Capital One to Pay $210 Million in First CFPB Enforcement

Capital One Financial Corp. (COF) will pay a total of $210 million to settle charges of deceptive marketing of credit card “add-on” products such as payment protection and credit monitoring.

It was the first public enforcement case brought by the Consumer Financial Protection Bureau, established by the Dodd- Frank Act to increase oversight of consumer financial products. The bureau and the Office of the Comptroller of the Currency, the bank’s primary regulator, said Capitol One agreed to provide between $140 million and $150 million in restitution to 2 million customers and pay an additional $60 million in penalties -- $25 million to the CFPB and $35 million to the OCC.

The McLean, Virginia-based company didn’t admit or deny wrongdoing. Its shares fell 1.4 percent to $55.01 in New York at 3:00 p.m., cutting their gain for the year to 30.1 percent.

“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, referring to the refund amount in the consumer bureau’s settlement. “We are putting companies on notice that these deceptive practices are against the law and will not be tolerated.”

In a conference call with reporters, Cordray said that other card issuers who market similar products face CFPB enforcement actions as well.

‘Deceptive’ Tactics

“We know these deceptive marketing tactics for credit card add-on products are not unique to a single institution,” Cordray said. “We expect announcements about other institutions as our ongoing work continues to unfold.”

Cordray said the first public enforcement action by the agency would not focus on smaller issues that are in a legal “gray area.” The agency is looking out for “violation of law and substantial consumer harm,” he said.

The bureau began operations on July 21, 2011.

He also said the CFPB would seek restitution in future enforcement actions. “We will insist on refunds for injured consumers,” Cordray said. “That’s a priority.”

As part of the settlement, Capital One agreed not to market the add-on products until the CFPB approves its plan for complying with the settlement, the bureau’s assistant director for enforcement, Kent Markus, told reporters. This is one reason why the bureau wasn’t concerned that Capital One didn’t admit wrongdoing, Cordray said.

Third-Party Vendors

“Capital One is agreeing to a compliance regime that is quite careful about ensuring that this does not happen again,” Cordray said.

The CFPB said its examiners discovered that Capital One’s third-party vendors engaged in deceptive tactics to sell ancillary products to the company’s credit cards. The products included “payment protection” that allows customers to cancel as many as 12 months of minimum payments if they face unemployment or temporary disability.

The vendors also sold credit-monitoring services, which promised identity-theft protection and access to “credit education specialists,” the CFPB said.

Cordray said that customers were wrongly led to believe they needed to buy the services to activate their cards or that debt protection or credit monitoring was free, while others were left with the impression that the purchase would improve their credit scores. Some customers were simply not eligible, but got billed anyway.

‘We Apologize’

Capital One said in a statement that it became aware of its vendors’ practices in late 2011.

“We are accountable for the actions that vendors take on our behalf,” Ryan Schneider, president of Capital One’s card business, said in the statement. “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.”

More cases against credit-card companies may be in the works. The CFPB and Federal Deposit Insurance Corp. have subpoenaed Discover Financial Services (DFS) amid a probe into that lender’s marketing of fee-based products, including debt- protection, the company said in a June filing.

Inadequate Monitoring

“Capital One’s third-party vendors did not always adhere to company sales scripts and sales policies for payment protection and credit-monitoring products, and the bank did not adequately monitor their activities,” the bank said in today’s statement. Capital One had set aside $75 million to refund customers, Chief Executive Officer Richard Fairbank said in April.

“It’s very important that we make sure that all of our customers have bought the products in the context that we exactly intended,” Fairbank said at the time.

Markus said the agreement’s requirement that Capital One submit future scripts to CFPB for approval before use suggests “there is sufficient concern that the scripts themselves do not permit this kind of activity in the future.”

Debt-protection products, also known as credit insurance, are lucrative mainly because of limited competition. Customers can’t get a card from one company and credit insurance from another, according to consumer advocates including Birny Birnbaum, executive director of the Austin, Texas-based Center for Economic Justice and a former state insurance official.

Fees Pocketed

Card-issuing banks kept about 55 percent of the fees in pretax earnings, according to a March 2011 Government Accountability Office report. Issuers reaped $2.4 billion in fees from the products in 2009, according to the GAO, Congress’s investigative arm.

In January, Capital One agreed to provide $13.5 million to West Virginia and consumers there to settle claims tied to the sale of payment-protection and other products between 2001 and 2005, state Attorney General Darrell McGraw said in a Jan. 17 statement. The company denied liability, according to the statement.

Discover said that same month that the CFPB and FDIC had told the company they plan to take a joint enforcement action over the marketing of fee-based products, including payment protection. The Riverwoods, Illinois-based firm said the exposure could exceed $100 million.

The CFPB said it will consider whether new rules are needed for debt-protection products, which have been among the CFPB’s priorities since before the agency officially started work a year ago. Bureau examiners are responsible for assuring compliance with federal consumer laws at banks with assets of more than $10 billion.

Catherine West, the CFPB’s former chief operating officer, and Raj Date, the agency’s deputy director and former head of its research, markets and regulation division, both worked at Capital One.

To contact the reporters on this story: Carter Dougherty in Washington at cdougherty6@bloomberg.net; Dakin Campbell in San Francisco at dcampbell27@bloomberg.net

To contact the editors responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net; David Scheer at dscheer@bloomberg.net

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