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CFPB takes hammer to Cap One

By Janna Herron · Bankrate.com
Wednesday, July 18, 2012
Posted: 4 pm ET

The federal consumer watchdog agency has found its bite.

Three days shy of its first birthday, the Consumer Financial Protection Bureau on Wednesday handed out its first enforcement action to Capital One. And the sequel isn't far off: The agency hinted that more actions will follow.

The CFPB ordered the credit card issuer to refund $140 million to 2 million credit card customers after the agency found the company had deceptively sold add-on products to them. Capital One also must pay a $25 million penalty.

In a coordinated, but separate action, the Office of the Comptroller of the Currency levied a $35 million penalty against Capital One and ordered the issuer to set aside $150 million in restitution, which includes the $140 million to cardholders along with other bank consumers who enrolled in credit-monitoring services.

Capital One also won't be able to sell add-on products until it submits a compliance plan to the CFPB and OCC and it is approved.

The CFPB put a notice out for all issuers as well on Wednesday.

"We want to discourage deceptive practices," said Kent Marcus, assistant director for enforcement at the CFPB, in a conference call Wednesday. "We want to make it more costly to violate the law than to comply with it."

Expect more actions against banks and issuers soon, warned Richard Cordray, director of the CFPB.

"What we know is that a GAO report came out recently and said that add-on products were a potential problem across the credit card industry," he told reporters on the call. "This is not unique to a single institution, and we expect more activity going forward."

The CFPB said it found that Capital One's vendors targeted consumers with low credit scores or low credit limits and misled them into buying extra services such as payment protection or credit monitoring when they opened a credit card.

The disingenuous practices included:

  • Telling consumers the services offered bogus benefits, such as boosting a credit score or limit.
  • Omitting the fact that the products were optional or outright lying to customers by saying the products were a required purchase.
  • Knowingly selling these services to customers who were ineligible for the benefits.
  • Leading customers to believe the add-on products were free when they were not.
  • And enrolling customers in services without their consent.

Capital One distanced itself somewhat from the practices by saying its vendors deviated from its company sales scripts and policies, and the issuer's failure was not monitoring their practices close enough.

"We are accountable for the actions that vendors take on our behalf," said Ryan Schneider, president of Capital One's card business, in a press release. "These marketing calls were inconsistent with the explicit instructions we provided to agents for how these products should be sold. We apologize to those customers who were impacted, and we are committed to making it right."

Capital One will begin sending out refunds later this year. Consumers will receive refunds based on the cost of the add-on product, any fees incurred due to buying the product, and interest, according to Marcus. The CFPB said in a conference call Wednesday that current Cap One customers will see a statement credit, while noncustomers will get a check in the mail.

The CFPB also issued two consumer advisories, one to Capital One customers about Wednesday's actions and a general one to all consumers about identifying deceptive selling tactics.

"Consumers deserve to be treated fairly by credit card issuers, and that's our objective," Cordray said.

Who do you think is next on the CFPB's list? Do you think the agency went far enough or too far?

Follow me on Twitter: @JannaHerron

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