In our recent GT Alert, The Consumer Financial Protection Bureau — The New Sheriff in Town, we stated that enforcement by the Bureau is not a question of “if,” but one of “when.”1 The “when” has now occurred. Just days from its one year anniversary as a new Bureau, the Consumer Financial Protection Bureau, (CFPB or Bureau), in its first public enforcement action announced that it has reached a settlement with Capital One Bank (U.S.A.) N.A., (Capital One) requiring it to pay both a fine and restitution.
Specifically, according to the CFPB’s public statement2 and the Stipulation and Consent Order,3 Capital One has agreed to refund all customers who bought the products at issue, totaling approximately $140 million. It will also pay an additional $25 million as a civil monetary penalty. As part of the settlement Capital One has also agreed to stop certain practices that will be assured through an independent auditor.4
News of this enforcement action is germane not only to credit card companies, but all providers of financial products and services that fall under the Bureau’s supervisory and enforcement authority.5 Why is it germane? Simultaneous with the announcement of the settlement, the Bureau released new guidance directed at “add-on” products. While the guidance concerned credit card add-on products, the CFPB advised that institutions should consider the guidance with regards to other similar products offered in connection “with other forms of credit or deposit services.”6
Some of the highlights of this guidance include factors identified by the CFPB that it considers in evaluating the effectiveness of disclosures at preventing consumers from being misled, including, disclosures related to “add-on” products.7 These factors include the following:
- Is the [disclosure] statement prominent enough for the consumer to notice?
- Is the information presented in an easy-to-understand format that does not contradict other information in the package and at a time when the consumer’s attention is not distracted elsewhere?
- Is the information in a location where consumers can be expected to look or hear? and
- Is the information in close proximity to the claim it qualifies?8
In addition, the Bureau further laid out its expectations with regards to steps that institutions should take when marketing credit-card add-on products to limit the potential for violations and related consumer harm, and advised on compliance management programs that needed to be employed by providers of add-on products.9 In brief, its expectations include:
- Marketing materials, including direct mail promotions, telemarketing scripts, internet and print ads, radio recordings, and television commercials, reflect the actual terms and conditions of the product and are not deceptive or misleading to consumers;
- Employee incentive or compensation programs tied to the sale and marketing of add-on products require adherence to institution-specific program guidelines and do not create incentives for employees to provide inaccurate information about the products;
- Scripts and manuals used by the institution’s telemarketing and customer service centers:
- Direct the telemarketers and customer service representatives to accurately state the terms and conditions of the various products, including material limitations on eligibility for benefits;
- Prohibit enrolling consumers in programs without clear affirmative consent to purchase the addon product, obtained after the consumer has been informed of the terms and conditions;
- Provide clear guidance as to the working and appropriate use of rebuttal language and any limits on the number of times that the telemarketer or customer service representative may attempt to rebut the consumer’s request for additional information or to decline the product; and
- Where applicable, make clear to consumers that the purchase of add-on products is not required as a condition of obtaining credit, unless there is such a requirement.
- To the maximum extent practicable, telemarketers and customer service representatives do no deviate from approved scripts;
- Applicants are not required on a prohibited basis to purchase add-on products as a condition of obtaining credit; and
- Cancellation requests are handled in a manner that is consistent with the product’s actual terms and conditions and that does not mislead the consumer.10
These expectations are of particular consequence for any provider of financial services or products that uses a telemarketer or vendor to sell add-on products, as in the case of Capital One.11 According to a statement released by the President of Capital One, the marketing calls by its vendors, “were inconsistent with the explicit instructions [we] provided to agents for how these products should be sold.”12 Nonetheless, Capital One was the target of the CFPB’s enforcement action brought pursuant to the CFPB's authority to prohibit unfair, deceptive or abusive acts or practices (also known as “UDAAP”), found at Secs. 1031 & 1036, Title X of the Dodd-Frank Act.13
According to a public statement14 issued by the CFPB, the enforcement action resulted from a CFPB examination that identified deceptive marketing tactics used by Capital One's vendors to pressure or mislead consumers into paying for "add-on products" such as payment protection and credit monitoring when they activated their credit cards. The Bureau’s Director, Richard Cordray, was quoted as saying that Capital One’s 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.”15 Cordray further warned, “we are putting companies on notice that these deceptive practices are against the law and will not be tolerated.”
This settlement and the CFPB’s statements, are the first peek into the CFPB’s thinking and what will be driving it in days ahead. One year has passed since the CFPB started collecting consumer data on credit card providers. What will this mean for other companies that have been the target of the consumer complaint initiative? If anything, the CFPB’s enforcement action further confirms the importance of this consumer complaint database as an essential part of the CFPB’s monitoring of large banks and non-banks under its supervisory arm.
In days ahead will the Bureau be focusing solely on larger banks? Given its activity to date, no. The CFPB has been actively gathering consumer complaint data not only of credit card companies, but of smaller providers of financial services and products, such as mortgage servicers and brokers, student loan and other consumer loan providers. In light of this activity, reviewing practices related to consumer complaints should be top priority of entities under the Bureau’s reach.
In addition to the above referenced fine and restitution, Capital One also reached a settlement with the Office of the Comptroller of the Currency (OCC) which includes payment of restitution by Capital One for additional consumers harmed by "unfair billing practices taking place between May 2002 and June 2011 in violation of Section 5 of the FTC Act," as well as a civil monetary penalty of $35 million.16 In total the amount to be paid out by Capital One as a result of the two settlements is $210 million.
The OCC’s actions are of particular significance for small federal depository institutions.17 Since the prudential bank regulator not the Bureau has primary enforcement authority with regards to small federal depository institutions to enforce the requirements of Federal consumer financial laws under Title X of the Dodd-Frank Act, this action shines light on the OCC’s thinking for the days ahead.18