U.S. Credit-Card Lenders Shun Add-Ons as CFPB Cracks Down

JPMorgan Chase & Co., Bank of America Corp. and American Express Co. are among credit-card lenders retreating from a $2.4 billion market as regulators seek curbs on deceptive marketing of products including debt cancellation.

Scrutiny from the Consumer Financial Protection Bureau has led to fines against banks including Capital One Financial Corp. and Discover Financial Services, prompting them to curtail sales of so-called add-ons that offer to help customers pay card bills if they get sick or lose their jobs, or monitor their credit.

“We’re on a glide path to selling fewer,” Discover Chief Executive Officer David Nelms said in a Sept. 27 interview. Nelms, 51, cited higher standards set by regulators including the two-year-old CFPB.

“You’d have to ask regulators whether they want the product to go away or not,” he said. “From our perspective, we think that they add a good amount of value to some of our customers.”

American Express also is cooperating with regulators amid an “industrywide review” of the products, said Michael O’Neill, a spokesman for the New York-based lender.

AmEx, the biggest U.S. credit-card issuer by purchases, said yesterday that it will pay $112.5 million to settle claims it violated consumer safeguards from marketing to collections in products sold to about 250,000 customers. That case didn’t involve add-on products.

Enforcement Campaign

The crackdown is CFPB Director Richard Cordray’s first enforcement campaign after the Dodd-Frank Act consolidated regulation of retail financial products under one federal agency. With U.S. banks already complaining that regulation has squeezed revenue, the bureau is considering new limits on payday lending and fees for checking overdrafts, and has proposed an overhaul of mortgage practices.

The industry lobbied against Dodd-Frank, and the CFPB in particular, before its passage in 2010. The law also included limits on debit-card swipe fees paid by merchants, wiping out about $8 billion in annual revenue for the biggest U.S. banks.

While most credit-card lenders don’t disclose what they earn from add-on products, payment protection alone generated $2.4 billion in 2009, according to the U.S. Government Accountability Office. Card add-ons generated $428.2 million in fiscal 2011 for Discover, a 3.8 percent increase from a year earlier, the Riverwoods, Illinois-based bank said in an annual regulatory filing.

Limiting Fees

Bill Carcache, an analyst with Nomura Securities in New York, said the Credit Card Accountability Responsibility and Disclosure Act of 2009 started the process of limiting fees -- late fees, for example -- that issuers are allowed to charge.

“The fees are under pressure and the profitability model of a credit card business is in question,” Carcache said in an interview. “The CFPB further reinforces what the CARD Act set out to do.”

The CFPB and other regulators accused Capital One and Discover of deceptive marketing that included speaking quickly while soliciting customers and enrolling people without their knowledge. Call centers run by other companies conducted some of the sales.

“We are signaling as clearly as we can that other financial institutions should review their marketing practices to ensure that they are not deceiving or misleading consumers into purchasing financial products or services,” Cordray, 53, said on Sept. 24. He promised that “more such actions will follow.”

‘High Value’

Nelms said competitors have announced that they’re exiting “some products, but not all.” His firm will shift resources elsewhere to higher priorities, “but we’ve also said that we’re continuing to offer these products to the people that feel like what we offer is of a high value,” he said.

Kent Markus, the CFPB’s assistant director of enforcement, said the agency’s focus is on deceptive marketing of the products, not the products themselves, which consumer groups have criticized as having little value.

Kevin McKechnie, head of the American Bankers Insurance Association, said the industry is willing to “give the CFPB the benefit of the doubt” for now.

“I don’t want to ascribe to them the belief that they want to pick winners and losers in the market,” McKechnie said. “We may have to revisit that question in the future.”

Necessarily ‘Deceptive’

To Birny Birnbaum, a former Texas insurance regulator, the trend is vindication of consumer advocates’ longstanding contention the products aren’t a good deal.

“It’s not hard to see why you have to be deceptive to even be able to sell it,” Birnbaum, now executive director of the Austin, Texas-based Center for Economic Justice, said in an interview.

McKechnie said that the products can be money-makers as long as banks carefully manage third-party marketers.

“It has nothing to do with deception,” he said. “What we are confronting is a perception issue because of the enforcement action and consumer groups.”

The CFPB’s agreement with Discover is being viewed within the industry as a guideline for avoiding enforcement action, according to Patricia Sahm, managing director of Auriemma Consulting Group.

“Abiding beyond the letter of law -- the consent decree -- is a good idea,” said Sahm, whose New York-based firm advises card issuers. She tells clients, “Ask yourself what you would be thinking if you heard this pitch on the phone.”

Careful Compliance

Sahm said the need for careful compliance is particularly acute when using third-party marketers, where quality control can be hard to maintain. The sheer cost of that may be driving card lenders to simply give up on the add-on products, she said.

Capital One CEO Richard Fairbank said his company, which gets more than half of its revenue from credit cards, was getting out of the market the day after the McLean, Virginia-based firm settled with the government in July.

AmEx stopped enrolling its cardholders in debt protection and identity theft programs earlier this year and will cease offering them by December, said Marina Norville, a spokeswoman.

“We are very sensitive to concerns that the regulators have, so we’re pulling back,” Norville said.

‘Business Decision’

JPMorgan, the biggest U.S. credit-card lender, stopped new enrollments into debt-protection plans last October, according to Paul Hartwick, a spokesman for the New York-based bank. In March, the firm halted sales of credit monitoring, which notifies customers of changes on their credit reports. Hartwick said it was “just a business decision.”

Bank of America, the No. 2 card lender, stopped offering credit monitoring late last year, and debt-protection services in August, according to Betty Riess, a spokeswoman for the Charlotte, North Carolina-based company.

“The decision to discontinue selling these services is consistent with our strategy to streamline our business,” Riess said in an e-mail.

Citigroup Inc., the third-largest credit-card lender, “paused” telemarketing of debt-protection products in August as it “as we continue adapting to the regulatory environment,” said Emily Collins, a spokeswoman for the New York-based bank.