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Costly payment protection programs just won’t die

Fred Williams

After a wave of lawsuits and regulatory crackdowns, overpriced, underperforming credit card “payment protection” programs should be a thing of the past.

But you better check your card statement for unexplained charges anyway. Despite all the wrath and refunds the programs have drawn, some of them still live on.

In February, Pennsylvania resident Jennifer Gordon filed a lawsuit against Kohl’s Corp. and Capital One over the “Account Ease” payment protection plan on her Kohl’s card. According to her federal claim, Gordon was enrolled in the program without her consent when she got the card in October 2011. She has paid about $128 in premiums for a protection program whose restrictions leave it with “little or no value,” the suit charges.

Refunds for payment protection skip many cardholders

“They don’t offer it to new cardholders,” said Angela Edwards, Gordon’s lawyer. “But that certainly didn’t stop them from continuing to bill people who didn’t even sign up for it.”

Restrictions in the program’s fine print mean Gordon was never eligible to make a claim on the program — had she even known she was enrolled in it, Edwards said. The lawsuit seeks an injunction to halt protection charges that are still being billed to cardholders.

Payment protection, also called debt protection or debt cancellation, is an insurance-like program sold by credit card issuers. It is supposed to cover your monthly card payment in hard times, such as job loss, or even wipe out your balance.

A report by the Government Accountability Office in 2011 said the programs could be beneficial, but the ones offered by big banks charged high fees for skimpy coverage.

“A relatively small proportion of the fees consumers pay for debt protection products is returned to them in tangible financial benefits,” the GAO said. Of every dollar they paid in, cardholders got only 21 cents in benefits, on average. Insurance companies that sell similar protection programs are supposed to pay at least 60 cents of benefits for each dollar of premiums, in order to meet regulatory guidelines for reasonable prices.

Seven major card issuers named in the report have refunded $1.7 billion to customers for add-on products, chiefly payment protection, under settlements with the U.S. Consumer Financial Protection Bureau. They also largely dropped their protection offerings.

Capital One, for example, paid refunds of $150 million to 2 million cardholders, according to the consumer protection bureau. But that settlement did not cover store cards issued in partnerships with retailers.

“Kohl’s is one of three partners that maintains payment protection programs for cardholders who enrolled many years ago,” Capital One representative Pam Girardo said in an email response to questions. She didn’t name the other two.

The company’s store cards aren’t the only ones accused of collecting unfair fees for payment protection. In a federal lawsuit filed last year, Massachusetts resident Brenda Edwards charged that Macy’s and a unit of Citibank slammed her into a payment protection program sometime before 2011. Edwards is self-employed, so she was never eligible for the program’s benefits, which are linked to job loss, her complaint says.

It wasn’t until April 2014 that Edwards noticed charges for something called “Credit Pro” on her Macy’s card and discovered she was enrolled in the payment protection plan, according to court papers.

“In total,” the complaint charges, “since January 2011, Ms. Edwards paid more than $250 in unauthorized premiums for a service she never requested and for which she was ineligible.”

Macy’s and the Citibank unit argue that Edwards does not have the right to take them to court, or participate in a class action, because her card agreement requires disputes to be arbitrated instead. The case is before Judge Colleen McMahon in U.S. District Court for the Southern District of New York.

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