April 17, 2024

DealBook: In Its First Penalty, Consumer Agency Fines Bank

Capital One — which is known for its catchy television ads with Alec Baldwin — received a regulatory rebuke for misleading customers.Capital One — which is known for its catchy television ads with Alec Baldwin — received a regulatory rebuke for misleading customers.

The nation’s consumer watchdog on Wednesday delivered its first enforcement action against the financial industry, fining Capital One for pressuring and misleading more than two million credit card customers.

Capital One, one of the nation’s biggest banks and credit card lenders, agreed to pay $210 million to resolve a pair of regulatory cases, the latest legal setback for the financial industry.

The Consumer Financial Protection Bureau, Wall Street’s newest regulator, accused Capital One of “deceptive marketing tactics.” The credit card company — which is known for its catchy television ads, asking “what’s in your wallet” — received a regulatory rebuke for misleading card customers into buying unnecessary products like payment protection and credit monitoring, according to the consumer agency.

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As part of the deal with the consumer bureau, Capital One must reimburse about $140 million to customers. In a separate legal action, the Office of the Comptroller of the Currency, which regulates national banks, also sanctioned Capital One for bogus billing practices that spanned nearly a decade.

“We are putting companies on notice that these deceptive practices are against the law and will not be tolerated,” said Richard Cordray, the director of the consumer bureau. Before Mr. Cordray became director of the bureau, he ran its enforcement division.

In a statement on Wednesday, Capital One said the wrongdoing occurred at outside call centers that “did not always adhere to company sales scripts.” But the bank’s president of credit cards, Ryan M. Schneider, also acknowledged that the company was “accountable for the actions that vendors take on our behalf.”

“We apologize to those customers who were impacted and we are committed to making it right,” Mr. Schneider said.

The case against Capital One could be the first of many actions against lenders that are aggressively ramping up payment-protection insurance programs, consumer advocates say. The insurance, which promises card holders that the lender will suspend any late charges and minimum payments, has become particularly attractive in the depths of the recession. While costs vary by card issuer, credit card companies typically charge up to 80 cents for every $100 of debt that is insured, lawyers for consumers said.

Banks are pushing into these products, according to industry analysts, in part to recoup billions in lost income resulting from new federal curbs on debit and credit-card fees.

The regulatory scrutiny comes on the heels of several Wall Street blowups and federal investigations that have stoked the anger of consumers and investors. Last month, Barclays agreed to pay authorities $450 million to settle accusations that it had manipulated a benchmark interest rate, the first case to stem from a wide-ranging investigation into wrongdoing across the financial sector. JPMorgan Chase is dealing with the fallout from a multibillion-dollar trading debacle.

The Capital One action was the consumer bureau’s first attempt to exercise its enforcement muscle. Its case also comes on the second anniversary of the bureau’s creation, demonstrating the rapid growth of the nascent agency.

A centerpiece of the Dodd-Frank regulatory overhaul law passed in the wake of the financial crisis, the bureau is charged with protecting consumers from financial malfeasance. The agency can write rules for an array of financial products, including credit cards and mortgages, as well as file enforcement actions against banks and the previously unregulated corners of the financial world like payday lenders.

In the Capital One case, regulators say the bank allowed its call centers to deceptively sell certain credit card products to customers. The products included a plan to allow customers to seek protection from bills if they lost their job – and debt forgiveness in the case of death or permanent disability. The bank also offered credit monitoring, a feature that came with identity-theft protection and “credit education” for customers with a spotty borrowing history.

In a 30-page order, the consumer bureau outlined how the bank’s call centers marketed and sold the products to ineligible unemployed consumers, who despite paying for the services, never received the full benefits. At some call centers, a vendor working for the bank imposed the products without the consumer’s consent. In other cases, according to the bureau, the bank employed “high pressure tactics,” including misleading customers into thinking the product was free, mandatory and would bolster credit scores.

Under the deal with regulators, Capital One must halt the deceptive practices and submit to an independent audit. The deal also requires the bank to fully repay its customers who fell victim to the scheme.

In a related action on Wednesday, the Office of the Comptroller of the Currency required the bank to reimburse customers “harmed by unfair billing practices” that unfolded over a 10-year span, from 2002 to June of last year. The O.C.C. imposed a $35 million fine against Capital One.

“Unfair and deceptive practices will not be tolerated,” Thomas J. Curry, the comptroller, said on Wednesday.

Between the restitution to customers and the fines to regulators, the bank will pay $210 million to settle the actions.

Capital One has run afoul of regulators before. The bank, based in McLean, Va., was cited by the O.C.C. in 2010 for imposing “unfair” fees after customers sought to close their accounts.

The bank is also a longtime foe of consumer advocacy groups like the National Community Reinvestment Coalition. The consumer groups have assailed the bank for its subprime and risky lending, while painting its credit card business as overly aggressive. About a third of Capital One’s credit card portfolio carries the subprime label, defined as loans to borrowers with credit scores below 660, the company said last year.

The consumer bureau’s case against Capital One, which centers on credit card practices, comes as the bank has been ramping up its card business. The bank closed a deal this year to buy HSBC’s American credit card business.

The National Community Reinvestment Coalition led the charge last year against Capital One’s bid to take over ING’s online banking unit in the United States, saying the deal would create the next too-big-too-fail banking behemoth. The deal, the latest in a string of acquisitions, transformed Capital One into the fifth-largest bank by deposits.

While the Federal Reserve approved the deal, the consent came with some crucial conditions. The Fed, citing consumer complaints and legal actions against the bank, ordered Capital One to bolster its internal controls of lending and debt-collection practices.

Top state law enforcement officials are also turning their attention to Capital One and other banks that pitch payment protection insurance.

Earlier this year, David M. Louie, Hawaii’s attorney general, sued seven major banks, including Capital One, for purportedly targeting elderly cardholders with payment protection plans. The plans are “virtually worthless,” Mr. Louie said.

Credit card companies take advantage of consumers by signing them up for the protection without their permission, according to Mr. Louie. The aggressive practice is particularly egregious, the attorney general’s office said, because the banks are pitching the products to their existing customers and have their sensitive card information.

“This practice is hardly limited to Capital One,” said Richard Golomb, a lawyer in Philadelphia who has brought class action lawsuits against lenders, including Bank of America, Citigroup, Discover Financial and JPMorgan Chase for credit protection insurance.

Article source: http://dealbook.nytimes.com/2012/07/18/consumer-watchdog-fines-capital-one-for-deceptive-credit-card-practices/?partner=rss&emc=rss

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