October 15, 2015
Authored by: Seyi Iwarere
The CFPB has issued another enforcement action exceeding the half-billion dollar mark against a large bank for its add-on product offerings. Citibank and its subsidiaries were penalized for alleged deceptive marketing, unfair billing and deceptive debt collection involving its credit card add-on products and services. This marks the tenth public enforcement action that the CFPB has announced for practices associated with marketing or administering add-on products in its four-year history.
As part of the settlement Citi was ordered to pay $700 million in restitution to about 8.8 million consumers who were impacted by the add-on product offerings. The company also must pay the CFPB a $35 million civil penalty. Further, the Bank was required to end alleged unfair billing practices and submit a compliance plan to the CFPB before continuing to market any add-on products by telephone or point of sale, or attempting to retain add-on product customers by telephone.
In the 57-page order the CFPB refers to an add-on product as “any consumer financial product or service…offered to Cardholders as an optional addition to credit card accounts issued by [Citibank].” The CFPB put several of Citibank’s add-ons at issue, which were for consumer services such as such as debt cancellation or deferral products, credit monitoring or credit report retrieval services, and services to notify credit and debit card issuers when a consumer reports cards lost or stolen.
The CFPB alleges that, from at least 2003-2012, Citibank – including its service providers – was deceptive in its methods for “actively market[ing] and enroll[ing]” consumers for add-on services. For example, the Bank is alleged to have misrepresented various aspects of the add-ons, such as costs and fees for coverage, the benefits of coverage, cancellation of a service after a trial period and eligibility requirements for the services.
The CFPB also alleges that Citibank and its vendors engaged in unfair billing practices that resulted in consumers being charged for benefits they did not receive. For example, in order for a company to offer credit monitoring and credit report retrieval services legally, under Section 604 of the Fair Credit Reporting Act a “permissible purpose” is required to obtain a consumer’s credit information. In this case, the permissible purpose needed was release based on a consumer’s written instructions, but it was alleged that proper authorization was never obtained, violating the Act.
Regarding the CFPB’s allegations that Citi engaged in deceptive debt collection practices, the order states that, when collecting payment on delinquent retailer-affiliated credit card accounts, consumers were offered an option to pay by phone using a checking account that involved a costly, improperly disclosed fee. It is alleged that Citibank misled consumers by not stating that the fee associated with the service was for same-day processing, only that it was a “processing” fee. It also is alleged that, in those circumstances, Citi failed to disclose other no-cost payment alternatives.
This latest enforcement action is the CFPB’s third involving add-on products in July. On July 1 the CFPB announced actions against two credit card add-on product vendors for alleged unfairness in charging consumers for add-ons they did not receive. Together the companies were ordered to pay more than $6.8 million in redress to consumers and $2.1 million in civil penalties. One of the companies involved, Affinion Group Holdings, Inc., was a vendor for Citi and was named in Citi’s Order as a basis for the unfair billing allegations against the Bank. These actions raise questions about a bank’s obligations when offering third party financial products.
The CFPB’s $700 million-plus action against Citi for its credit card add-on products is not the first of this size. In April 2014 the CPFB ordered another major bank to pay $727 million to consumers for deceptive marketing and unfair credit card billing practices involving add-on products, and a civil penalty of $20 million. Four other actions against banks for credit card add-ons have each topped $100 million in consumer redress and civil penalties – and out of those, three exceeded $200 million.
Director Cordray’s statement announcing Citi’s penalty signaled, once again, that it will not be the last in this arena: “We continue to uncover illegal credit card add-on practices that are costing unknowing consumers millions of dollars…We will remain on the lookout for similar conduct and will address it as we find it.”
In other words, companies offering these products should be wary.