GAO-11-311, Credit Cards: Consumer Costs for Debt Protection Products Can Be Substantial Relative to Benefits but Are Not a Focus of Regulatory Oversight


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Can Be Substantial Relative to Benefits but Are Not a Focus of 
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United States Government Accountability Office: 
GAO: 

Report to Congressional Committees: 

March 2011: 

Credit Cards: 

Consumer Costs for Debt Protection Products Can Be Substantial 
Relative to Benefits but Are Not a Focus of Regulatory Oversight: 

GAO-11-311: 

GAO Highlights: 

Highlights of GAO-11-311, a report to congressional committees. 

Why GAO Did This Study: 

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. 

What GAO Found: 

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 (see figure). These products can be 
difficult for consumers to understand, but federal agencies offer few 
educational resources to aid consumers in assessing them. 

Figure: Allocation of Fees Collected by the Nine Largest Credit Card 
Issuers for Their Debt Protection Products, 2009: 

[Refer to PDF for image: pie-chart] 

Earnings (pretax): $1.3 billion (55%); 
Administrative expenses and reserves: $574 million (24%); 
Financial benefit to consumers: $518 million (21%). 

Total debt protection product fees: $2.4 billion. 

Source: GAO analysis of nine largest credit card issuers' data. 

[End of figure] 

What GAO Recommends: 

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. 

View [hyperlink, http://www.gao.gov/products/GAO-11-311] for key 
components. For more information, contact Alicia Puente Cackley at 
(202) 512-8678 or cackleya@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Debt Protection Products Have Displaced Credit Insurance, although the 
Products Are Similar for Consumers: 

Debt Protection Products Are Regulated Primarily at the Federal Level, 
and Credit Insurance Is Regulated by the States: 

Debt Protection Products and Credit Insurance May Offer Some 
Advantages, but Fees Can Be Substantial: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Comments from the Bureau of Consumer Financial Protection: 

Appendix III: Comments from the National Credit Union Administration: 

Appendix IV: Comments from the National Association of Insurance 
Commissioners: 

Appendix VGAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Credit Card Issuers by Outstanding General Purpose Credit 
Card Balances, Year Ending 2010: 

Table 2: Regulatory Differences between Debt Protection Products and 
Credit Insurance: 

Table 3: Complaints Received by Federal Agencies Related to Credit 
Card Debt Protection Products, 2009: 

Figures: 

Figure 1: Description of Debt Cancellation and Suspension Benefits: 

Figure 2: Illustrative Example of the Monthly Fee for a Debt 
Protection Product: 

Figure 3: Illustrative Example of Credit Card Monthly Billing 
Statement with Debt Protection Product Fee: 

Figure 4: Allocation of Fees Collected by the Nine Largest Credit Card 
Issuers for Their Debt Protection Products, 2009: 

Abbreviations: 

FDIC: Federal Deposit Insurance Corporation: 

FTC: Federal Trade Commission: 

NAIC: National Association of Insurance Commissioners: 

NCUA: National Credit Union Administration: 

OCC: Office of the Comptroller of the Currency: 

OTS: Office of Thrift Supervision: 

TILA: Truth in Lending Act: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

March 25, 2011: 

The Honorable Tim Johnson:
Chairman:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate: 

The Honorable Spencer Bachus:
Chairman:
The Honorable Barney Frank:
Ranking Member:
Committee on Financial Services:
House of Representatives: 

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. 
[Footnote 1] 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.[Footnote 2] 

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.[Footnote 3] 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.[Footnote 4] 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.[Footnote 5] 
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).[Footnote 6] 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. 

Background: 

Credit cards are widely used in the United States. Seventy-eight 
percent of consumers had a credit card in 2008.[Footnote 7] As of 
2009, credit cardholders had more than $800 billion in outstanding 
debt on roughly 600 million credit cards, according to Federal Reserve 
estimates.[Footnote 8] 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. 

Table 1: Credit Card Issuers by Outstanding General Purpose Credit 
Card Balances, Year Ending 2010: 

Card issuer: JPMorgan Chase & Co.; 
Outstanding balance: $133 billion; 
Percentage of total market: 19%. 

Card issuer: Bank of America Corporation; 
Outstanding balance: $122 billion; 
Percentage of total market: 17%. 

Card issuer: Citigroup Inc.; 
Outstanding balance: $95 billion; 
Percentage of total market: 13%. 

Card issuer: American Express Company; 
Outstanding balance: $80 billion; 
Percentage of total market: 11%. 

