More than 2 million Capital One credit card customers will get refunds totaling $150 million as part of a settlement reached with federal banking and consumer protection regulators. The bank also must pay $60 million in penalties for deceptive marketing and billing practices, according to the agreement announced Wednesday.
According to federal authorities, Cap One failed to monitor and control third-party vendors that operated call centers pitching credit card add-on products such as payment protection plans and credit monitoring services. The vendors used high-pressure sales and marketing tactics and misleading or deceptive practices to sign customers up. In some cases, customers were duped into signing up for these services and were rebuffed when they tried to cancel.
The average refund will be less than $100, according to the bank.
It was the first enforcement action taken by the federal consumer financial watchdog agency -- which marks its first year of operations on July 21.
"We are putting companies on notice that these deceptive practices are against the law and will not be tolerated," Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB), said in a statement . The settlement was part of a joint effort between the consumer watchdog, which polices the financial services sector for abusive or deceptive practices, and the Office of the Comptroller of the Currency, which oversees large bank operations.
"Our agencies' actions will require the bank to pay up to $210 million in penalties and restitution," said OCC comptroller Thomas Curry. The Cap One payout includes: about $140 million in refunds to customers who purchased payment protection plans after Aug. 1, 2010; about $10 million to customers who signed up for credit monitoring services between March 2006 and June 2011; $35 million in penalties to the OCC; and $25 million in penalties to the CFPB.
Capital One issued a statement on its website saying affected customers should begin receiving refunds later this year.
Update: Charges for the services will continue to appear on monthly statements until the refunds are issued, according to a July 18 document filed by the bank with the U.S. Securities and Exchange Commission (SEC). According to the filing, Cap One has continued to bill and collect revenues for the add-on services and took in $24 million in revenues from them during the second quarter of 2012.
Bank apologizes to customers
"We are accountable for the actions that vendors take on our behalf," said Ryan Schneider, president of the bank's card business. "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."
According to the bank, after learning about the problem in late 2011, Capital One stopped all phone sales of the products, stopped the vendors from selling them, and identified the affected customers. The bank said it also beefed up oversight of vendors and took steps to prevent future violations.
The CFPB's enforcement chief, Kent Markus, said the restitution will also include refunds of any interest or over-limit fees customers may have been charged as a result of the products. Current Capital One customers will receive a credit on their accounts and those who are no longer customers will receive a check.
"Customers do not have to opt in to this," Markus said. "They are in automatically. Cap One has to identify the customers."
He said an independent auditor will review the bank's refund process. Those who do not receive refunds but believe they should, are asked to call the bank first before contacting either the CFPB at www.consumerfinance.gov or the OCC at www.helpwithmybank.gov .
CFPB's examiners discovered that the bank's third-party call center vendors were engaging in deceptive tactics while signing new customers up for additional products -- called add-ons. These include services such as payment protection, which allows cardholders to suspend their minimum monthly payments for up to 12 months should they become unemployed or disabled, or allow the debt to be forgiven in the event of death or permanent disability. Other services included credit monitoring, identity theft protection, access to credit education specialists and daily monitoring and notification.
According to the CFPB, Capital One call center vendors used high-pressure sales tactics to push these products on new credit card customers with low credit scores or low credit limits when they called to activate their cards.
The tactics included:
- Misleading customers about the benefits of the services, such as telling them the products would improve their credit scores or help increase the credit limit on the Cap One cards.
- Misrepresenting the products, including not informing customers the services were optional or telling some they couldn't get full information about the product unless they purchased them. Customers were also told they could cancel the services at any time, but were met with resistance when they called to cancel.
- Misleading customers about their eligibility for protection plans. Some vendors signed and billed ineligible customers, for example, people who were already unemployed or disabled.
- Claiming the products were free when they weren't.
- Enrolling customers in services without their permission.
Cordray said the Capital One action should serve as an alert to consumers who may be considering signing up for these products and a wake-up call to banks that are marketing them. The bureau issued a consumer advisory on how to spot and avoid deceptive credit card products . Other lenders were put on notice that the bureau is monitoring how add-on products are marketed and will take action against abusers.
High-pressure sales of payment or debt protection plans and other fee-based products are common in the credit card industry. A 2011 report from the Government Accountability Office found that customers got only 21 cents in benefits for every dollar spent on debt protection plans with the nine largest card issuers in 2009. Several states, including Hawaii, Minnesota and West Virginia, have filed suit against Capital One, Bank of America , Chase and Citi . Authorities said federal actions and fines against other banks are likely in the near future.
Cordray said the CFPB is investigating other credit card issuers for similar practices but declined to name which lenders are involved.
"We know these deceptive marketing tactics for credit card add-on products are not unique to a single institution," he said. "We expect more announcements as our ongoing work continues to unfold."
Discover's practices scrutinized
Discover may be one of them. In documents with filed the SEC earlier in 2012, the bank revealed that the CFPB and the Federal Deposit Insurance Corp. (FDIC), which regulates Discover, were investigating its practices.
According to the bank: "The FDIC and the CFPB have notified Discover Bank that they plan to take a joint enforcement action against Discover Bank. Before the FDIC's and the CFPB's review began, Discover Bank made changes to both its fee-based products and program, and Discover Bank believes its current business practices substantially address the regulators' concerns. The enforcement action could include civil monetary penalties, significant restitution and additional business practice changes."
A Discover company spokesman emailed a statement following the Capital One announcement: "Discover continues to work with the FDIC and CFPB toward a resolution of this matter as we remain focused on providing our card members with the quality products and service they expect from us."
See related: 7 questions to ask before buying credit protection , Are credit protection plans worth the cost , ID protection tools work, but you better shop around
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