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COMING OUT SWINGING: CONSUMER FINANCIAL PROTECTION BUREAU S FIRST ENFORCEMENT ACTIONS PACK A PUNCH FOR THE CREDIT CARD INDUSTRY Hanah Harris-Yager Student Fellow Institute for Consumer Antitrust Studies LOYOLA UNIVERSITY CHICAGO SCHOOL OF LAW I. INTRODUCTION President Obama recently directed the nation s attention to the new regulatory body in Washington: the Consumer Financial Protection Bureau (CFPB). The President encouraged consumers to seek assistance when confronted with fraud, saying that the CFPB s only mission is to fight for you. 1 And fight they have. Over the course of only three months, the CFPB has forced the credit card industry to pay $435 million in restitution to 5.75 million consumers and an additional $101.5 million in civil penalties. 2 During the course of routine supervision, the CFPB uncovered deceptive marketing practices currently being used by numerous financial institutions to sell credit card add-on products in violation of consumer protection laws. 3 The CFPB promptly issued public enforcement orders against the industry s giants: Capital One Bank, Discover Bank and American Express Bank. 4 By aggressively asserting itself as a regulatory body, the CFPB has put many financial institutions on edge. 5 Industry actors have initiated sweeping changes in their business practices, indicating that strict compliance may be the new norm. 1 President Barack Obama, Weekly Address to the Nation (Oct. 27, 2012), 2 CONSUMER FINANCIAL PROTECTION BUREAU, SUPERVISORY HIGHLIGHTS: FALL 2012, 7, 3 Id. at 1. 4 Id. at 8. 5 E.g. Daniel Wagner, Aggressive start for Consumer Financial Protection Bureau, THE BOSTON GLOBE (Sept. 13, 2012), [1] II. THE ORIGINS OF THE CONSUMER FINANCIAL PROTECTION AGENCY The Wall Street Reform and Consumer Protection Act of 2010, better known as the Dodd- Frank Act, was signed into law by President Obama on July 21, The Act established the CFPB to implement and, where applicable, enforce Federal consumer financial law consistently for the purpose of ensuring that all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services are fair, transparent, and competitive. 7 The Dodd-Frank Act transferred to the CFPB the authority to supervise many consumer financial products and industries; authority which was previously wielded by a number of other agencies. 8 The Dodd-Frank Act allocated to the CFPB the authority to supervise and regulate any person that engages in offering or providing a consumer financial product or service. 9 The authority extends to both depository institutions and non-depository institutions. Covered depository institutions are limited to those which hold more than $10 billion in assets and their affiliates. 10 The CFPFB has broad power to define the scope of its authority over non-depository institutions. 11 Covered institutions include lenders and servicers of mortgages and educational loans, payday lending organizations, and larger participant[s] in markets for other consumer financial products or services. 12 The definition of larger participants is outlined in a series of rules issued by the CFPB with consultation from the FTC. 13 The CFPB scrutinizes the activities of covered institutions for violations of consumer protection law. Financial institutions are required to file regular reports on their business practices and submit to examinations. 14 Where a violation is discovered, the CFPB has the authority to commence civil actions in the U.S. District Courts for both legal and equitable relief. 15 Civil penalties, either ordered by the courts or as a result of a settlement agreement, are 6 Michael A. Benoit, The Birth of a New Financial Services Regulator, 2010-NOV Bus. L. Today U.S.C. 5511(a). 8 CFPB, supra note 1, at (c)(6)(A) (a)(2) (b)(1) (a)(1) (b)(1) (b)(1) (a). [2] deposited into a separate fund within the Federal Reserve called the Consumer Financial Civil Penalty Fund. 16 The Civil Penalty Fund is used to compensate victims of consumer fraud and to finance consumer education and financial literacy programs. 17 III. PUBLIC ENFORCEMENT ORDERS A. CAPITAL ONE The CFPB announced its first public enforcement action on July 18th, 2012 against Capital One Bank. 18 The action was a result of a months-long investigation into a third-party Capital One vendor marketing credit card add-on products. When calling to activate a credit card, Capital One customers with a low credit score or credit limit were routed to a third-party vendor charged with selling products to supplement the credit card account. 19 Many Capital One customers were lead to believe that the products were a free service. 20 Other customers believed that purchase of the product was mandatory. 21 Capital One regularly billed for products while the customers enrollment was pending, thereby receiving payment before the customer was eligible for benefits. 22 Telephone vendors also mislead Capital One customers about the benefits of the add-on products. The Capital One payment protection add-on allows customers to defer all payments in case of death, disability of unemployment. 23 Disabled and unemployed customers were lead to believe that they were eligible for the payment protection plan; although the terms of that service ensured that they would never receive a benefit. 24 Vendors also marketed a number of different 16 CONSUMER FINANCIAL PROTECTION BUREAU, CIVIL PENALTY FUND, 17 Id. 18 Capital One Bank, AA-EC , 1, (2012) 19 Id. at CONSUMER FINANCIAL PROTECTION BUREAU, ENDING DECEPTIVE MARKETING PRACTICES, (last visited Nov. 17, 2012). 21 Id. 22 Capital One, AA-EC , at Id. at Id. [3] credit monitoring products and customers were regularly lead to believe that credit monitoring would help them improve their credit scores. 25 The CFBP determined that Capital One s marketing practices were in violation of Section 5 of the Federal Trade Commission Act (FTC Act), which prohibits all unfair or deceptive acts or practices in or affecting commerce. 26 A practice is generally deemed to be deceptive if: 1) it misleads or is likely to mislead a consumer, 2) the consumers interpretation of the practice is reasonable under the circumstances, and 3) the misleading practice is material. 