The government’s new consumer watchdog took its first enforcement action Wednesday by fining McLean-based Capital One Bank for deceiving millions of customers into buying costly and unneeded services when they signed up for credit cards.
The nation’s fifth-largest bank will pay $210 million, mostly to reimburse consumers who were duped into paying for credit monitoring and other add-ons. Targeting the unemployed or people with poor credit, call-center agents falsely claimed that such services were mandatory or free. Some customers were wrongly told that enrolling would improve their credit scores or provide debt forgiveness if they got sick.
The case marks the Consumer Financial Protection Bureau’s first extensive investigation into the operations of a financial powerhouse, an effort that comes on the anniversary of the bureau’s opening. Despite Republican efforts to dismantle the agency, the CFPB is flexing its regulatory muscle at a time when bank misconduct is coming under fire around the world.
“We are putting companies on notice that these deceptive practices are against the law and will not be tolerated,” CFPB Director Richard Cordray said in a statement. “Capital One customers were pressured or misled into buying credit card products they didn’t understand, didn’t want, or in some cases, couldn’t even use.”
Officials at the consumer bureau say a third-party vendor, hired by Capital One, used high-pressure tactics to deceive customers. Some cardholders were even enrolled without their consent, CFPB officials said. They were then automatically billed for the product, which they had trouble canceling.
Known for its “What’s in your wallet” television campaign, Capital One settled the charges without admitting or denying wrongdoing, though the bank took responsibility.
“We are accountable for the actions that vendors take on our behalf,” Ryan Schneider, president of Capital One’s card business, said in a 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.”
The bank will pay the consumer agency a $25 million fine and $35 million to its regulator, the Office of the Comptroller of the Currency (OCC). Capital One will also refund $150 million to 2.5 million consumers who purchased credit-monitoring and payment-protection services between August 2010 and January.
Customers will begin receiving refunds later this year. Those with active Capital One accounts will be automatically credited, while customers who have since closed their accounts will receive a check.
The average payout is expected to be less than $100 per cardholder.
Capital One said it was alerted to problems late last year, at which time it stopped phone sales of the products and began identifying affected customers. The bank said it is putting stronger internal controls in place, including recording more of its calls.
“It’s unclear what the ongoing implications are for this segment of Capital One’s business, but it’s probably unfavorable relative to the returns they were generating before,” said analyst Sanjay Sakhrani of Keefe, Bruyette & Woods.
This is not Capital One’s first run-in with regulators. In 2010, the bank entered into an agreement with the OCC to reimburse $775,000 to consumers who were unduly charged fees when they sought to close their credit card accounts.
“Capital One has a history of deceptive and abusive credit card practices,” said John Taylor, president and chief executive of the National Community Reinvestment Coalition, a consumer group. “We raised these issues with the Federal Reserve . . . but regulators allowed the credit card company to grow larger.”
Taylor’s group led the charge last year to oppose Capital One’s $9 billion purchase of ING Direct, accusing the McLean bank of steering low-to-moderate-income borrowers into subprime credit cards. The group argued that the deal should not be approved without Capital One doing more to address the needs of underserved communities.
Regulators approved the deal with conditions that Capital One enhance its risk management and compliance controls. It also ordered the bank to tweak internal controls for debt collection and lending in response to consumer complaints.
According to the CFPB’s consumer complaint database, there have been 393 credit card complaints against Capital One since June 1. That number accounts for about 22 percent of the total.
The CFPB, along with the Federal Deposit Insurance Corp., is conducting a similar probe of Discover Financial Services. The credit card company said in a regulatory filing that losses tied to the investigation could exceed $100 million.
“Congress created the CFPB to go after this exact type of behavior,” said Jaret Seiberg, senior policy analyst at Guggenheim Partners. “They’ve been focusing on enforcement since Day One, and the fruits of that labor will start to surface in the next couple of months.”
In the case against Capital One, Seiberg said, “there is a real danger of extrapolating too much out of the investigation.” He added, “It would be impossible to find a large business that doesn’t run into problems” with outside vendors.
“This was clearly a case where telemarketers went far beyond what’s permitted, but that doesn’t mean you can condemn the entire business,” he said.
Capital One’s stock tumbled 1.7 percent to close at $54.89 a share. The bank also announced second-quarter earnings Wednesday of $92 million, down 90 percent from the same period a year ago.
Capital One’s settlement arrives on the heels of a series of probes into banking misconduct. This week, Senate lawmakers released a report admonishing HSBC for failing to monitor money laundering by Mexican drug cartels.
Barclays, in late June, agreed to pay $450 million to U.S. and British regulators to settle allegations that it schemed to rig the London interbank offered rate, or Libor, a critical lending rate used around the world. The case is part of a far-reaching investigation into the actions of some of the world’s largest banks.