Card issuer: Capital One Financial Corporation; 
Outstanding balance: $53 billion; 
Percentage of total market: 7%. 

Card issuer: Discover Financial Services; 
Outstanding balance: $45 billion; 
Percentage of total market: 6%. 

Card issuer: Wells Fargo & Company; 
Outstanding balance: $33 billion; 
Percentage of total market: 5%. 

Card issuer: U.S. Bancorp; 
Outstanding balance: $22 billion; 
Percentage of total market: 3%. 

Card issuer: HSBC North America Holdings Inc.; 
Outstanding balance: $19 billion; 
Percentage of total market: 3%. 

Card issuer: Total; 
Outstanding balance: $602 billion; 
Percentage of total market: 85%. 

Source: The Nilson Report. 

Note: Because of rounding numbers may not exactly sum to total. 

[End of table] 

Debt Protection Products: 

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.[Footnote 9] 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.[Footnote 10] 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.[Footnote 11] 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. 
[Footnote 12] 

Credit Insurance: 

Credit insurance is insurance coverage sold in connection with a loan, 
credit agreement, or credit card account.[Footnote 13] 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. 

Debt Protection Products Have Displaced Credit Insurance, although the 
Products Are Similar for Consumers: 

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. 

Debt Protection Products Have Largely Displaced Credit Insurance: 

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.[Footnote 14] 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.[Footnote 15] 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. 

Debt Protection Products Cancel or Suspend Part or All of a Debt when 
Specific Events Occur: 

Debt protection products cancel or suspend some or all of a 
cardholder's debt after the occurrence of certain qualifying events 
(see figure 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:[Footnote 16] 

* 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. 

Figure 1: Description of Debt Cancellation and Suspension Benefits: 

[Refer to PDF for image: illustration] 

Debt cancellation benefits: Balance cancellation; 
Cancels a cardholder’s total credit card balance, up to a maximum 
amount for some products. 

Debt cancellation benefits: Payment cancellation; 
Cancels a cardholder's minimum monthly payment and reduces a 
cardholder's balance by that amount. 

Debt suspension benefits: Payment suspension; 
Suspends a cardholder’s minimum monthly payment and waives interest. 

Source: GAO. 

[End of figure] 

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.[Footnote 17] 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 
figure 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. 

Figure 2: Illustrative Example of the Monthly Fee for a Debt 
Protection Product: 

[Refer to PDF for image: illustration] 

Monthly fee = $0.90 times Monthly balance divided by 100. 

Monthly balance: $500; 
Monthly fee: $4.50. 

Monthly balance: $3,000; 
Monthly fee: $27.00. 

Monthly balance: $0; 
Monthly fee: 0. 

Source: GAO. 

[End of figure] 

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. 

Figure 3: Illustrative Example of Credit Card Monthly Billing 
Statement with Debt Protection Product Fee: 

[Refer to PDF for image: illustration] 

Fictional Credit USA: 
October Account Statement: 

Joe Cardholder: 
Account: xxx-xxxx-5555: 
Closing date: 09/21/2010: 

Fees/Interest	Minimum				
Previous balance $905.00; 	
Payments/Credits $35.00; 
Charges $27.66; 
Transactions $150.00; 
New Balance $1,047.66; 
Minimum Amount Due $15.00				
Payment due date: 10/15/2010. 
				
Transactions: 
Payments, Credits, & Adjustments For Account: xxxx-xxxx-5555				
09/17/10: Payment Received	-$35.00. 

Transactions For Account xxxx-xxxx-5555: 
09/16/10: Pharmacy Prescription:	$18.00; 
09/19/10:	Grocery Store USA:	$97.00; 
09/20/10:	Gasoline Fillup:	$35.00; 
Total Transactions This Period:	$150.00. 

Fees: 
09/21/10: Fictional Credit USA Account Protection Fee: $9.34; 
Total fees this period: $9.34. 

Interest Charged:		
09/21/10:	Interest Charged On Current Balance: $18.32; 
Total Interest This Period:	$18.32. 
				
2010 Totals Year-To-Date: 
Total fees charged in 2010: $78.12; 
Total interest charged in 2010	$109.17. 

Source: GAO example based on sample credit card statements. 

[End of figure] 

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. 

Debt Protection Products Are Marketed Broadly: 

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. 

Credit Insurance and Debt Protection Products Function Similarly from 
a Consumer's Perspective: 

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. 

Debt Protection Products Are Regulated Primarily at the Federal Level, 
and Credit Insurance Is Regulated by the States: 

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. 

