Reuters puts the spotlight on the scam that is the multi-billion-dollar credit-card insurance industry, which promises to cover payments if a cardholder gets sick or loses her job.
So-called payment protection plans have super-high profit margins for the banks selling them. Reuters reports on a Government Accountability Office study that says the loss ratio on such insurance is just 21 percent. In other words, people buying the insurance get just 21 cents for every dollar they spend on premiums. The banks keep 79 cents.
That number is glaring even in isolation, but how does it compare to other insurance products? Not well. Property and casual insurance policies pay out between 70 and 80 cents to policyholders for every dollar they get from premiums.
Here’s how the industry lobby spins the 21 percent number:
“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.”
“A premium” is a disingenuous, flacky word for when companies charge sky-high prices for products for which there is no alternative. My word is “gouging.”
How bad is the debt-insurance industry (which includes credit-card insurance)? No less a friend of the banks than the Federal Reserve last year tried to force banks to include “STOP. You do not have to buy (name of product) to get this loan” on their forms, as well as “You may not receive any benefits even if you buy this product.”
Which is what happened to a woman Reuters finds for its lede anecdote:
“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.
If it sounds like a job for the new Consumer Financial Protection Bureau, that’s what Reuters reports the GAO recommended and it’s where the Fed punted after its constituents (the banks) complained about its “STOP” proposal. Which is why it’s nice that Reuters points out this American Banker op-ed by Andrew Kahr, the head of something called Credit Builders, who is nothing if not blunt about the industry position:
Let’s Keep the CFPB Leaderless
Reuters says Kahr is “the mastermind behind many controversial credit products,” which got me interested in who he is. It turns out he’s something of a caricature of a predatory lender—and an American Banker BankThink columnist.
A look through the clips shows that he was the founder of Providian Financial Corporation, a subprime credit-card issuer, which ended up in the hands of Washington Mutual in 2005, in a fitting bit of predatory synergy. Here’s a memo Kahr sent to Providian executives in the late 1990s, according to a 2002 Associated Press story:
“Making people pay for access to credit is a lucrative business wherever it is practiced,” he wrote in a March 1999 memo to Executive Vice President David Alvarez. “Is any bit of food too small to grab when you’re starving and when there is nothing else in sight? The trick is charging a lot, repeatedly, for small doses of incremental credit.”
Here’s another quote, via an outstanding 2002 piece in the San Francisco Chronicle, which back in a better day for newspapers and that newspaper in particular, got the documents put on the record via the courts:
In lending to the kinds of high-risk customers Providian specialized in, Kahr wrote, the “problem is to squeeze out enough revenue and get customers to sit still for the squeeze.”
And here he is plotting with Providian execs on how to mislead customers about payment-protection plans:
“The (credit protection) fee can be denominated at 9.8 cents per hundred dollars of line, or whatever, and this has the additional merit of making the $96 go away from the disclosure box.”
Unfortunately, Kahr’s American Banker column on stunting the CFPB wasn’t the only one he’s penned for the trade paper’s BankThink site. He’s a weekly columnist there, where he pitches ideas like getting rid of flat pricing because it’s harder to charge customers more for “innovations” like using bill-pay services to pay their car payment late:
To start with, many customers would like all or most of their bill payments — other than those incurring late fees — to be received nearly (but not quite) a month late, so that no delinquency would show at the credit bureaus. There’s an opportunity to build a business on deferring payments.
What’s Kahr and Credit Builders up to today?
Never fear, Angelo Mozilo. Maybe Inside Mortgage Finance or some such has a weekly column with your name on it.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.