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CFPB's First Enforcement Action: A Good News, Bads News Story in Capital One Settlement

David Callahan

Today we got a concrete sense of why, exactly, the banks fought so hard to kill the Consumer Financial Protection Bureau: Because, among other things, this is an agency that can slap the banks with huge fines and force them to alter their business practices by legal fiat.

The CFPB's latent muscles finally ripped through its shirt today when it ordered Capital One to:

refund approximately $140 million to two million customers and pay an additional $25 million penalty. This action results from a CFPB examination that identified deceptive marketing tactics used by Capital One’s vendors to pressure or mislead consumers into paying for “add-on products” such as payment protection and credit monitoring when they activated their credit cards.

Capital One was also sanctioned by the OCC, and its net penalty is $210 million.

The CFPB order shows why executive regulatory power is so scary to business: Because without any kind of trial and with no judge or jury, regulatory agencies can effectively convict companies of criminal behavior and mete out a sentence.

To be sure, this power is unnerving, but it's absolutely essential for policing malfeasance in the private sector, given the difficulties and expense of bringing criminal cases against corporations.

Which brings me to the bad news of the settlement: It's not clear that civil penalties like this are very effective at reducing corporate crime. So while it's nice to see the CFPB fully up and running, wielding its powers for financial sanctions, it's not clear that another agency with a slingshot is going to help very much in the face of a stampede of rogue corporations -- many of which are repeat offenders when it comes to breaking the law.

For instance, this may be the first penalty meted out by the CFPB, but it's not the first time Capital One has been in trouble.

Capital One was fined by the British government back in 2007 for a similar deceptive marketing practice, paying a penalty "after the company did not give adequate information to customers who bought payment protection insurance (PPI) that they thought would pay off their credit card bills in case they became ill or lost their jobs."

Likewise, Minnesota's attorney general sued two subsidiaries of Capital One in 2004 "contending that their 'No Hassle' credit card ads were false, deceptive and misleading because they erroneously gave consumers the perception that their 'fixed' interest rates would never increase."

It's no wonder that the CFPB went after Capital One given that complaint data collected by the agency found that Capital One credit cards generated more gripes than those from any other bank.

Digging further back, Capital One was sued by shareholders for allegedly misleading investors about its profitability to keep its stock artificially high.

All in all, Capital One appears to be a typical major bank. And one reason banks keep behaving badly is that punishments of them are so lax. Even impressive sounding settlements are paltry when compared to earnings. Yes, Capital One will have to pay $210 million, but the company earns about $16 billion a year, a fourth of which is pure profit. This is like sticking a parking ticket under the wiper of a Rolls Royce.

Also, as usual with these settlements, the actual executives responsible for criminal behavior were not named and nor is it remotely likely that they will be punished. Crimes occurred, but -- yet again -- no one seems to have committed them.

To its credit, Capital One did what corporate wrongdoers almost never do: It actually apologized to its customers and took responsibility for its actions. 

Still, will anyone at the bank be fired or sanctioned, at the very least through an internal process? Capital One didn't say. I hope the shareholders are paying attention here: Something really big went wrong at a big bank, and tens of millions of dollars are being shelled out in settlements, and yet so far no heads are rolling.

Just maybe that's because ripping off customers is now part of the business model for big banks. Why punish executives for doing their job?