Several Federal Regulations Apply to Debt Protection Products: 

Regulation Z: 

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.[Footnote 18] 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.[Footnote 19] 

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 
[Footnote 20]: 

* 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; 
[Footnote 21] 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.[Footnote 22] 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." 

OCC Regulation: 

OCC has a rule specific to debt protection products that applies to 
all national banks.[Footnote 23] 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.[Footnote 24] 

Other Applicable Laws and Regulations: 

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.[Footnote 25] The act applies to financial 
institutions, and federal banking regulators have the authority to 
issue and enforce additional rules of their own.[Footnote 26] 

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.[Footnote 27] 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.[Footnote 28] 

Bank Examiners Review Issuers' Compliance with Disclosure Requirements 
but Do Not Address Costs and Benefits to Consumers: 

Federal banking regulators told us that their examinations could 
include, as necessary, a review of an institution's debt protection 
products.[Footnote 29] 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.[Footnote 30] 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.[Footnote 31] 
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.[Footnote 32] 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.[Footnote 33] Also under the Dodd-
Frank Act, the bureau may find a practice to be unfair under the 
conditions set forth in the act.[Footnote 34] The increased popularity 
of debt protection products raises the importance of effective 
regulatory oversight of these products. 

State Regulation of Credit Insurance Takes Steps to Establish a 
Relationship between Consumer Costs and Benefits: 

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.[Footnote 
35] 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. 

Table 2: Regulatory Differences between Debt Protection Products and 
Credit Insurance: 

Type of product: 
Debt protection products: Banking product; 
Credit insurance: Insurance product. 

Regulatory regime: 
Debt protection products: Primarily federal laws and regulations; 
Credit insurance: Primarily state laws and regulations, also 
Regulation Z. 

Regulator: 
Debt protection products: Primarily federal banking regulators; 
Credit insurance: Each state's department of insurance. 

Structure: 
Debt protection products: Two-party agreement between the credit card 
issuer and consumer; 
Credit insurance: Three-party arrangement among insurance company, 
credit card issuer, and consumer. 

Product design: 
Debt protection products: One product offered nationwide; 
Credit insurance: Varies by state. 

Price of product: 
Debt protection products: Not subject to price controls[A]; 
Credit insurance: Premiums defined by state regulation and may require 
state approval. 

Source: GAO. 

[A] As noted previously, although debt protection products are not 
subject to price controls, under OCC rule 7.4002, fees charged by a 
national bank for debt protection products must be established 
"according to sound banking judgment and safe and sound banking 
principles." 

[End of table] 

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.[Footnote 36] 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."[Footnote 37] 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. 

Debt Protection Products and Credit Insurance May Offer Some 
Advantages, but Fees Can Be Substantial: 

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. 

Debt Protection Products and Credit Insurance May Offer Certain 
Advantages: 

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.[Footnote 38] 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.[Footnote 39] 

* 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. 

Regulators Have Reported Relatively Few Complaints and Cited Few 
Formal Violations: 

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.[Footnote 40] 
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. 

Table 3: Complaints Received by Federal Agencies Related to Credit 
Card Debt Protection Products, 2009: 

Regulator: FTC; 
Debt protection product complaints: 113; 
Total credit card complaints: 45,203. 

Regulator: OCC; 
Debt protection product complaints: 94; 
Total credit card complaints: 26,165. 

Regulator: FDIC; 
Debt protection product complaints: 20; 
Total credit card complaints: 4,226. 

Regulator: Federal Reserve; 
Debt protection product complaints: 16; 
Total credit card complaints: 928. 

Regulator: OTS; 
Debt protection product complaints: 2; 
Total credit card complaints: 2,263. 

Regulator: Total; 
Debt protection product complaints: 245; 
Total credit card complaints: 78,785. 

Sources: FDIC, Federal Reserve, FTC, OCC, and OTS. 

[End of table] 

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.[Footnote 41] 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.[Footnote 42] 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. 

Fees for Debt Protection Products Can Be Substantial: 

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.[Footnote 43] 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.[Footnote 44] This 
extrapolates into average fees of about $200 annually in 2009 for debt 
protection products.[Footnote 45] 

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. 

Financial Benefits to Consumers May Be Limited: 

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.[Footnote 
46] 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. 
[Footnote 47] The average direct financial value of this benefit was 
$607. 

Figure 4: Allocation of Fees Collected by the Nine Largest Credit Card 
Issuers for Their Debt Protection Products, 2009: 

[Refer to PDF for image: pie-chart] 

Earnings (pretax)[A]: $1.3 billion (55%); 
Administrative expenses and reserves[B]: $574 million (24%); 
Financial benefit to consumers[C]: $518 million (21%). 

