  efforts have not focused on debt protection products because these  products have not been a source of significant complaints. The new  Bureau of Consumer Financial Protection will have the authority to  improve consumer financial literacy through its Office of Financial  Education, which is charged with developing and implementing initiatives  to educate and empower consumers to make better informed decisions  about financial products. Without good information about debt protection  products, it may be difficult for consumers to assess this product and  determine whether it represents a good value for them.
section_title: Conclusions
paragraphs: Debt protection products sold in conjunction with credit cards can  provide consumers with certain advantages, most notably by potentially  helping to protect a cardholder’s credit rating and providing 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. In  recent years, the debt protection products sold in conjunction with credit  cards have largely displaced credit insurance. In contrast to state  regulation of credit insurance, which seeks to establish a reasonable  relationship between the tangible financial costs and benefits of the  product, federal regulation of debt protection products generally has not  addressed the costs and benefits to consumers. 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. The bureau is specifically charged with  considering consumer awareness and understanding of a product’s or  service’s benefits and costs when making rules concerning disclosure.  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. Federal agencies offer relatively little consumer information  specific to debt protection products, in part because they have received  few complaints about them and as a result have not focused on these  products in their educational efforts. The new Bureau of Consumer  Financial Protection will also include an Office of Financial Education that  is charged with improving consumers’ financial literacy and providing  them with information that will help them evaluate credit products.  Consumers would benefit from information from the bureau to help them  assess whether or not credit card debt protection products represented a  good choice for them.
section_title: Recommendations for Executive Action
paragraphs: 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.
section_title: Agency Comments
paragraphs: We provided a draft of this report to the Bureau of Consumer Financial  Protection, FDIC, Federal Reserve, FTC, NAIC, NCUA, OCC, and OTS for  comment and we incorporated technical comments received from these  agencies as appropriate. In addition, the Bureau of Consumer Financial  Protection provided a written response, which is reprinted in appendix II.  The bureau said that it agreed with our recommendations and intended to  implement them. The bureau noted the new authorities granted to it under  the Dodd-Frank Act to oversee credit card debt protection products and  educate and empower consumers. NCUA also provided a written  response, which is reprinted in appendix III. NCUA said it believed our  conclusions were reasonable and consistent with our findings. It noted  that it was pleased that our report found that the few credit unions  electing to offer credit card debt protection products generally did so at  rates comparatively favorable to consumers. Finally, NAIC provided a  written response, reprinted in appendix IV, in which it noted that state  insurance regulators monitor the relationship of benefits provided and  premiums charged to evaluate the suitability of credit insurance.
We are sending copies of this report to the appropriate congressional  committees, the five federal banking regulators, Bureau of Consumer  Financial Protection, FTC, NAIC, and other interested parties. In addition,  this report will be available at no charge on the GAO Web site at  http://www.gao.gov.
If your offices have any questions about this report, please contact me at  (202) 512-8678 or cackleya@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this report are listed in appendix V.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: 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. The focus  of our report was on debt protection products and credit insurance for  credit cards, although such products may be offered with other types of  loans, including mortgages, auto loans, and home equity lines of credit.  The report addresses only general purpose credit cards and not small  business or private label cards used at specific retail stores.
To address our first objective, we obtained data from and interviewed  representatives of the nine largest credit card issuers as of December 31,  2010, as measured by outstanding balances on general purpose credit  cards. These issuers, which represented about 85 percent of the general  purpose credit card market, were American Express; Bank of America;  Capital One; Citibank (South Dakota), N.A.; Discover; Chase Bank USA,  N.A.; HSBC; U.S. Bancorp; and Wells Fargo Bank, N.A. We also obtaine d  data from and interviewed representatives of three major insurance  companies that offer credit card credit insurance—Aegon USA, Assurant  Solutions, and Central States Indemnity—which were estimated to  represent about 30 percent of the open-end credit insurance market in 200 according to data from the National Association of Insurance  Commissioners (NAIC). We also interviewed representatives of the  firms representing the Debt Cancellation Coalition, a coalition of credit issuers and insurance companies that offer and administer debt products.
The Debt Cancellation Coalition engaged Argus Information and Ad Services, LLC, a third-party analytics firm, to collect and aggregate  proprietary data that we requested related to debt protection and cred insurance products from the nine credit card issuers and three credit  insurance companies noted above. We developed separate questionna for credit card issuers that provide debt protection products and for  insurance companies that provide credit insurance products. The  questionnaires collected information on product sales, fees, financial  benefits, administrative expenses, earnings, complaints, cancellatio incentives and commissions, the marketing of these products, and  characteristics of consumers who purchase them. We received com ments  and technical corrections on drafts of the questionnaires from the  companies that would be completing them, as well as representatives of  the Debt Cancellation Coalition, Argus, and an actuarial firm, and  incorporated changes as appropriate. The third-party provider, Argus,  distributed the questionnaires we developed and asked the companies to  submit their responses within approximately 3 weeks. We discussed wit h  Argus and with representatives of the companies steps that were being taken to ensure that the data were accurate and complete, and Argus  provided us with documentation of these steps. However, we did not have access to the issuers’ or insurance companies’ systems to fully assess t he  reliability of the data they provided or the systems themselves, which  house the data. Therefore, we present these data  in our report only as  representations made to us by these companies.
