Bank of America Nixes Debt-Protection Product Amid Industry Scrutiny

  By Andrew R. Johnson 
 

Bank of America Corp. (BAC) has stopped selling to credit-card customers add-on products that suspend borrowers' minimum monthly payments in the event of a job loss or other hardship as regulatory scrutiny of these offerings grows.

Debt-cancellation products, also known as payment or credit protection, have also sparked class-action lawsuits against the country's largest credit-card issuers and led to a $210 million settlement last month between Capital One Financial Corp. (COF) and federal regulators. Capital One has stopped offering payment protection as well as a credit-monitoring product.

Bank of America stopped offering products called Credit Protection Plus and Credit Protection Deluxe to new customers this month but is continuing provide them for the time being to existing cardholders who are enrolled in the services, Betty Riess, a spokeswoman for Bank of America, confirmed Monday.

The decision to discontinue the products, which are provided by third-party vendors, is part of the bank's "larger strategy to streamline our business," Ms. Riess said, citing Bank of America's recent moves to exit certain businesses and sell assets deemed non-core.

Consumer advocates have argued the products provide little financial benefit to consumers, and customers have alleged in lawsuits that banks' sales agents have enrolled them in the services without their consent and mischaracterized their costs and features.

Capital One's settlement with the Consumer Financial Protection Bureau and Office of the Comptroller of the Currency could prompt other banks to eliminate or alter payment protection and other add-on products, such as identity-theft protection and credit monitoring, experts said. Under the settlement, Capital One agreed to refund $150 million to customers and pay $60 million in fines.

The issues surrounding Capital One's actions were "not unique to a single institution, and we do expect that there will be more activity," Richard Cordray, director of the CFPB, said last month. The agency issued a bulletin in July reminding banks of steps they should take to ensure payment protection and other add-on products are marketed appropriately to customers.

Bank of America's main competitors continue to market payment protection and other add-on products, according to their websites. While the Charlotte, N.C.-based lender does not disclose how much revenue such products generate, the Government Accountability Office said in a March 2011 report that consumers paid $2.4 billion in fees for payment-protection products in 2009.

The report looked at nine credit-card issuers, including Discover Financial Services (DFS), American Express Co. (AXP) and Bank of America, concluding that a "relatively small proportion of the fees consumers pay for debt-protection products is returned to them in tangible financial benefits.

Bank of America and other large banks have marketed payment protection as a safety net cardholders can rely on in the event they lose their job, encounter health problems or incur another hardship that prevents them from making their minimum monthly payment. If such an event occurs, the service is supposed to suspend a borrower's minimum monthly payments for a certain period of time.

"Credit Protection Plus is an optional Plan that can give you relief from your Bank of America minimum monthly credit card payments when you need it most," a Bank of America webpage states. "It can help protect your Bank of America credit card account by canceling the minimum monthly payment for up to 18 months when times get tough or if you experience a life event such as getting married or purchasing a new home."

Fees typically range from 85 cents to $1.35 per $100 of outstanding balance each month, the GAO said. Bank of America charged 85 cents for every $100 of balance a customer carried, according to the company's webpage.

The bank, which is the second-largest credit-card issuer based on outstanding loan balances, agreed to pay $20 million this summer to settle a class-action lawsuit alleging it mismarketed payment-protection products. The settlement, filed in U.S. District Court in San Francisco, received preliminary approval in July but awaits final approval.

The settlement does not require Bank of America to discontinue the products, which Ms. Riess and a court filing described as a business decision by the bank. The settlement requires the bank to provide two months of credit protection to customers already enrolled in the services for free, though it has independently decided to do so for six months as it winds down the products, Ms. Riess said. That should occur sometime next year, she added.

Capital One has no intention of selling payment protection or credit monitoring products "in the future because the economics of our credit-card business does not depend on revenues from add-on products," Richard Fairbank, chairman and chief executive officer of the bank, said on an earnings conference call last month.

Fairbank said Capital One's third-party vendors "did not uniformly adhere to our sales scripts and the explicit instructions we provided to agents for how these products should be sold."

Discover also expects the CFPB and Federal Deposit Insurance Corp. to take a joint enforcement action against it regarding its marketing of payment protection and other add-on products. The company said in a filing with the Securities and Exchange Commission in June that the cost of such an action could exceed what it has already accrued for litigation and regulatory matters by $110 million.

The Riverwoods, Ill.-based lender generated $101.2 million in revenue from payment protection, ID-theft protection and other add-on products in its fiscal second quarter. The amount was down 3.7% from a year earlier, which the company attributed to changes it has made to sales practices based on regulator feedback.

In addition to eliminating payment-protection products, Bank of America also stopped offering ID-theft protection services to credit-card customers late last year, Ms. Riess said.

Bank of America has received inquiries from regulatory authorities regarding ID-theft protection services, "including customers who may have paid for but did not receive" certain services from third-party vendors, the company said in a filing with the SEC earlier this month.

Discover, like Bank of America, settled class-action litigation alleging it enrolled customers in payment-protection services without their consent and misrepresented product features when pitching them to consumers. J.P. Morgan Chase & Co. (JPM), Capital One and HSBC Holdings PLC (HBC) have also reached settlements in similar litigation in the last two years.

Richard Golomb, a plaintiffs' attorney involved in those cases, said he does not expect many banks will eliminate such products entirely.

"I think these banks and credit-card companies will try to do anything to generate revenue to the extent that they can, and ... until it doesn't make sense for them to do it anymore they'll continue to do it," said Mr. Golomb, a managing shareholder of law firm Golomb & Honik PC.

-Write to Andrew R. Johnson at [e-mail]

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