Why it matters

Credit card add-on products were the subject of a recent enforcement action brought by the Federal Deposit Insurance Corporation (FDIC) against Comenity Bank of Delaware and Comenity Capital Bank in Utah. The two wholly owned subsidiaries of Comenity LLC offered co-branded credit cards with various retailers featuring payment protection and debt cancellation add-on products that allowed consumers to receive benefit payments for life events such as involuntary unemployment. But the FDIC said the banks ran afoul of Section 5 of the Federal Trade Commission (FTC) Act by deceiving consumers with material misrepresentations about the refund process and the conditions for receiving a gift card or other incentives to enroll in the products. The banks also promised consumers they would not be charged a fee if an account had no balance—and then charged a fee in those circumstances, the FDIC said. The settlement requires the banks to pay a civil money penalty of $2 million and provide restitution of $53 million (Comenity Bank) and $450,000 and $8.5 million (Comenity Capital). In addition, the banks must ensure future compliance with Section 5 of the FTC Act. The action continues the trend of regulatory enforcement actions targeting credit card add-on products, following a $16 million FDIC deal with Merrick Bank over the marketing and servicing of its products last September and a record-setting $772 million agreement between Bank of America and the Consumer Financial Protection Bureau in April 2014.

Detailed discussion

Add-on products proved to be a costly addition to the product line for a pair of banks in a recent settlement with the Federal Deposit Insurance Corporation (FDIC).

Comenity Bank of Delaware and Comenity Capital Bank of Utah, both wholly owned subsidiaries of Ohio-based Comenity LLC, offered co-branded credit cards with various retailers across the country.

The cards featured "Account Assure" and "Account Assure Pro," payment protection and debt cancellation add-on products that allowed consumers to request certain benefit payments for life events such as disability or unemployment. But the marketing and servicing of these products violated Section 5 of the Federal Trade Commission (FTC) Act (FTC), the FDIC alleged.

Between January 2008 and September 2014, the banks represented to consumers that they would not be charged a fee for the products if their balance remained at $0, but the institutions charged them anyway, the regulator said. Material misrepresentations and omissions were made regarding the refund process if a customer cancelled the product within the first 30 days; similarly, customers were misled about the conditions for receiving a gift card or account statement credit offered as an incentive for enrolling in the products.

To settle the charges of unfair and deceptive acts, the banks reached a deal with the FDIC. The financial institutions agreed to correct the violations of law and ensure future compliance with Section 5 of the FTC Act with the establishment of "a comprehensive, written, sound, risk-based" Compliance Program that will institute detailed operating procedures and controls designed to prevent violations of consumer protection laws, complete with a training program, internal monitoring process, and an independent third-party audit.

As part of the settlement, each of the banks stipulated to the issuance of a Consent Order, Order for Restitution, and Order to Pay Civil Money Penalty. Under the FDIC orders, Comenity Bank will pay a civil money penalty (CMP) of $2 million and provide restitution of approximately $53 million to harmed consumers. Comenity Capital Bank will pay a CMP of $450,000 and provide restitution of approximately $8.5 million to harmed consumers.

To read the Consent Order in In the Matter of Comenity Bank, click here.

To read the Consent Order in In the Matter of Comenity Capital Bank, click here.