In a proof of concept one year after the standing up of the agency, the Consumer Financial Protection Bureau announced an enforcement action that will give consumers a full refund on illegal credit card fees extracted by Capital One.
The enforcement action, the first from the CFPB, accomplishes the rare feat of clawing back exactly the amount gained on the illegal action, plus interest, for all 2 million consumers affected. This sounds intuitive, but happens rarely in Washington. In fact, in this case, Capital One will pay a $25 million penalty on top of what they gained in fees. Here’s an excerpt of the press release from CFPB:
Through the supervision process, CFPB’s examiners discovered Capital One’s call-center vendors engaged in deceptive tactics to sell the company’s credit card add-on products. These products included “payment protection,” which allows consumers to request that the bank cancel up to 12 months of minimum payments – roughly one percent of their credit card balance – if they encounter certain life events like unemployment and temporary disability. It also provides debt forgiveness in the event of death or permanent disability. Another product was “credit monitoring,” with services such as identity-theft protection, access to “credit education specialists,” and, in some cases, daily monitoring and notification.
Consumers with low credit scores or low credit limits were offered these products by Capital One’s call-center vendors when they called to have their new credit cards activated.
I’m sure everyone reading this shook their heads when they read the last paragraph. Every time I’ve activated a new credit card, which happens routinely as new ones are issued when I reach the expiration date, I’ve been offered products. I decline them, but credit card companies use an array of pressure tactics to get customers to sign up. CFPB found that Capital One told customers the products would improve their credit scores and increase their credit limit, an outright lie. They hid the fact that the add-on products were optional or that they had to buy them to hear about the full benefits. They made it difficult to cancel the product after the fact. They sold the product to customers who were not supposed to be eligible, such as the unemployed. They hid the full cost, often telling customers the product was free. And sometimes, Capital One just placed customers into the product without their consent.
This is a classic financial scam, and it basically has been the way credit cards made their exorbitant profits for quite a while. CFPB took action, and they notably got the OCC involved in the action as well. OCC will extract an additional $35 million from Capital One for civil penalties on separate violations of unfair billing practices. So Capital One will bear
$200 $210 million in overall costs (UPDATE: The full number is $210 million, with some additional OCC fines). This is obviously not going to break the company, but considering that it’s $60 $70 million over what they made on the scheme, it’s not a bad haul. Capital One also agreed to end their deceptive marketing schemes and agree to an independent audit to ensure compliance.
Perhaps the best part of this is that CFPB structured it in a way so that customers don’t have to fill out a form or do anything to get restitution. They’ll simply get a refund on their card, or if they no longer hold a Capital One credit card, they’ll get a check in the mail. This is good governance in action, where the victims don’t have the burden of jumping through hoops to get what’s owed to them. Cardmembers will get “a refund of the associated finance charges, any over-the-limit fees resulting from the charge for the product, and interest,” according to the press release.
CFPB also is sending out a consumer advisory to all credit card holders, warning them of mystery credit card fees arising from these add-on products.
Short of referring this to the Justice Department, this is about the best you can hope for on an enforcement action against a financial company.
Ryan Grim has more on this, including the implications for the Senate race between Scott Brown and the originator of the CFPB, Elizabeth Warren. If all their enforcement actions look as clean and smooth as this, we’d be on to something.
UPDATE: The National Community Reinvestment Coalition argues in a statement that this kind of abuse was exactly why they opposed Capital One’s acquisition of IMG Direct last year. Federal regulators allowed that deal to take place. NCRC’s John Taylor writes that we shouldn’t just be concerned about credit cards:
Today’s enforcement action against Capital One for deceptive credit card practices confirms andvindicates the serious concerns the National Community Reinvestment Coalition raised about Capital One during their acquisition of ING Direct. Though themerger was approved, it is clear that the scrutiny brought to bear from NCRC’s objections has born results for consumers. This penalty calls into question why the Federal Reserve allowed a bank, known for its deceptive practices, to get even bigger [...]
When a consumer deals with a financial institution, they should be guaranteed fair treatment. This is our goal. NCRC has also filed complaints against Capital One in several other areas, including for mortgage servicing practices and discriminatory lending. These complaints remain active.