When Mariya Kruseck broke her tailbone snowboarding and lost her part-time job five years ago, the then 19-year-old college student was relieved she had bought payment protection to go with her credit card.
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But she said the product failed to kick in and her debt ballooned to more than $2,100, destroying her credit rating. It got so bad that she received a default judgment in court. To this day, she cannot get an unsecured credit card and had to get her father to co-sign her car loan.
"Everything in my whole entire life pretty much got ruined," said Kruseck. "I felt like I was put in the system to be duped rather than taken as a serious customer."
She said the credit card issuer, Capital One, failed to apply the insurance to her account despite her repeated calls. The bank had no comment on her specific allegations.
Kruseck is not alone in feeling shortchanged by payment protection. In complaints on consumer websites, to federal regulators, and in a raft of lawsuits filed by West Virginia and other states, consumers have railed against the product.
Debt protection products are sold on the idea that they suspend or cancel credit card debt for a period after a critical event, such as a lost job, disability or death.
But many customers complain they were unknowingly signed up for the insurance, or unfairly denied benefits.
Consumers are increasingly vulnerable as banks try to make up for lost revenue because of recent government restrictions on other financial products, and as persistently high unemployment makes promises of debt insurance more appealing.
A government watchdog has directly asked the new U.S. Consumer Financial Protection Bureau to take a hard look at payment protection, after other attempts to crack down on the products stalled.
The Government Accountability Office said in March that the bureau, which was created by last year's Dodd-Frank financial oversight law, should assess the value of the products.
It said cardholders only get 21 cents of benefit for every dollar they spend on debt protection fees. The nine largest credit card issuers collected $2.4 billion in fees for debt protection products in 2009, and only paid out $518 million of that to consumers in benefits.
The new bureau may take some time before it tackles the question. It faces an uphill battle to get Senate Republicans to confirm its nominated director Richard Cordray, and it is swamped with other work.
The banking industry says payment protection plans can be costly but provide a needed service.
"They are underwriting people for whom there is no alternative," said Kevin McKechnie, executive director of the American Bankers Insurance Association, a subsidiary of the American Bankers Association. "There is a premium for that."
Consumer groups contend the products prey on desperate customers.
"It's a Catch-22 for consumers," said Ed Mierzwinski, consumer program director at the federation of state Public Interest Research Groups. "You are worried you are not going to be able to pay your bills, you are worried you might lose your credit card because you get laid off, so you pay extra for a junky product."
Ira Rheingold, executive director of the National Association of Consumer Advocates, said he fears the plans will get pushed more aggressively because of curbs on other fees.
The banks have faced restrictions in recent years on their ability to charge for overdraft protection and impose other fees.
"Will we see a rise in this stuff? I'm sure there will be," Rheingold said in reference to the payment protection plans.
The GAO said in March that on top of providing relatively little benefit, the products can be difficult to understand and federal agencies offer few educational resources.
Debt protection plans arrived in the 1960s, when the Office of the Comptroller of the Currency gave its seal of approval.
Before then, banks had mostly contracted with insurers to offer "credit insurance" - which came under heavy state regulation.
Over the following decades, a series of legal cases and rulemakings by the OCC solidified and expanded the banks' right to offer the products under federal regulation, outside of the reach of state regulators. By the late 1990s, payment protection was a growing industry.
FLURRY OF LAWSUITS
States and consumers are not waiting for the federal government to take action on credit card protection plans, thanks in part to a Dodd-Frank provision that empowers states to challenge big banks.
The Minnesota attorney general settled earlier this month with Discover Bank <DFS.N>, after alleging it deceptively charged customers for payment protection plans. The bank agreed to pay $2 million as part of the settlement.
The West Virginia attorney general has also taken action. In August, the office sued 9 banks over payment protection, including Discover, alleging the banks used deceptive marketing tactics and enrolled customers who were ineligible or unaware of their enrollment.
Discover has reached a preliminary settlement on eight class action suits, but still faces a probe from the Missouri attorney general and a pending enforcement action by the Federal Deposit Insurance Corp over the marketing of fee-based products, including the payment protection plans.
"We believe that our current practices address concerns relating to the marketing of our protection products," said Jon Drummond, a spokesman for Discover.
The Federal Reserve initiated a crackdown on payment protection plans in September 2010, tucking a proposal into a larger mortgage lending rule that would have required bold disclosures on the plans' costs and risks.
But the proposal drew fierce resistance from industry.
"We said, 'we think you are exceeding your authority,"' said the American Bankers Insurance Association's McKechnie, who complained the Fed was "killing a business" with its requirement that disclosure forms include the phrase "STOP. You do not have to buy (name of product)."
In February, the Fed said it would not finalize the proposal, and opted to punt the issue to the Consumer Financial Protection Bureau once it opened its doors in July.
The consumer agency has expressed interest in taking it up. In a letter attached to the March GAO report, Raj Date, who is now the consumer agency's temporary head, said the study raised "important questions" about the value and consumer understanding of the product.
He said he agreed with the report's conclusions and intends to factor the cost and benefit to consumers into oversight and regulation of payment protection.
A representative from the agency, however, could not estimate when it would take up the issue.
The credit card industry is happy to keep the consumer agency idle on the issue.
Andrew Kahr, a principal at Credit Builders LLC, a financial product development company, and the mastermind behind many controversial credit products, has waged a public campaign to keep the consumer agency from curbing payment protection plans.
He wrote an opinion piece in The American Banker in July called "Let's Keep the CFPB Leaderless."
In it, he lays out that payment protection plans only have a loss rate of 20 to 25% for banks, compared to state-regulated insurance products that often have a mandated loss rate of at least 80%.
Kahr warned that the consumer agency could severely cut into banks' ability to make money:
"So, is the pricing of credit protection 'unfair?' It is if the CFPB says it is. Are we really hell-bent to hear what the CFPB is going to say is 'unfair?' Let the bad times roll!" (Reporting by Alexandra Alper; Editing by Martin Howell and Tim Dobbyn)