The news hit early Monday morning and it was massive: Discover Bank announced it would be refunding $200 million to more than 3 million credit cardholders. The reason? Accusations of illegal or deceptive telemarketing efforts.
You might recall the continued assurances from the newly-formed Consumer Financial Protection Bureau that it would be investigating consumer complaints and then acting on those most credible. Consider the Discover announcement a promise kept. CFPB and the Federal Deposit Insurance Corporation made a joint announcement Monday. Calling it an “investigation”, the agencies said the strategies used by one of the world’s most popular credit card companies were both deceptive and aggressive. Specifically, the charges surrounded additional financial products that should have been optional for those opening new accounts, but instead were told they were free (some products or services tacked on an addition $9.99 a month or more for each service) or that they were mandatory.
So what happened?
Telemarketers Gone Wild
Both agencies say telemarketing employees for Discover used “deceptive language” to sell card holders identity theft protection, services that kept track of their credit reports so potential fraud could be detected earlier and various insurance or payment protection plans. In some instances, said Richard Cordray, CFPB’s director, customers were told the products were free and simply added bonuses of having a Discover card. Consumers were told one of the products would allow them to delay making credit card payments for up to two years. “Discover’s telemarketing scripts contained many misrepresentations”, said CFPB Cordray during a press release on Monday. He went on to say that both his agency as well as FDIC had
listened to numerous recorded sales calls where Discover’s telemarketers spoke unusually fast when explaining the cost and product terms, and even processed purchases without the consent of consumers.
Discover employees had financial incentives for enrolling customers into the various programs or selling them the different products.
The whopping $200 million will be divvied up between those cardholders who purchased credit protection products via telephone calls from late 2007 through August 2011. It’s estimated those customers will receive, on average, a refund of $57 for the fees they paid. Because the product prices varied and because some consumers believed these ere free products and therefore had them all added, each affected card holder’s payouts will be different. For instance, the Discover “credit score tracker” service was tacked on to bills for $7.99 a month while the identity theft protection service was sold for $9.99 a month.
Both FDIC and CFPB will share $14 million in penalties. The penalty fees will divided evenly with $7 million allotted for the FDIC going to the U.S. Treasury while the other $7 million will go to the CFPB’s Civil Penalty Fund.
At a minimum, those customers affected will be refunded a minimum of three months in product fees. The refunds will be distributed via account statements and those who are no longer customers will receive checks. For those who no longer have the accounts, but have balances in default, their refunds will be applied to those outstanding balances. The refunds should be applied by spring 2013.
Moving forward, Discover will be instituting changes to its telemarketing routines. Any deceptive sales efforts will cease and the credit card company has been notified that it will be audited to ensure compliance with the agreement.
We have worked hard to earn the loyalty of our card members, and we are committed to marketing our products responsibly,
said David Nelms, chairman and chief executive officer of Discover in a statement about the agreement.
This isn’t the first ruling that’s come down due to CFPB’s investigations. Earlier this year, another credit card company was hit with a $140 million tab for the same reasons Discover has been found guilty of. There was also a penalty totaling $25 million it was forced to pay for the same reasons.
But how is the public image of the agency that was formed as a result of the 2009 CARD Act? Consumers are overwhelmingly pleased with the willingness of a government agency that not only works on behalf of the public, but takes steps to hold financial institutions accountable. Now, with the two most recent rulings, CFPB has now compiled what it’s referring to as a “warning for other companies”. In it, various banking and credit card companies are put on notice.
We are signaling as clearly as we can that other financial institutions should review their marketing practices to ensure that they are not deceiving or misleading consumers into purchasing financial products or services,
Cordray said on Monday.
Have your own credit card complaints? CFPB has a database of complaints that consumers can not only add to, but research previous complaints to see if solutions have been found or to see if changes have been made that would affect their own relationships with these companies. “It’s the reason the agency was founded”, said one spokesperson.