WASHINGTON - The Obama administration's consumer watchdog agency flexed its enforcement muscles for the first time Wednesday and ordered Capital One Bank to repay millions to credit card customers allegedly tricked into buying costly add-on services.
Capital One will pay $210 million in refunds and regulatory fines. Most of the money will go directly to customers.
The bank's phone-sales operators told customers that services like payment protection and credit monitoring were free or mandatory or offered more benefits than they did, federal officials said. The hard selling targeted people with poor credit, they said.
The order against Capital One is the first enforcement action by the Consumer Financial Protection Bureau, set up a year ago to protect consumers from excessive or hidden fees and other financial threats.
Capital One will pay up to $150 million to 2.5 million customers, $25 million to the CFPB and $35 million to the Office of the Comptroller of the Currency, a separate federal agency that oversees its banking operations.
"Consumers deserve to be treated fairly by their credit card issuer," CFPB director Richard Cordray told reporters. He said the problems are not isolated at Capital One and said he expects announcements about other companies.
CFPB officials observed heavy-handed sales tactics by workers at Capital One call centers as they monitored the bank's operations, the agency said in its order.
Agency officials reviewed records and phone scripts, interviewed managers and listened to taped calls with customers, the agency said. The CFPB can oversee the biggest banks and certain other companies by stationing employees at their offices.
Customers were transferred to the call centers when they phoned to activate their credit cards, the order said. For most customers, that meant a two-minute process without any ads for extra products. But people with subprime cards or lower credit limits endured eight-minute pitches by live operators while they were waiting for the card to be activated.
Call center operators often ignored scripts and instructions provided by Capital One, the CFPB's order said. Capital One is being held responsible because of "ineffective oversight," it said.
Comptroller of the Currency Thomas Curry, who heads the OCC, said banks' management of outside vendors is "an area we have identified as an increasingly significant risk," especially for big banks.
Call center operators told customers that buying a product would improve their credit scores or credit limits, the CFPB said. Operators misled callers about the products' costs and sold them to people who were not eligible for their benefits, the agency said.
For example, operators sold "payment protection" that would cancel some credit card debt if the customer became sick or unemployed. But the buyers sometimes were already sick or jobless, so they could never collect on a claim.
The settlement also cites credit monitoring products with names like Credit Inform and ID Alert that are supposed to monitor people's credit records and sometimes reimburse them for lost wages or other expenses related to identity theft.
Banks are pushing the extra services as they scramble to replace profits lost because of recent limits on fees they can charge and how cards can be marketed. Industry officials argue that the limits are encouraging banks to come up with increasingly obscure, difficult-to-detect ways of charging customers.
CFPB enforcement chief Kent Markus said the agency wants to "make it more costly to violate the law than to comply with it."
"We want to discourage the harmful practices from occurring to begin with," he said.
People with lower credit scores and lower credit limits typically have less cash available as a cushion before they start incurring fees on cards, loans and other bills. They are more likely to buy financial products in error because of misunderstandings, independent research shows.
The regulators' charges hinge on the consumer bureau's allegation that Capital One's phone sales workers were "deceptive" in selling the add-on services. The CFPB can charge companies engaged in "unfair, deceptive or abusive practices."