Total debt protection product fees: $2.4 billion. 

Source: GAO analysis of nine largest credit card issuers' data. 

[A] Earnings is defined as debt protection product fees collected 
(revenue) less administrative expenses, company representative 
incentives, benefits, and increases in reserves, before taxes. 

[B] Administrative expenses and reserves include costs related to 
administering the product, incentives paid to issuer representatives 
for enrolling and retaining customers, and the change in reserve 
requirements between 2008 and 2009. Institutions may be required to 
establish and maintain appropriate reserves to cover anticipated 
losses in connection with lending activities. 

[C] Financial benefits to consumers derive from monthly balances, 
payments, interest, or fees that were canceled for consumers with debt 
protection products. 

[End of figure] 

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.[Footnote 48] 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. 
[Footnote 49] 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.[Footnote 50] 

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.[Footnote 51] 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. 

Consumers May Face Challenges in Evaluating Debt Protection Products: 

Financial markets function best when consumers have information 
sufficient to understand and assess financial services and products. 
[Footnote 52] 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. 

Conclusions: 

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. 

Recommendations for Executive Action: 

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. 

Agency Comments: 

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 [hyperlink, 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. 

Signed by: 

Alicia Puente Cackley: 
Director, Financial Markets and Community Investment: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

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.[Footnote 53] 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 obtained 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 2009, according to data from the 
National Association of Insurance Commissioners (NAIC). We also 
interviewed representatives of the law firms representing the Debt 
Cancellation Coalition, a coalition of credit card issuers and 
insurance companies that offer and administer debt protection products. 

The Debt Cancellation Coalition engaged Argus Information and Advisory 
Services, LLC, a third-party analytics firm, to collect and aggregate 
proprietary data that we requested related to debt protection and 
credit insurance products from the nine credit card issuers and three 
credit insurance companies noted above. We developed separate 
questionnaires 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, cancellations, incentives and commissions, the marketing 
of these products, and characteristics of consumers who purchase them. 
We received comments 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 with 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 the 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 
nine issuers' primary debt protection products by having three 
analysts 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 issuers and three insurance companies also 
provided us with sample marketing materials, including telephone 
scripts used by their representatives to sell 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 
and regulations related to debt protection products, including 
Regulation Z, which implements the Truth in Lending Act, Section 5 of 
the Federal Trade Commission Act, and a rule from the Office of the 
Comptroller of the Currency (OCC) that specifically addresses debt 
protection products.[Footnote 54] We reviewed the compliance 
examination handbooks and procedures of the five federal banking 
regulators--Federal Deposit Insurance Corporation (FDIC), Board of 
Governors of the Federal Reserve System (Federal Reserve), National 
Credit Union Administration (NCUA), OCC, and the Office of Thrift 
Supervision (OTS)--and identified procedures and activities specific 
to debt protection products. We also obtained and 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 federal 
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, three 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 three states--California, Maine, and 
New York. We selected these states 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 insurance experts 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 
and disadvantages of debt protection products and credit insurance. We 
also addressed these issues in interviews with representatives of 
individual credit card and credit insurance companies, as well as with 
the 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, and spoke with representatives of the 
American Academy of Actuaries. In 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 debt 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 cards (as measured 
by number of credit unions).[Footnote 55] 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. 

[End of section] 

Appendix II: Comments from the Bureau of Consumer Financial Protection: 

Department Of The Treasury
Washington, D.C. 20220 

Ms. Alicia Puente Cackley: 
Director, Financial Markets and Community Investment: 
U.S. Government Accountability Office: 
441 G Street N.W. 
Washington, D.C. 20548: 

Dear Ms. Cackley: 

Thank you for the opportunity to comment on the GAO's draft report 
entitled Credit Cards: Consumer Costs for Debt Protection Products Can 
Be Substantial Relative to Benefits, but Are Not a Focus of Regulatory 
Oversight. 

The CFPB welcomes this study as an important contribution to 
understanding the dynamics of a significant consumer financial product 
market. The report finds, based on industry data from the top nine 
general purpose credit card issuers, that consumers are spending $2.4 
billion on debt protection products but receiving only $518 million it 
monetary benefits. The report raises important questions as to how 
well consumers understand the products they are purchasing and their 
value since, as the report observes, these products "can be difficult 
for consumers to assess." 

