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GAO report critical of debt protection plans

By Daniel Wagner
Associated Press / March 27, 2011

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WASHINGTON — Consumers pay high fees and see limited benefits from debt-protection offers that suspend credit card payments when borrowers become unemployed or disabled, government auditors say.

For every dollar that consumers spend on fees for debt protection, banks pay out only 21 cents in claims, according to a report Friday from the Government Accountability Office. The costs of the product often exceed 10 percent of borrowers’ monthly balances, the GAO said.

“A relatively small proportion of the fees consumers pay for debt protection products is returned to them in tangible financial benefits,’’ the GAO said. It said the nine top card issuers collected $2.4 billion in fees for the products in 2009, but paid out only $518 million in monetary benefits.

That gap allowed banks to pocket $1.3 billion in pretax earnings in 2009, the GAO said.

The GAO acknowledged that the products can help consumers by protecting their credit ratings during times of financial distress. But it said consumers often fail to understand how much they are paying or how much coverage they enjoy.

Companies have stepped up their marketing of debt protection in recent years, using recorded messages on customer-service hotlines, direct mail, e-mail, and telemarketing, the study says.

It says debt protection has displaced credit insurance, a product that provides similar benefits but is subject to tighter regulation.

Banks told the GAO that debt protection can be offered “through multiple marketing channels more efficiently,’’ and can generate more profits because there are no price controls.

The report says debt protection products should be a focus of the new Consumer Financial Production Bureau.