CFPB and FDIC Subpoena Discover in Payment Protection Probe

Payment protection plans are to credit card issuers what paint protection plans are to used car dealerships – an easy way to scam unwitting customers out of their money. We’ve been saying this for a while now. We even broke down the costs and found that if an insurance company were to charge the same rates that card issuers charge for a similar protection service, it would be considered illegal. The costs would literally be criminally high.

Finally, it looks like the government is starting come around to our way of thinking. This week, the Consumer Financial Protection Bureau and the Federal Deposit Insurance Corporation officially subpoenaed Discover Financial Services over the card issuer’s marketing of costly add-on products. Though Discover has been at the heart of a federal investigation for a year now, this marks the first time the company has officially been called to testify before a federal court.

According to the official release, Discover will be required to answer questions regarding four of its most profitable services – payment protection, identity-theft protection, credit score tracking and something called “wallet protection.”

Though each service offers something different, they all have one big thing in common: they charge cardholders ridiculously high fees for a service that they’ll probably never use. Take payment protection, for instance. This reviled add-on will defer your monthly minimum payments on your balance for up to two years if you lose your job or are hospitalized. In return, you’ll pay 86 cents for every $100 you carry on your balance each month. When you consider that the minimum payment for a $100 balance is only $2, tacking on an extra 10.5% to your annual interest rate just to avoid paying the minimum seems ridiculous.

The other add-ons are just as bad. For $2.99 per month, wallet protection will let the credit monitoring agencies know that your wallet is missing – if and when that happens. If you’ve got identity theft protection, an algorithm will watch your spending patterns for suspicious charges. You’ll pay $160 a year for that. Credit score tracking costs $100 per year. But you know what? None of these services offer something that consumers can’t already do themselves for free.

But cost isn’t the biggest problem with these add-ons. The problem is that Discover has a bad habit of quietly tacking these products onto a customer’s bill. In fact, Discover is currently in the process of settling a number of class-action lawsuits filed by customers who found surprise charges on their monthly statements. In some cases, the customer actually refused the service at first, but the card issuer signed them up anyway.

“Even if you tell them you’re not interested, they turn around and say ‘Let me send you more information’ and then basically disregard your rejection and enroll you unilaterally,” said David S. Paris, one of the lawyers handling the Discover class-action suit in New Jersey.

So the CFPB and the FDIC are finally starting to hold card companies like Discover accountable for such practices, and it’s about time. According to a March, 2011 report from the Government Accountability Office, consumers paid $2.4 billion in fees to credit issuers in 2009 for services like payment protection. That sort of payout is absurd, especially considering the quality of the product provided.

The subpoena simply requires Discover to appear in court and testify, but it’s a step in the right direction. Even if federal charges are not filed, the CFPB and FDIC can use Discover’s testimony to help craft a new set of regulations that limit the fees card issuers can charge for add-on products. At the very least, the agencies should gain enough ammo to require issuers to receive explicit permission before signing a customer up for a service. We’ll accept any solution, really, as long as it gets America’s card issuers to stop taking advantage of vulnerable consumers with useless, predatory products.

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