The report highlights the important role the new Consumer Financial 
Protection Bureau can play in markets like these. The Dodd-Frank Act 
grants important new authorities to the Bureau to ensure that the 
terms and features of consumer financial products and services are 
"fully, accurately and effectively disclosed to consumers in a manner 
that permits consumers to understand the costs, benefits, and risks" 
and also to protect consumers from "unfair, deceptive and abusive 
practices." 

The CFPB agrees with the report's conclusion that it would be 
"consistent with the bureau's mission" to "consider[ l consumer 
awareness and understanding of the costs ... and benefits" of credit 
protection products in evaluating the existing disclosures rules with 
respect to these products. The CFPB intends, as (he report recommends, 
to "factor into its oversight and regulation" of these products 
considerations of this sort. 

The report also finds that "federal agencies offer relatively little 
consumer information specific to debt protection products." Under the 
Dodd-Frank Act, the CFPB will be creating an Office of Financial 
Education to develop initiatives "to educate and empower consumers to 
make better informed financial decisions."	The CFPB will, as the 
report also recommends, explore ways to "improve consumers' 
understanding" of debt protection products in connection with our 
financial education efforts. 

Sincerely yours, 

Signed by: 

Rajeev Date: 
Associate Director: 
Research, Markets & Regulations: 
Consumer Financial Protection Bureau: 

[End of section] 

Appendix III: Comments from the National Credit Union Administration: 

National Credit Union Administration: 
Executive Director: 
1775 Duke Street: 
Alexandria, VA 22314-3428: 
703-518-6320: 

March 15, 2011: 

Ms. Alicia Puente Cackley: 
Director, Financial Markets and Community Investment: 
United States Government Accountability Office: 
441 G Street NW: 
Washington, DC 20548: 

Dear Ms. Cackley: 

Thank you for the opportunity to comment on the draft report Credit 
Cards: Consumer Costs for Debt Protection Products Can be Substantial 
Relative to Benefits, but Are Not a Focus of Regulatory Oversight (GAO-
11-311). In your report you recommend that the Consumer Financial 
Protection Bureau (CFPB), once operational, should consider the costs 
and benefits of credit card debt protection products as a part of its 
supervision and rulemaking responsibilities. You also recommend that 
the CFPB should incorporate information about credit card debt 
protection products, from a consumer's perspective, as a part of its 
financial literacy efforts. 

At the National Credit Union Administration (NCUA), we believe your 
conclusions are reasonable and consistent with your findings. As the 
CFPB develops its structure, it would be appropriate to evaluate the 
quality of disclosures associated with credit card debt protection 
products. Over the long run, this will allow consumers to understand 
the total costs of these products and make valid comparisons. 
Moreover, since credit card debt protection products are relatively 
new and typically have higher costs when compared to comparable credit 
insurance products, a focus on consumer educational initiatives is 
also prudent. 

As you note in your report, credit unions do not have a significant 
share of the overall market for credit card debt protection products. 
However, we are pleased your report notes the few credit unions 
electing to offer these types of products generally do so at rates 
comparatively favorable to consumers. 

As NCUA advances consumer protection goals through our Office of 
Consumer Protection, we will continue to encourage credit unions to 
consistently demonstrate best practices in offering consumer products, 
and support financial education initiatives. We will use your report 
as a benchmark when assessing trends associated with newer financial 
products. 

We appreciate the opportunity to comment and commend the 
professionalism of your staff throughout the audit process. 

Sincerely, 

Signed by: 

Dace Marquis: 
Executive	Director: 

[End of section] 

Appendix IV: Comments from the National Association of Insurance 
Commissioners: 

National Association of Insurance Commissioners: 
and: 
The Center for Insurance Policy and Research: 

March 15, 2011: 

Alicia Puente Cackley: 
Director, Financial Markets and Community Investment: 
U.S. Government Accountability Office: 
441 G. Street, NW: 
Washington, DC 20548: 

Dear Ms. Puente Cackley: 

Thank you for the opportunity to comment on the GAO's draft report 
titled "Consumer Costs for Debt Protection Products Can Be Substantial 
Relative to Benefits, But Are Not a Focus of Regulatory Oversight" 
(GA0-11-311). 

As you noted in your report, debt protection products are generally 
subject to federal regulation while credit insurance is primarily 
regulated by the states. We agree that state regulation of consumer 
insurance is enhanced with tools such as financial examinations, 
market conduct examinations and states' adoption of the NAIC's 
Consumer Credit Insurance Model Act and Regulation. The Models in 
particular allow state Departments of Insurance to monitor the 
relationship of benefits provided and premiums charged to evaluate the 
suitability of these products. 

