One year ago, in the August 2011 Quarterly Report, we addressed the potential expansion and increased emphasis on regulation of unfair, deceptive and abusive acts and practices (“UDAAP”) by the CFPB. Well, the Bureau has lived up to its promises, and in its first enforcement action, has made an example out of Capital One.
According to the CFPB, Capital One employees misled consumers about the benefits, nature, eligibility, and costs of certain credit card add-on products and also enrolled some consumers without express consent. Examples of these add- on products include payment protection plans and monitoring services. The payment protection plan potentially allows eligible consumers to cancel up to twelve payments in certain situations such as disability or unemployment. The monitoring services include identity theft protection services and other daily monitoring and account notifications. Capital One’s total penalty is approximately $210 million dollars which includes a $25 million payment to the CFPB, a $35 million payment to the OCC, and refunds to approximately two million customers.
Specifically, the CFPB alleged, in part, that Capital One representatives engaged in the following improper sales tactics:
- indicating that the add-ons may help to increase a consumer’s credit score;
- implying that the products were free features of a Capital One credit card as long as the customer maintained good payment practices;
- misstating the costs of the services;
- refusing to provide additional information about the services to consumers who were not yet enrolled in the add-on features;
- misstating relevant statistics;
- failing to inform consumers that the services were optional;
- failing to cancel the service when requested by the consumer to do so; and
- failing to verify the consumer’s eligibility prior to enrollment.
The CFPB set forth explicit instructions for Capital One to end deceptive marketing of the add-on products until an approved compliance plan is in place, provide refunds to approximately two million customers, pay all claims that were denied to consumers who were ineligible, and engage in an independent audit of compliance with the terms of the consent order.
Additionally, the CFPB issued a bulletin providing detailed instructions and expectations for the marketing of credit card add-on products. The bulletin provides that all institutions must comply with various laws and regulations such as the Dodd-Frank Act by prohibiting unfair and deceptive practices, the Truth-in-Lending Act/Regulation Z’s requirements when applying fees for debt cancellation plans, and the Equal Credit Opportunity Act/Regulation B’s fair lending requirements by not requiring applicants to enroll in the credit card add-on products based on a prohibited basis. In addition to compliance with the above listed regulations, the CFPB set forth its own, detailed expectations for the marketing of credit card add-on products and services. These expectations include ensuring that all marketing materials provide only the actual terms and conditions of a product. Further, any incentive or compensation plan tied to the add-on products or services must not create an incentive for employees to misrepresent product information. Finally, all scripts should be reviewed to ensure that all terms and conditions of the add-on credit products are accurately stated and that affirmative consent is obtained, and provide guidance for rebuttals and proper handling of cancellation requests.
The CFPB’s bulletin also requires that banks offering credit card add-on products should have written policies and procedures in place, conduct periodic reviews and independent audits, oversee the actions of any third-parties, adequately train employees, and properly and effectively respond to complaints.
There are several lessons to be learned from this enforcement action. First, the significant amount of the penalty’ alone makes it clear that the CFPB is very serious about UDAAP enforcement. The CFPB’s goal in increasing penalty amounts is to prohibit banks from continuing to profit from unfair, deceptive and abusive practices. Lesser penalty amounts may often be perceived simply as a cost of doing business.
Second, the Stipulation and Consent Order was very detailed and clearly explained the facts of what happened at Capital One, why the CFPB found Capital One’s behavior to be reprehensible, and how other banks may comply in the future. The detailed nature of the order is uncommon and may have both positive and negative effects. On one hand, plaintiff’s attorneys now know exactly what to look for and how to draft similar complaints. On the other hand, financial institutions now know exactly what not to do, in no uncertain terms, and can better monitor and tailor their marketing practices accordingly.
Finally, whether or not this enforcement action will impact the ability’ to offer add-on credit card products, or just the way they are marketed has yet to be determined. It is likely that the marketing practices of other credit card companies will be under some scrutiny, but it has yet to be determined by the CFPB whether the products themselves will come under attack, or just the way they are promoted to consumers.