27 As a result of the consent order, Capital One agreed to pay nearly $140 million in restitution to two million consumers affected by deceptive marketing practices. 28 Payment of $60 million in civil penalties was also required, with $25 million to be paid into the CFPB s Civil Penalty Fund. 29 In addition, Capital One was prohibited from marketing any add-on products until the company successfully drafted a compliance program. In response, Discover drafted detailed policies for training telephone vendors about unfair and deceptive practices and panned annual assessment of all vendors to ensure compliance. 30 B. DISCOVER The CFPB s second action was a consent order issued on September 24, 2012 against Discover Bank. 31 Discover had been engaged in a marketing program very similar to that utilized by Capital One. Discover marketed its products during inbound activation and customer service calls and outbound calls which were misleadingly characterized as courtesy calls. 32 During the sales calls many Discover customers were misled to believe that they were enrolling in a free benefit, rather than purchasing an additional product. In order to facilitate that belief, telemarketers were instructed to speak quickly while presenting the cost of the product and during the mandatory disclaimer Id (a)(1). 27 CFPB Bulletin, , (July 18, 2012) 28 Id. at Id. at Id. at Discover Bank, FDIC b, 2012 WL , at *2-3 (2012) (joint consent order). 32 Id. 33 Id. at *8. [4] The agency determined that Discover s telephone marketers were engaged in deceptive practices in violation of section 5 of the FTC Act 34 and in deceptive acts and practices in violation of sections 1031 and 1036 of the Dodd-Frank Act. 35 As part of the consent order, Discover agreed to pay $200 million in retribution to more than three million customers and an additional civil penalty of $14 million. Discover was directed to overhaul its policies regarding all advertising, marketing and customer communication campaigns. In accordance with the agreement, all Discover vendors must promptly identify the purpose of an outgoing call as a sales call. 36 Vendors answering inbound calls must complete all customer service business prior to engaging in marketing activities. 37 Prior to being billed for a product, the consumer must acknowledge that the purchase is optional and voluntary and affirmatively consent to the purchase. 38 C. AMERICAN EXPRESS The CFPB s latest enforcement action was leveled against three subsidiaries of American Express Bank. All three subsidiaries engaged in similarly deceptive and illegal practices at virtually every stage of the consumer experience. 39 The subsidiaries used a credit scoring system that unlawfully discriminated against credit card applicants on the basis of age, in violation of Equal Credit Opportunity Act. 40 One subsidiary promised, but did not deliver, a $300 cash bonus to eligible consumers under its Sky Blue program. 41 Debt collectors from another subsidiary convinced that repaying old debts would beneficially impact their credit scores. In actuality, the debts were too old to be reflected on the consumers credit reports and the American Express subsidiary regularly neglected to report repayment U.S.C. 45(a)(l) U.S.C. 5531, Id. 37 Id. 38 Id. at CFPB, supra note 1, at U.S.C. 1691(a) U.S.C. 45(a)(1). 42 CFPB Orders American Express to Pay $85 Million Refund to Consumers Harmed by Illegal Credit Card Practices, CONSUMER FINANCIAL PROTECTION BUREAU, (Oct 1, 2012), [5] In the resulting consent agreement, the American Express subsidiaries agreed to pay restitution of $85 million to approximately 250,000 consumers in addition to a $27.5 million civil penalty. 43 The subsidiaries were ordered to bring all practices into compliance with consumer protection laws and submit their practices to the scrutiny of an independent auditor. 44 IV. AGENCY GUIDANCE The CFPB also issued several bulletins in conjunction with its first enforcement actions which have the potential to shape the future of the credit card industry. In the first bulletin, the CFPB s directed consumers to remain vigilant against deceptive practices and to engage in a cost benefit analysis prior to the purchase of any product. 45 The CFPB also alerted consumers to the possibility that they may have been wrongfully sold a product and urged consumers to search their monthly credit statements for unwanted charges. 46 The second bulletin provided guidance to the industry by outlining the applicable law and suggesting a number of policies which financial institutions may utilize to ensure compliance. 47 The CFPB guidance for the use of telephone marketing is specific about the practices necessary to ensure compliance: representatives are to clearly state the terms of the agreement, explain that purchase is voluntary, and obtain clear, affirmative consent prior to enrolling a customer in a program. 48 In addition, the financial institution should provide guidance to telephone marketers regarding the number of times vendors may attempt to sell a product after the consumer refuses to buy. 49 V. NEXT STEPS In response to the enforcement actions, financial institutions have scrambled to bring themselves into compliance and avoid regulatory action. Bank of America and JP Morgan 43 CFPB supra note Id. 45 Gail Hillebrand, How to Stop Mystery Credit Card Fees, CONSUMER FINANCIAL PROTECTION BUREAU, (July 18, 2012), 46 Id. 47 CFPB Bulletin supra note Id. 49 Id. [6] announced that they would discontinue sales of credit card add-on products. 50 Citigroup temporarily ceased all telephone sales while it developed a comprehensive compliance program. 51 Many have predicted that the CFPB will continue to be aggressive in its enforcement. 52 Elizabeth Warren, the recently elected Massachusetts Senator who first proposed the agency and fostered its creation, says [i]t s a sober agency. It s a careful agency. But it s not timid Andrew Johnson, BofA Exits Credit Protection, WALL STREET JOURNAL (Aug. 21, 2012), 51 Id. 52 See, Id.; Wagner, supra note 5; Laureen E. Galeoto, Karen Y. Bitar, and Gil Rudolph, The Consumer Financial Protection Bureau - The New Sheriff in Town, 129 Banking L.J. 702 (2012). 53 Wagner, supra note 5. [7]
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