The NAIC and its members share the GAO's concern that consumers 
receive significant protection for premiums they pay for credit 
insurance. Again, we appreciate the opportunity to review this report 
and submit comments. 

Sincerely, 

Signed by: 

Andrew J. Beal: 
Chief Operating Officer and Chief Legal Officer: 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Alicia Puente Cackley, (202) 512-8678 or cackleya@gao.gov. 

Staff Acknowledgments: 

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. 

[End of section] 

Footnotes: 

[1] Pub. L. No. 111-24, § 509 (2009). 

[2] Debt protection products and credit insurance may be offered on 
loans other than credit cards, including mortgages, auto loans, and 
home equity lines of credit, but our report generally covers only 
products associated with general purpose credit cards. In addition, 
private label cards for use at specific retailers and small business 
credit cards were not included in our review. 

[3] HSN Consultants Inc., The Nilson Report, vol. 966 (February 2011); 
8-9. We did not identify comprehensive data on the size of the total 
credit card-related debt protection product market. 

[4] All data presented in this report from the three insurance 
companies are solely for credit card-related credit insurance. 

[5] We could not fully assess the reliability of the aggregated data 
or the systems used to access them and as a result consider the data 
to be representations that the issuers and insurers made to us. 

[6] This report uses the term "federal banking regulators" to refer 
collectively to the Federal Reserve, FDIC, NCUA, OCC, and OTS. 

[7] Kevin Foster, Erik Meijer, Scott Schuh, and Michael A. Zabek, "The 
2008 Survey of Consumer Payment Choice," Public Policy Discussion 
Papers, Federal Reserve Bank of Boston, No. 09-10. 

[8] Federal Reserve's November 2010 G.19 release on consumer credit, 
which includes 2009 data. 

[9] These products are individually called debt suspension agreements 
and debt cancellation contracts, but for the purposes of this report 
we refer to them collectively as debt protection products. 

[10] State-chartered banks that are members of the Federal Reserve 
System are subject to supervision by the Federal Reserve; insured 
nonmember banks are subject to FDIC supervision. Both state and 
federal banking regulators review those institutions' compliance with 
federal lending laws and other requirements applicable to debt 
protection products. 

[11] Citibank (South Dakota), N.A., is a subsidiary of Citigroup Inc. 
Chase Bank USA, N.A., is a subsidiary of JPMorgan Chase & Co. Wells 
Fargo Bank, N.A., is a subsidiary of Wells Fargo & Company. For the 
purposes of this report, bank representatives asked us to refer to 
"Citibank (South Dakota), N.A."; "Chase Bank USA, N.A."; and "Wells 
Fargo Bank, N.A." when referencing debt protection products. 

[12] FDIC-insured national and state nonmember commercial banks and 
state-chartered savings banks are required to file financial data 
quarterly reports, often known as Call Reports for banks and Thrift 
Financial Reports for savings associations. NCUA's Call Report does 
contain a field that captures whether federally chartered credit 
unions have a debt cancellation/suspension program on any type of 
loan, not solely credit cards. A recent description of information 
required in Call Reports is set forth in the federal banking agencies' 
publication of information collection activities and joint comment 
request at 75 Fed. Reg. 68856 (Nov. 9, 2010). 

[13] For the purposes of this report, we use the term "credit 
insurance" to refer to credit insurance sold specifically in 
connection with a credit card account, unless otherwise noted. 

[14] Although the top nine issuers no longer market credit insurance 
policies or packages in connection with credit cards, some credit 
unions and other financial institutions continue to do so. 

[15] Credit insurance sold to consumers in connection with credit 
cards is typically referred to as a credit insurance package because 
it covers a variety of individual events (e.g., loss of life, 
disability, and involuntary unemployment) that are bundled together 
into a single product. The three insurance companies (Aegon USA, 
Assurant Solutions, and Central States Indemnity) were estimated to 
represent about 30 percent of the open-end credit insurance market in 
2009, according to NAIC data. We did not identify any available data 
on the size of the total credit card-related credit insurance market. 

[16] While issuers may offer several different debt protection 
products, 84 percent of the nine largest issuers' debt protection 
products consist of primary, or core, products that offer a package of 
benefits. In addition to their primary products, credit card issuers 
also may offer alternative products that are usually less expensive 
and have fewer benefits. These products are typically offered to 
consumers enrolled in a primary product who seek to cancel their 
enrollment. Information provided in this report about issuers' debt 
protection products generally refers to their primary products. 

[17] One credit card issuer we reviewed offers one product with a 
different pricing structure--a flat fee of $19.99 per month regardless 
of the cardholder's monthly outstanding balance. 

