TheÂ Consumer Financial Protection Bureau (CFPB)Â announced its first public enforcement action today -- and it is a big one. Â The new agency has ordered Â Capital One Bank to refund approximately $140 million to two million customers and pay an additional $25 million penalty. And another agency hit the bank with an additional $35 million penalty.
The action results from a CFPB examination that identified deceptive marketing tactics used by Capital One's vendors to pressure or mislead consumers into paying for "add-on products" such as payment protection and credit monitoring when they activated their credit cards.
"Today's action puts $140 million back in the pockets of two million Capital One customers who were pressured or misled into buying credit card products they didn't understand, didn't want, or in some cases, couldn't even use," said CFPB Director Richard Cordray. "We are putting companies on notice that these deceptive practices are against the law and will not be tolerated."
Meanwhile, theÂ Office of the Comptroller of the Currency announced a $35Â million penalty against Capital One for violations of section 5 of the Federal Trade Commission (FTC) Act,
CFPB said that through its 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.Â Â
These products included "payment protection," which allows consumers to request that the bank cancel up to 12 months of minimum paymentsÂ -Â roughly one percent of their credit card balanceÂ -Â if they encounter certain life events like unemployment and temporary disability.Â It also provides debt forgiveness in the event of death or permanent disability.Â
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.Â As part of the high-pressure tactics Capital One representatives used to sell these add-on products, consumers were:
Misled about the benefits of the products: Consumers were sometimes led to believe that the product would improve their credit scores and help them increase the credit limit on their Capital One credit card.
Â Deceived about the nature of the products:Â Consumers were not always told that buying the products was optional.Â In other cases, consumers were wrongly told they were required to purchase the product in order to receive full information about it, but that they could cancel the product if they were not satisfied. Many of these consumers later had difficulty canceling when they called to do so.Â
Misled about eligibility:Â Although most of the payment protection benefits kicked in when consumers became disabled or lost a job, some call center representatives marketed and sold the product to ineligible unemployed and disabled consumers.Â Despite paying the full fees, they could not get all the benefits of payment protection; some later filed claims that were denied because their "loss" (e.g. loss of job or onset of disability) occurred prior to enrollment
Misinformed about cost of the products:Â Consumers were sometimes led to believe that they would be enrolling in a free product rather than making a purchase.Â
Enrolled without their consent:Â Some call center vendors processed the add-on product purchases without the consumer's consent.Â Consumers were then automatically billed for the product and often had trouble cancelling the product when they called to do so.Â
One of those who signed up for the payment protection plan on both his business and personal credit cards was Douglas of Austin, Texas, but in a complaint to ConsumerAffairs last month said the product turned out to be "a joke."
When he became ill and unemployed, Douglas said he called to activate the 12 months of payments and was told, "Don't worry. We will takae care of you." Instead, Douglas said, Capital One closed his business account and showed it as a bad-debt charge-off. Bank employees apologized but said there was nothing they could do, he said.
"Capital One acknowledged their error verbally; yet, they pin it on me by ruining my credit," Douglas concluded.Â
Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB has the authority to issue Consent Orders and take action against institutions engaging in unfair, deceptive, or abusive practices. To ensure that all affected consumers are repaid and that consumers are no longer subject to these misleading and high-pressure tactics, Capital One has agreed to:
End deceptive marketing:Â Capital One has ceased all marketing of these products, and will not resume doing so until Capital One submits a compliance plan, acceptable to the Bureau, which helps ensure these unlawful acts do not occur in the future.Â Â
Complete repayment, plus interest, to two million consumers:Â Capital One will pay approximately $140 million to all of the estimated two million consumers who either initially enrolled in a product on or after August 1, 2010, or who tried to cancel a product on or after August 1, 2010, but were persuaded to keep the product after speaking with a call-center representative.Â In addition to the amount paid for the product, cardmembers will receive a refund of the associated finance charges, any over-the-limit fees resulting from the charge for the product, and interest.Â
Pay claims denied based on ineligibility at enrollment:Â For any of these eligible consumers whose payment protection claims were previously denied because their loss occurred prior to enrollment (because of unemployment, disability, etc.), Capital One will pay their claims as if they had been eligible, if that amount is greater than the refund for that consumer.Â
Convenient repayment for consumers:Â If the consumers are still Capital One customers, they will receive a credit to their accounts.Â If they are no longer a Capital One credit card holder, they will receive a check in the mail.Â Consumers are not required to take any action to receive their credit or check.
Â Independent audit:Â Compliance with the terms of this agreement will be assured through the work of an independent auditor, who will determine if Capital One has complied with the CFPB's Consent Order.
$25 million penalty:Â Capital One will make a $25 million penalty payment to the CFPB'sÂ Civil Penalty Fund.
Other banks warnedÂ
Complaints received by the CFPB indicate - and the Bureau's supervisory experience confirms - that other consumers have been misled by the marketing and sales practices associated with credit card add-on products.Â
To further protect consumers, the Bureau is issuingÂ a compliance bulletinÂ that puts other institutions on notice that the CFPB will not tolerate deceptive marketing practices, and institutions will be held responsible for the actions of their third-party vendors.Â Companies engaging in deceptive practices will be expected to refund fees paid by consumers and, particularly where practices are widespread, pay an appropriate penalty.