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AmEx in hot water with CFPB

By Janna Herron ·
Monday, October 1, 2012
Posted: 4 pm ET

The federal consumer watchdog on Monday ordered the usually consumer-friendly American Express to pay $112.5 million in refunds and penalties for a slew of illegal credit card practices.

The enforcement comes after the Consumer Financial Protection Bureau handed down other restitution orders and penalties to Discover just last week. It also hit Capital One in July.

The question that lingers: Is that enough to force the industry to shape up?

First, the details. American Express will pay back $85 million to 250,000 consumers after federal investigators cited the company for several violations between 2003 and 2012. The government says AmEx withheld a $300 sign-on reward from some eligible cardholders. The company also charged late fees that violate the Credit Card Accountability, Responsibility, and Disclosure Act, discriminated against applicants because of age and failed to report consumer disputes to the credit bureaus. The company also lied to consumers about the benefits of paying off old debt.

Consumers were told if they settled old credit card debt, it would be reported as paid to the credit reporting agencies. It wasn't. Now, the CFPB says, those cardholders will get their money back plus interest.

Blue Sky customers who were promised $300 for signing up will get $300. Consumers who paid an illegal late fee will be reimbursed with interest. Last, American Express will give $100 and a pre-approved credit card offer to consumers who thought their outstanding AmEx debt was forgiven.

The CFPB worked in conjunction with the Federal Deposit Insurance Corp., the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency.

"Before the CFPB, it wasn't the norm for consumers to see refunds from credit card violations," says Ruth Susswein, deputy director of national priorities at consumer advocate Consumer Action. "And recently, we’ve seen three against major credit card companies, even those with great reputations."

American Express has topped J.D. Power and Associates' credit card customer satisfaction survey for six straight years, including 2012. And Discover, which must refund $200 million to credit card holders and pay a $14 million penalty for deceptively selling add-on products, ranked second this year.

Both companies said they are working hard to fix the problems by conducting internal reviews. And American Express is still cooperating with regulators who are investigating sales of add-on services throughout the industry, such as payment protection and credit monitoring. Could that mean more actions against American Express soon?

The company declined to comment further.

That brings us to whether these actions will persuade credit card issuers to behave all the time, instead of just some of the time. Let's break it down by dollar signs. American Express pocketed $4.94 billion last year and is on track to at least match that figure this year. The refunds represent less than 2 percent of that, and the penalty is only a half-percent of the company's earnings.

That's like a $250 penalty and an $850 refund for a person making $50,000 a year. That's not small potatoes, but over a year's time, it's not too hard to swallow.

And after Discover disclosed its CFPB spanking, its stock actually ended slightly higher that day. An analyst who covers the company reiterated that investors should buy the stock and predicted that shares would rise to $45 apiece, up from his previous estimate of $40 per share.

That's wonky stuff, I know, but it shows that Wall Street considers these fines negligible. Still, Susswein says, what's important is that the focus is on cardholders getting their money back.

"Finally, there's someone who is looking out for the average cardholder," she says. "If the penalty and restitution numbers were reversed, then there would be a lot of questions over why that money isn't going to consumers."

What do you think? Is this enough to convince issuers to play by the book?

Follow me on Twitter: @JannaHerron

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October 02, 2012 at 10:07 am

If you're going to play with snakes, you better know what you are doing.