Debt protection plans are all the rage
By Caroline E. Mayer
The Washington Post
March 22, 2004
The offers come stuffed into credit-card bills, in letters accompanied by $15 checks, in telemarketing calls or in the stacks of documents that borrowers get when closing mortgages or car loans.
Sign up for the Borrowers Protection Plan -- or Account Guard, or Credit Protector, among other names -- and get "peace of mind," as some put it, a way to protect your credit rating in times of financial stress. If you lose your job, become disabled or have other kinds of financial crises, you can suspend your payments temporarily without consequence.
Just a few years after they were introduced, such plans are a resounding success for banks, credit-card issuers and other financial institutions that collect more than $100 million a month from their borrowers.
One marketer estimates that 10 percent of the nation's 111 million credit-card holders have enrolled in debt-protection plans. Joining such a plan can add $25 a month on an average $3,000 credit-card balance, or $50 a month on a $670 mortgage payment. Bank of America estimates that 20 percent to 30 percent of its mortgage, car and other installment-loan customers have signed up.
But consumer advocates and some state regulators say the products offer little protection. They say the plans are too expensive and operate with little regulatory oversight.
"This is incredibly lucrative," said Robert McKinley, chief executive of CardWeb.com, a Frederick, Md., firm that tracks the credit-card industry. Under most plans, lenders are not forgiving the debt but just "stopping the clock" for a period of time, he said. "It's just gravy" for the issuer.
Birny Birnbaum, executive director for the Center for Economic Justice, a nonprofit advocacy group for low-income and minority consumers, calculates that the programs pay consumers 1 to 3 cents for every dollar paid in fees. "Debt protection products pay out next to nothing to consumers because the benefits are so narrowly defined and the requirements for paying a benefit so great," he said.
Under the optional plans, borrowers pay a monthly fee so their bank or credit-card issuer will suspend payment of their debt if they lose their job or become disabled, or in some cases get married, are called into the military or have a child. Many plans bar use of the card if a claim is filed, and most pay off the entire debt only in the event of accidental death, accounting for about 4 percent of all U.S. deaths.
Bank industry officials declined to say what the exact payouts are, and because the products aren't insurance policies they aren't required to disclose their claims experience to state regulators.
Bank of America's Dave Curren said his company is "making great progress in moving to a payout rate" that consumer advocates as well as regulators "are comfortable with."
For home and personal loans, Bank of America's Borrower Protection currently charges 4 percent to 18 percent of the monthly loan payment, depending on whether the protection is for one person or two; covers involuntary unemployment as well as disability and accidental death; and lasts for six or 12 months, said Curren, the bank's product executive for debt cancellation products.
Bank of America started selling Borrowers Protection in July 2001, after it stopped selling credit insurance, which in recent years has been linked to predatory lending.
"Credit insurance is not a great product, but I think these are worse," said Eric Stein, senior vice president for Center for Responsible Lending, of the debt relief products. His North Carolina-based nonprofit research and policy group specializes in predatory lending issues.
Credit insurance -- usually life, disability or both -- is bought to make payments to a lender on behalf of the borrower in certain circumstances. Credit life generally pays off a consumer's entire loan if the borrower dies, while credit disability makes monthly loan or card payments for a set period while the consumer is disabled.
Joanne Kerstetter, president of the Consumer Credit Counseling Service of Greater Washington, said cash-strapped consumers would be better off using the money they spend on these plans to reduce their debt. If they are in trouble financially, some creditors are willing to work with consumers even if they don't buy such plans, she said.
What these programs are really doing is protecting a consumer's credit rating, said Jack Panno, president of the Financial Group, a Louisiana firm that administers credit insurance and debt protection programs for banks. "And that's important because you can't live without credit in this country," he said.
The Office of the Comptroller of the Currency, which regulates national banks, issued regulations that went into effect last summer governing debt relief products. They set disclosure requirements and bar mortgage lenders from charging a single lump-sum fee in residential loans.
The new rules did not include a recommendation from state insurance regulators to require lenders to pay out at least 60 percent of the revenue they receive for debt protection plans -- a goal many states set for credit insurance.
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