The Consumer Financial Protection Bureau on Wednesday ordered Capital One Bank to refund about $140 million to 2 million customers, marking the new watchdog agency’s first major enforcement action since it began operating last year.
Capital One call center vendors used deceptive marketing to sell consumers “add-on” products such as credit monitoring and debt protection, bureau director Richard Cordray said.
From 2010 to 2012, consumers who had low credit scores or limits were wrongly told that the products would improve their credit, were free or were mandatory, Cordray said. Some consumers who were ineligible due to disabilities or unemployment were enrolled anyway and then told that they couldn’t receive the advertised benefits.
The bank also will pay $25 million in civil penalties to the bureau, an additional $35 million in penalties to the Office of the Comptroller of the Currency – a separate government agency that monitors banks – and $10 million in additional compensation to customers for allowing unfair marketing practices.
Cordray said he hoped the action would send a message to Capital One and other banks.
“We are putting companies on notice that these deceptive practices are against the law and will not be tolerated,” he said.
All customers who purchased any of the add-on products from Capital One on or after Aug. 1, 2010 – as well as those who called to cancel products but were persuaded to keep them – will receive refunds. Payment amounts to each person will vary, said Kent Markus, the bureau’s director of enforcement.
The bank will identify the customers who should be refunded with the oversight of an independent auditor, Markus said. Customers won’t have to take any action to be paid. If they’re still Capital One customers, they’ll receive credits to their accounts. If not, Capital One will mail them checks.
Capital One, based in McLean, Va., didn’t admit or deny guilt as part of the settlement. In a statement Wednesday, Ryan Schneider, the president of Capital One’s credit card business, blamed third-party vendors who he said had deviated from the bank’s marketing instructions.
“We are accountable for the actions that vendors take on our behalf,” he said.
When the bank discovered late last year how its products were being marketed, it canceled phone sales and began trying to refund the customers affected, Schneider said. He apologized to those customers in his statement.
Until Capital One submits an acceptable marketing plan to the consumer bureau, it won’t be allowed to market its add-on products, Markus said. As part of the plan, the bank must submit the telephone scripts that vendors will use.
If Capital One reoffends, the financial penalties will be steeper, Cordray said.
Travis Plunkett, the legislative director of the Consumer Federation of America, called the bureau’s order “an exemplary first action.” The marketing tactics Capital One used were widespread, targeted financially vulnerable consumers and had long been ignored by regulators, he said.
“It is exactly the kind of enforcement action that consumer advocates hoped for,” Plunkett said.
Plunkett said he thought that the $140 million Capital One would pay to customers was a fair amount. But Chi Chi Wu, an attorney at the National Consumer Law Center, said that although she didn’t know how much Capital One had made from the deceptive marketing tactics, debt protection products were extremely profitable for credit card issuers.
Wu cited a study in which the Government Accountability Office found that consumers paid $2.4 billion for debt protection in 2009. Of the amount credit card issuers charge for debt protection, 55 percent is profit, she said.
The bureau plans to issue other actions soon, Cordray said. He encouraged financial institutions to scrutinize whether they’re in compliance with the law.
“The best time for all institutions to be reviewing and ensuring practices in this area is now,” Cordray said.