This Credit Card Bank Must Refund 2 Million Cardholders; Are You One Of Them?

By Christine Giordano
July 20, 2012

The ads have been inescapable. There's late-night funnyman Jimmy Fallon trying to convince a baby that getting cash back from your credit card is a great thing, and the baby just won't hear of it.

Credit card giant Capital One (NYSE: COF) created the spots, hawking the fact that one of its cards gives its users a 50% cash-back bonus each year on top of its normal cash rebate. 

Now, fast forward to July 18. Capital One is giving some of its cardholders cash back again -- but this time for a different reason.

The bank has been ordered by federal banking regulators to pay $210 million in fines and refunds to customers for deceptive marketing practices. 

What Capital One Reportedly Did, And What It Means For You

The Consumer Financial Protection Bureau -- the consumer watchdog agency that oversees credit card banks -- and the Office of the Comptroller of the Currency -- which also oversees Capital One -- said the bank had been deceptive in selling what the agency called "add-on" products. These included credit monitoring services as well as payment protection services, which allow consumers to temporarily skip minimum payments in case they become unemployed or disabled.

Here's what the agencies said Capital One did:

  • Led consumers to believe the products would increase their credit scores and credit limit;
  • Sold payment protection plans to ineligible customers who were already disabled or unemployed;
  • Misinformed consumers about program costs;
  • Enrolled customers without consent;
  • Failed to always disclose that buying those products was optional. Some customers believed they had to order the product in order to receive more information about it, but then were given a hard time when canceling it.
  • Because of those transgressions, about 2 million people will get refunds totaling about $150 million. 

And for those who ordered a payment protection plan while already unemployed or disabled, Capital One has been ordered to pay claims as if they had been eligible if the amount is greater than the refund.

The average payout is expected "to be less than $100" per customer, said Capital One spokeswoman Tatiana Stead, and customers will automatically receive it later this year as a check or an account deposit.

What Capital One was doing "was neither unique nor a new problem," said Ed Mierzwinski, federal consumer program director for U.S. Public Interest Research Group. "It’s endemic, All the kids are doing it. Consumer advocates have been complaining about this problem (of misconceptions of credit monitoring products) for 20 years or more."

What’s different about the penalty is that it is automatic, and customers don’t need to apply for it, which means they’re practically guaranteed to get it, Mierzwinski said.

Lawsuit's Impact May Go Beyond Capital One

If you don’t have a Capital One card, watch for similar lawsuits. Consumer advocate groups say the disciplinary action may change the face of bank marketing and bite into bank revenue as regulators take a no-tolerance stand on deceptive practices.

"We are putting companies on notice that these deceptive practices are against the law and will not be tolerated," said Consumer Financial Protection Bureau Director Richard Cordray in a statement; he sent a compliance bulletin to other institutions. Capital One is the sixth largest U.S. commercial bank by deposits.

Of the $210 million, $150 million will be refunded to customers, and $60 million will be paid in penalties -- $25 million to the newly created bureau and $35 million to the Office of the Comptroller of Currency. Some say the fines are small by banking standards, but being splashed across the news for deceiving customers is the larger punishment because reputation damage hurts management and stock value.

This is the first major enforcement action by the bureau, which was created a year ago in the wake of the 2008 financial crisis to protect consumers. It is headed by Cordray, the former Ohio attorney general.

The bureau is "the new sheriff, the new consumer cop on the beat. It’s not even one year old until Saturday (July 21, 2012), and it’s been under attack the entire time (by Congress)," said Mierzwinski. "It has withstood all of the attacks and is sending a strong message to Wall Street: You’d better stop cheating consumers because we’re not going to tolerate it. The market wants good and fair dealing firms to do well, and they don’t have a chance when other firms are cheating."

Capital One said the problems were traced to its vendors going off-script when talking with customers.

"We are accountable for the actions that vendors take on our behalf," said Ryan Schneider, president of Capital One’s card business. "We are committed to making it right."

The Investing Answer: Beware of scammers contacting you to help you "claim your refund." Call the bank for more information, and keep paying at least your minimum payments. To avoid mystery credit card fees, be alert when you’re routed to representatives who try to sell you things like credit protection or identity monitoring, and keep an eye on your monthly statement for unfamiliar fees. If you see any, call your credit card company with the number on the back of the card. If you can’t resolve the extra fees, you can file a complaint with the bureau.