Government scrutiny of payment protection plans long overdue

Portion of credit card

Payment protection plans -- programs peddled by credit card companies as a safety net in case of job loss, illness or death -- are about to get some government scrutiny.

Two agencies have opened a federal probe over the marketing practices of Discover Financial Services, the company behind the Discover credit card.

At issue is whether the company gave consumers enough information when they were asked to sign up for fee-based add-ons such as payment protections plans, which promise to defer credit card payments if you hit troubled financial times and even cancel debt should you die.

These plans come with big monthly charges and limited benefits, neither of which were made particularly clear to consumers.

That's one big reason to welcome a review that involves the Consumer Financial Protection Bureau, the government agency charged with regulating financial products offered to consumers, such as credit cards and mortgages. (The FDIC is the other government agency involved in the probe.) The CFPB has complete power to write new rules and enjoys absolute jurisdiction over most credit card companies.

"The (Government Accountability Office) found that consumer costs for these credit card debt protection products might be substantial relative to the benefits," CFPB spokeswoman Jennifer Howard told American Banker. "One of the CFPB's priorities is making sure that consumers have clear information about the costs and risks of these products."

Indeed, it's past time that the government took a hand in forcing finance industry companies to make their products and terms transparent and truthful.

And Discover, which had to defend its marketing practices as recently as two years ago, seems like a fine first stop.

In 2010, Minnesota Attorney General Lori Swanson sued the company, saying that its "telemarketers failed to tell consumers when they were agreeing to purchase optional, fee-based services, including payment protection."

In other words, Swanson alleged that telemarketers suggested that customers had to buy the payment protection plans as part of the overall credit package or that it might not issue credit if the customer didn't buy coverage.

Or they offered protection without mentioning that it carried a fee.

The monthly fee for debt cancellation or suspension programs ranges from 50 cents to $2 for each $100 of your monthly ending balance. (Discover charges 89 cents.) At $1 per $100 of balance, the monthly fee for a $2,000 balance is $20.

To make matters worse, Discover likely sold payment protection plans in the same way that many credit card companies and other financial service firms sell it: without checking to see if it would actually benefit the buyer.

Payment protection plans typically cover minimum payments for 12 to 24 four months if the borrower is involuntarily out of a job, sick, hurt in an accident or dead.

It pays minimum payments only, so interest continues to accrue on the balance and on any new purchases.

It does nothing at all for those who are self-employed, who are ill because of a preexisting medical condition or who pay off their balance every month.

And claims on payment protection plans are denied at a shockingly high rate, making this a strong profit center for many firms that sell the coverage.

So this is a dubious product in many cases.

Tricking people into buying it, if that's what Discover did? Low. Very low.

In a statement, Discover said, "Should the CFPB discourage the use of products we offer or steer consumers to other products or services it deems to be preferable, we could suffer reputational harm and a loss of customers."

That's probably true. I'll save CFPB the trouble.

Keep track of what you spend, and pay off your credit card bill every month if you possibly can.

Do that, and you'll never need payment protection plans.

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