BofA Ceases Credit Protection Biz

Bank of America Corporation (BAC - Analyst Report) has announced the decision to discontinue its disputed credit protection services. These services were the subject matter of a class-action lawsuit where the plaintiffs accused the bank of overcharging through unfair means.

The credit protection services offered cardholders the benefit of deferring the minimum monthly payments in case of contingencies – such as unemployment, health issues and other similar reasons – which stopped them from making the minimum monthly payment. A third-party vendor executed these services.

The program could cancel up to two times a customer's minimum monthly payment for 18 months for unemployment or hospitalization. For other occurrences – such as marriages or divorces – it could cancel a customer's minimum monthly payment for three.

The reason to revoke these services largely reflects BofA’s ongoing efforts to focus on fundamental activities and improve profitability. Moreover, these services were highly criticized by consumer lawyers. These were deemed to be of very little help to consumers. Further, the sales agents appointed by the banks misrepresented the pertaining details and enrollment was sometimes without an approval.

The banks will no longer offer services to new consumers and the existing consumers will be served free for another six months before cancellation.

Similar Actions by Other Banks

Last month, Capital One Financial Corp. (COF - Analyst Report) shelled out $210 million as compensation to regulators who alleged that the company had adopted deceptive means relating to the sale of certain payment protection and credit monitoring products.

Earlier in 2011, JPMorgan Chase & Co. (JPM - Analyst Report) withdrew its credit protection services for new customers. However, the existing customers will continue to enjoy the benefits of these services. Citigroup, Inc. (C - Analyst Report) has, for the time being, stalled all its credit services to complete the ongoing review of its overall sales activities.

Conclusion

The discontinuation of these services will affect BofA’s financials to some extent. However, over the long term, the bank stands to gain from the closure of such non-core activities. This will help BofA to concentrate better on fundamental activities, thereby improving its top line as well as bottom line.

Currently, BofA retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term ‘Neutral’ recommendation on the stock.