Additionally, we gathered information on the characteristics of the  issuers’ primary debt protection products by having three analy sts  independently review the products’ terms and conditions. Any  discrepancies among the three analysts about the products’ features,  terms, or conditions were identified, discussed, and resolved by referring  to the source documents provided by the nine issuers. In some instances,  we contacted issuers to confirm or clarify certain aspects of the products.  In coordination with the Debt Cancellation Coalition, the nine issuer s and  three insurance companies also provided us with sample marketing  materials, including telephone scripts used by their representatives to se the products, product brochures, promotional e-mail messages, screen  shots of product Web sites, direct mail materials sent to consumers, and  new card applications that include the option to purchase the products.
To address our second objective, we reviewed applicable federal laws an regulations related to debt protection products, including Regulation Z,  which implements the Truth in Lending Act, Section 5 of the Federal T Commission Act, and a rule from the Office of the Comptroller of the  Currency (OCC) that specifically addresses debt protection products. We reviewed the compliance examination handbooks and procedures of the  on  five federal banking regulators––Federal Deposit Insurance Corporati (FDIC), Board of Governors of the Federal Reserve System (Federal  Reserve), National Credit Union Administration (NCUA), OCC, and  Office of Thrift Supervision (OTS)—and identified procedures and  activities specific to debt protection products. We also obtained and  the  reviewed 24 compliance examination reports (representing 13 unique  institutions) completed by the Federal Reserve and OCC between 2006  and 2010 that included a review of a supervised institution’s debt  protection products. In addition, we conducted interviews with the fed banking regulators and the Federal Trade Commission (FTC) on their  roles in overseeing debt protection products.
We also reviewed model laws and regulations developed by NAIC related  to credit insurance, as well as summaries of credit insurance case law in  various states. Additionally, we interviewed representatives of NAIC, th credit insurance companies, and two consumer organizations for their  perspectives on state regulatory oversight of credit insurance. In addition we obtained more detailed information on credit insurance regulation in  s  three states—California, Maine, and New York. We selected these state because they represented a range of market sizes for open-end credit  insurance, use different regulatory models, and have taken a proactive  regulatory oversight approach to credit insurance, according to insurancexperts and consumer advocates. For each of these states, we reviewed the state laws and regulations related to credit insurance and obtained  information from representatives of the state’s insurance department.
To address our third objective, we reviewed reports and studies by  consumer organizations and trade groups that addressed the advantages  e. We  and disadvantages of debt protection products and credit insuranc also addressed these issues in interviews with representatives of  individual credit card and credit insurance companies, as well as with th American Bankers Association, Consumer Credit Industry Association,  Debt Cancellation Coalition, Center for Economic Justice, and Consumer  Federation of America. We also interviewed staff at and received materials  from CreditRe and Hause Actuarial Solutions, Inc., independent actuarial  firms with expertise in credit insurance and debt protection products,  . In  spoke with representatives of the American Academy of Actuaries addition, we evaluated the terms and conditions of selected debt  protection and credit insurance products and analyzed aggregated data  that we received from the nine largest issuers and three credit insurance  companies. For comparative purposes, we also gathered data on the deb protection products offered by credit unions. We obtained pricing data from CUNA Mutual, a provider of financial products and insurance to  credit unions, for 179 credit unions offering debt protection products in 2009. According to CUNA Mutual, these 179 credit unions represented  roughly 51 percent of the credit union debt protection market for credit  t  cards (as measured by number of credit unions). We analyzed aggregated  loss ratio data from three credit insurance companies and, for comparative  purposes, reviewed comparable ratios for group life insurance and  individual disability insurance in 2009. We obtained average group life  insurance loss ratios from SNL Financial, a data source that collects,  standardizes, and disseminates corporate, financial, and market data. The  average group life insurance loss ratio data covered all companies offering  group life insurance in the United States in 2009. We obtained average  disability insurance loss ratios from NAIC, which covered the top 125  insurance companies that offered accident and health insurance in the  United States in 2009. We determined that these data from SNL Financial  and NAIC were sufficiently reliable for the purposes of our study.
In addition, we collected consumer complaint data for calendar years 2005  through 2009 from FDIC’s Specialized Tracking and Reporting System, the  Federal Reserve’s CAESAR consumer complaint database, FTC’s  Consumer Sentinel database, OCC’s Remedy consumer complaint  database, and OTS’s consumer complaint database. To assess the  reliability of data from the regulators’ databases, we reviewed  documentation about these databases and interviewed agency staff who  managed them. We determined that these data were sufficiently reliable  for use in our report. We also reviewed data on consumer complaints  obtained, in aggregated form, from our questionnaires to the nine issuers  and three insurance companies. We obtained information from each of the  federal banking regulators on violations and enforcement actions related  to debt protection products that resulted from examinations conducted  between 2006 and 2010. We also gathered information on consumer  education resources related to debt protection and credit insurance  products by reviewing the Web sites of the 50 state insurance departments,  five federal banking regulators, FTC, and nine credit card issuers.
We conducted this performance audit from January 2010 through March  2011, in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Comments from the Bureau of Consumer Financial Protection
section_title: Appendix III: Comments from the National Credit Union Administration
section_title: Appendix IV: Comments from the National Association of Insurance Commissioners
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
paragraphs: Alicia Puente Cackley, (202) 512-8678 or cackleya@gao.gov.
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Jason Bromberg (Assistant  Director), Emily Chalmers, Beth Ann Faraguna, Catherine Gelb, Jamila  Jones Kennedy, Michelle Liberatore, Yesook Merrill, Marc Molino, Susan  Offutt, Andrew Stavisky, and Paul Thompson made key contributions to  this report.