The new U.S. consumer watchdog on Monday pledged that it will aggressively pursue financial firms for deceptive practices, formally announcing charges against Discover Bank and saying that similar actions are expected to follow.
The Consumer Financial Protection Bureau said Discover Bank will refund $200 million to settle charges it deceptively marketed credit card "add-on" products. It will also pay a $14 million penalty.
Discover, a unit of Discover Financial Services, first released details of the settlement late on Friday.
The joint action from the bureau and the Federal Deposit Insurance Corp marks the second major enforcement action by the consumer agency and underscores its role of pursuing wrongdoing that it believes directly harms average Americans.
The agency and another regulator fined Capital One Financial Corp $210 million in July to resolve charges that its call-center representatives misled consumers into paying for extra credit card products.
Director Richard Cordray said financial institutions should be on notice that deceptive or misleading marketing of products and services is illegal.
"We continue to expect that more such actions will follow," Cordray told reporters on Monday.
"In the meantime, we're 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," he said.
The regulators said that from Dec. 1, 2007 to Aug. 31, 2011, telemarketers selling payment protection, credit score tracking and other credit card extras misled consumers about charges, withheld important information or spoke quickly when they disclosed prices and terms of the add-on products.
Some consumers may have been charged for the products without knowing it because the company could bill their accounts directly, said Kent Markus, assistant director of enforcement at the consumer bureau.
"Discover's deceptive marketing of add-on products prevented consumers from understanding that they were actually buying a product and not simply receiving a free benefit," Markus said.
Discover neither admitted nor denied the allegations, the regulators said. The company had previously said it had been notified of a potential enforcement action and had added to its reserves held for future legal actions.
"We have worked hard to earn the loyalty of our card members, and we are committed to marketing our products responsibly," Discover Chief Executive David Nelms said in a statement on Friday.
SECOND MAJOR ACTION
The consumer agency, which was established by the 2010 Dodd-Frank financial oversight law, regulates credit cards, mortgages and other consumer products, and formally opened its doors in July 2011.
John Taylor, president of the National Community Reinvestment Coalition, which works on credit issues, said the agency's enforcement actions show a pattern of credit card companies taking advantage of consumers by not giving them enough information.
"Long after the housing crisis and collapse of the economy and so on, these companies, Capital One and Discover, continued to do abusive things," Taylor said. "People ought to be concerned about who's in their wallet because this is the way that consumers get ripped off."
He said the actions will likely prompt other companies to change the way they advertise products.
FDIC Director Martin Gruenberg said the $200 million refund represents the largest restitution amount the FDIC has ordered for any institution it supervises.
The officials said Discover is required to extend the refunds to more than 3.5 million consumers, most of whom are expected to receive the funds in early 2013.
People will be reimbursed based on when they bought the products and how long they kept them, Markus said. About 2 million people will get full restitution of all of the fees they paid, minus any refund they already received.
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