[18] Pub. L. No. 90-321, 15 U.S.C. §§ 1601-1666. 

[19] Regulation Z is set forth at 12 CFR Part 226. As discussed later 
in this report, Regulation Z also applies to credit insurance. 

[20] Regulation Z also has rules for nonvoluntary products--that is, 
debt protection products that are required as part of the loan. For 
example, for required products, a creditor must disclose the fee or 
premium on or with a solicitation or the application and the account- 
opening statement. 

[21] Regulation Z requires disclosure if interest will accrue during 
the suspension, but does not require a disclosure if interest does not 
accrue during the suspension period. 

[22] 75 Fed. Reg. 58539 (Sept. 24, 2010). The Federal Reserve first 
proposed changes to Regulation Z for debt protection and credit 
insurance disclosures in 2009. 74 Fed. Reg. 43232 (Aug. 26, 2009). The 
2010 proposal incorporates the 2009 proposal. 

[23] 12 C.F.R. Part 37. The rule covers debt protection products 
offered in connection with credit cards as well as other loans. State- 
chartered banks offering debt protection products may be required to 
follow the OCC rule as required by the state's parity law. 
Representatives from some non-OCC-supervised institutions told us 
their institution used OCC's regulation as a form of best practice 
guidance. In a May 2003 letter to federal credit unions, NCUA stated 
that credit unions should review OCC's rule as best practice guidance. 

[24] These provisions are contained in 12 C.F.R. § 37.3. 

[25] See Federal Trade Commission Act, 15 U.S.C. §§ 45, 57a. State- 
chartered banks and credit unions may be subject to state laws and 
regulations governing debt protection products, but state oversight of 
debt protection products was beyond the scope of this report. 

[26] 15 U.S.C. §§ 45 (a)(2), 57a(f). The Federal Reserve's Regulation 
AA (Unfair or Deceptive Acts or Practices), and comparable OTS 
regulations, do not specifically govern disclosures related to debt 
protection products. See 12 CFR Parts 227 and 535. 

[27] Pub. L. No. 111-203 (2010). The Bureau of Consumer Financial 
Protection has supervisory and enforcement authority over depository 
institutions holding more than $10 billion in assets. Pub. L. No. 111- 
203 § 1025. The primary consumer protection supervisory and 
enforcement powers over banks, thrifts, and credit unions with $10 
billion or less in assets largely remain with those institutions' 
prudential regulators. Pub. L. No. 111-203 § 1026. The bureau is the 
primary supervisor and enforcer for nondepository entities if certain 
statutory criteria are met. Pub. L. No. 111-203 § 1024. 

[28] See Designated Transfer Date. 75 Fed. Reg. 57252 (Sept. 20, 2010). 

[29] Banks, thrifts, and credit unions are subject to regular 
examinations to assess institutions' financial condition and ensure 
compliance with consumer protection and other laws. All depository 
institutions generally must be examined at least once every 18 months, 
but the scope and timing of examinations varies. Federal banking 
regulators have a full range of strong and flexible enforcement tools, 
such as formal and informal enforcement actions, when they find 
noncompliance with laws and regulations. 

[30] OCC told us it supervised, at a minimum, 14 institutions offering 
credit card debt protection products. The Federal Reserve told us it 
supervised 4 institutions offering credit card debt protection 
products and provided the examination for the 1 institution that had 
been reviewed within the specified time period. FDIC officials told us 
the agency supervised 3 institutions offering these products and 
provided narrative and descriptive comments about these institutions' 
products, but had not conducted an examination specific to the 
institutions' credit card debt protection products. According to OTS, 
three of the six largest credit card issuers it supervises currently 
offer debt protection products to new customers. OTS staff said the 
agency had not specifically reviewed any of its credit card issuers' 
debt protection products in the past 5 years. NCUA staff said that the 
exact number of credit unions offering credit card debt protection 
products was unknown, as was whether there had been any examinations 
specific to credit card debt protection products. NCUA estimated less 
than 5 percent of credit unions offered such products in 2009. 

[31] While NCUA does not have procedures specific to credit card debt 
protection products, NCUA staff told us that NCUA examiners may refer 
to a questionnaire that was developed to help examiners review debt 
protection products offered in connection with any type of loan. 

[32] There are no price controls for debt protection products, 
although OCC's rules (12 C.F.R § 7.4002) apply to the fees charged by 
national banks for these products. Under rule 7.4002, national banks 
are to establish noninterest charges and fees "according to sound 
banking judgment and safe and sound banking principles." 

