Minnesota's attorney general yesterday sued two subsidiaries of Capital One Financial Corp., contending that their "No Hassle" credit card ads were false, deceptive and misleading because they erroneously gave consumers the perception that their "fixed" interest rates would never increase.
The ads suggest that Capital One's cards, unlike its competitors', would bear interest rates that remain at 4.99 percent, the lawsuit said. However, it alleged, for many consumers, the interest rates went up -- in some cases they could have increased to 25.9 percent -- if they were just a day late in paying their bills or if they exceeded credit limits.
"In truth there is no 'fixed' rate on Capital One credit cards," claimed the lawsuit filed in Minnesota state court.
In a telephone interview yesterday, Attorney General Mike Hatch estimated, based on company data he has seen, that about 40 percent of Capital One's customers who sign up for the fixed-rate card "hit a tripwire that will trigger a higher rate."
Capital One spokeswoman Tatania Stead said, "We believe we've acted properly and are in full compliance with the law."
The Minnesota lawsuit was filed against Capital One Bank and Capital One FSB, which handle the company's credit card operations. Capital One is the nation's third-largest credit card issuer.
Hatch said his lawsuit affects only Minnesota consumers but that other states may join his action.
He is asking the court to stop Capital One from advertising that its rates are "fixed." The lawsuit also seeks restitution for Minnesota consumers and the return of all profits earned from the ads. Hatch said he did not know how much that would be.
Although this was the first enforcement action against the recent spate of aggressive credit card advertisements by many issuers, such marketing has drawn the attention of federal bank regulators this year.
In September, the Office of the Comptroller of the Currency issued an advisory letter elaborating its concerns, without naming any particular company. The comptroller said banks should not advertise credit limits "up to" a maximum dollar amount when that limit is seldom granted. Nor should banks tout promotional low interest rates without fully disclosing any restrictions, the advisory said. Banks need to "disclose fully and prominently in marketing materials and credit agreements" that they reserve the right to change interest rates, fees or other credit terms unilaterally, it added.
"We've deregulated the banking industry in this country and said competition is the most efficient regulator of rates," Hatch said yesterday. "The problem is lenders are building market share not on product offering, but on the basis of misleading ads they run and that forces other banks to engage in such practices. That's not good."
The "No-Hassle" ads cited in the lawsuit show two people competing to pay for lunch. One has a Capital One card with a "low and fixed" rate; the other, a competitor's card. When the man with the competitor's card asks what's going to happen to his rate, he is suddenly shot upwards, either by a catapult operated by barbarians or by a breaching whale.
The lawsuit said there are "momentary disclaimers" at the end of each TV ad, such as "Terms subject to change without notice" or "This offer assumes the account will be kept in good standing." But, the lawsuit contends, they are unreadable: "They appear for four to six seconds at the bottom of the television screen in a paragraph of blurry fine print, but their substance does not meaningfully alert consumers to the use of penalty-rate or change-in-terms repricing."
Capital One mail solicitations are also deceptive, the lawsuit claimed, noting that the back of the envelope states: "Interest rates are likely to go up SOON! The rate on this card won't."
According to the lawsuit, Minnesota resident Nicole Bourgeois signed up by phone for a Capital One card in July 2003 after seeing the TV ad and receiving a letter. She specifically asked whether her 4.9 percent rate would stay the same for the life of the card and was assured that it would. Six months later, her rate had jumped to 14 percent. When she called to ask why, she was told she had made one late payment. "Capital One refused to rescind the rate increase, even though Bourgeois had always paid on time," the lawsuit said.
