The Consumer Financial Protection Bureau landed its first major enforcement action on Wednesday, when Capital One Financial said it would pay as much as $210m to settle charges that it illegally marketed “add-on” products for its credit cards.
The action comes just a few days before the agency, which was created as part of the Dodd-Frank package of financial reforms introduced after the financial crisis, is to celebrate its one-year anniversary as an independent agency. It has been under pressure recently from consumer groups and civil rights organisations to launch a case against a major lender before its first birthday.
The CFPB’s new powers have proved to be a divisive issue between Democrats and Republicans. President Barack Obama appointed Richard Cordray as the bureau’s director during last year’s congressional summer recess despite Republican objections. In doing so he overlooked Democrat Elizabeth Warren, who helped build the bureau and is now running for a US Senate seat in Massachusetts.
“Today’s action puts $140m back in the pockets of two million Capital One customers who were pressured or misled into buying credit card products they didn’t understand, didn’t want, or in some cases, couldn’t even use,” Mr Cordray said in a statement. “We are putting companies on notice that these deceptive practices are against the law and will not be tolerated.”
The $210m figure includes $140m to $150m set aside to refund Capital One customers who were wrongly sold add-ons, a $25m penalty to the CFPB and a $35m to the Office of the Comptroller of the Currency, the bank’s main regulator.
The add-ons included “payment protection,” a type of insurance for credit card debt, as well as “credit monitoring” aimed at preventing identify theft. Capital One’s sales team misled customers about the cost and benefits of the products, the CFPB said, and customers were not always told that buying the add-ons was optional.
“Capital One’s third party vendors did not always adhere to company sales scripts and sales policies for payment protection and credit monitoring products, and the bank did not adequately monitor their activities,” the company said in a statement.
The bank said it discovered the mis-selling, which took place between August 2010 and January 2012, late last year and immediately stopped phone sales of the products. It set aside $75m for refunds when it released first-quarter earnings.
The company reported second-quarter earnings on Wednesday, showing net income fell almost 90 per cent to $92m. The results were impacted by the regulatory settlements and an extra $1.2bn of reserves set aside as part of its acquisition of ING Direct USA and HSBC’s US credit card business.
Attorneys representing lenders had been eagerly awaiting the CFPB’s first enforcement action. Industry officials have feared that the agency will take an overly punitive approach, in part to prove to US households that it will take an aggressive approach to enforcement.
US bank regulators have been accused of levying soft penalties against banks accused of wrongdoing. The CFPB is keen to avoid such a reputation.
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