[33] Pub. L. No. 111-203 § 1032(c). 

[34] Pub. L. No. 111-203 § 1031(c). 

[35] In contrast, with respect to noninsurance credit card debt 
protection products, state laws prohibiting unfair or deceptive acts 
or practices are preempted by TILA to the extent that they are 
inconsistent with TILA and Regulation Z. See, e.g., 12 C.F.R. §§ 
226.28, 226.29. 

[36] According to NAIC's Consumer Credit Insurance Model Regulation, 
"loss ratio" is defined as incurred claims divided by the sum of 
earned premiums and imputed interest earned on unearned premiums. 

[37] Reverse competition can be a feature of certain other insurance 
transactions as well, not just credit card-related credit insurance. 

[38] Credit card issuers typically report consumer information to 
credit reporting agencies. This information factors into the overall 
credit rating, which is used, among other ways, by lenders when 
deciding whether to offer credit and determining interest rates and 
terms. 

[39] At least one issuer we spoke with did note that it screens for 
unemployed cardholders during telephone sales of its debt protection 
product, because individuals who are already unemployed are not 
eligible for involuntary unemployment benefits. 

[40] We did not collect complaint data from NCUA because officials 
told us that credit unions represent a very small share of the credit 
card debt protection product market. 

[41] We did not comprehensively review enforcement activity related to 
debt protection products that may have occurred by regulators and 
enforcement authorities at the state level. The Minnesota Attorney 
General filed a lawsuit in December 2010 alleging that a bank and its 
affiliated processing company made aggressive, misleading, and 
deceptive telemarketing calls to sign individuals up for debt 
protection products. 

[42] Informal enforcement actions are typically noted within 
supervisory letters or other communications to the credit card issuers 
and still require corrective action. 

[43] The median fee of $0.89 cents per month for $100 in outstanding 
balance represents 0.89 percent of the balance. Multiplied by 12 
months, that would represent fees totaling 10.68 percent of the 
cardholder's average monthly balance over the course of that year. 

[44] These data exclude cardholders who were enrolled in a debt 
protection product plan but had a zero balance during the previous 
billing period and thus paid no fee (31 percent of accounts). Fees for 
debt protection products are paid monthly and vary based on the 
outstanding balance. 

[45] We calculated average annual fees by multiplying the average 
monthly fee in 2009 by 12, resulting in $197.88. 

[46] Representatives from the nine issuers said they believe the 
administrative expense data they provided may be understated because 
debt protection products are not always managed as stand-alone 
products, and thus some expenses could not be directly allocated to 
these products. As a result, they said they believe that earnings 
potentially may be overstated as well. 

[47] This estimate was derived by dividing the number of enrolled 
cardholders who received a benefit at any point in 2009 by the total 
number of enrolled cardholders with a nonzero balance in December 
2009. Data were not available for the number of such cardholders for 
the full calendar year 2009. If enrolled cardholders who had a zero 
balance in December 2009 are included in the total, the proportion of 
cardholders who received a benefit in 2009 is 3.6 percent. 

[48] In contrast, premiums for credit insurance are not assessed on 
debt that exceeds the maximum benefit amount, according to the 
Consumer Credit Industry Association. 

[49] These circumstances may affect relatively few cardholders with a 
debt protection product because only 1.2 percent of them had a balance 
of $10,000 or more as of December 2009, according to data we received 
from the nine largest issuers. 

[50] Christopher H. Hause and Robert W. Busby, "Study of Claim Costs 
by Age and the Effect of Bundling On Credit Card Debt Protection 
Products," prepared for the Consumer Credit Industry Association, by 
Hause Actuarial Solutions, Inc. (Dec. 13, 2010). 

[51] Industry representatives have noted, however, that consumers who 
are older or who have health conditions may face higher costs for term 
life coverage or may find it difficult to obtain such coverage. 

[52] GAO, Financial Regulation: A Framework for Crafting and Assessing 
Proposals to Modernize the Outdated U.S. Financial Regulatory System, 
[hyperlink, http://www.gao.gov/products/GAO-09-216] (Washington, D.C.: 
Jan. 8, 2009). 

[53] HSN Consultants Inc., The Nilson Report, vol. 966 (February 
2011); 8-9. The Nilson Report is a publication covering news and 
proprietary research on consumer payment systems. 

[54] 12 C.F.R Part 37. 

[55] NCUA data indicate that in 2009 fewer than 350 credit unions 
offered debt protection products on any type of loan, including credit 
cards. 

[End of section] 

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