Consumer Comeback Blog

Bank of America Dumps Debt-Protection Product

Amidst increasing regulatory scrutiny and a pending class action lawsuit, Bank of America has discontinued its credit protection services. The controversial service, which suspended credit card customers’ minimum monthly payment in the face of hardship or job loss, had been dogged with allegations of improper practices, including charging customers without consent.

The Wall Street Journal reports that consumer groups have argued that the add-on products, which are provided by third-party vendors, “provide little financial benefit” and customers have alleged that Bank of America sales agents mischaracterized the costs and features of the services.

The decision to cease offering the products, called Credit Protection Plus and Credit Protection Deluxe, comes just weeks after the bank received preliminary approval to settle the outstanding class action lawsuit for $20 million. Bank of America’s move to stop offering the services is referred to as an “independent business decision” in court documents and part of a broader strategy to streamline the business and refocus on core services by banks spokespeople, reports Reuters.

According to the International Business Times, the settlement, which still has to receive final approval, will most likely pay customers between $50 and $100, based on their circumstances. Bank of America’s website states that the services, called Credit Protection Plus and Credit Protection Deluxe, cost customers 85 cents for every $100 of a customer’s monthly balance up to $25,000.

The services cancelled up to twice the amount of a customers’ minimum monthly credit card payment, for up to 18 months, in the case of job loss or hospitalization, and would cancel minimum monthly payments for three months in the case of marriage or divorce.

Bank of America is not the only company under fire for offering credit protection, also known as payment protection and debt-cancellation, products to consumers. A class action lawsuit against Capital One Financial, regarding the credit card company’s debt cancellation products, resulted in a $210 million settlement last month with the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency, reports the Wall Street Journal.

Under the terms of the settlement Capital One will refund $150 million to customers and pay $60 million in fines, amounts that have already prompted some banks and credit card companies to either eliminate or alter their payment protection and other add-on products. Citigroup has suspended telephone sales of its debt protection service, pending an internal review of the scripts being used by the sales agents.

Marketing debt-cancellation and other add-on programs have proven to be very problematic for banks and other lenders. A recent SEC filing from Discover states that the credit card company expects the CFPB and the FDIC to pursue a joint enforcement action against the company because of the way its payment protection program was marketed. The company said that the costs associated with such an action could exceed the $110 million set aside for regulatory and litigation matters.

Much of the regulator focus on marketing comes because of an inherent disconnect between what consumers are paying for and what they are getting. A March 2011 Government Accountability Office report estimated that, in 2009, consumers paid $2.4 billion in fees for payment protection plans and that “a relatively small proportion of the fees consumers pay for debt-protection products is returned to them in tangible benefits.”

Regulatory attempts have not been limited to federal agencies. In April the Hawaii Attorney General filed suit against seven banks and credit card companies for allegedly enrolling, often ineligible, customers into credit-protection plans without their knowledge. The suit seeks compensation under the Hawaii Unfair and Deceptive Trade Practices Act, which provides penalties from $500 to $10,000 per violation.