Why the CFPB's AmEx Fine Should Scare Bankers

WASHINGTON — Although American Express received lighter fines than the two previous credit card players targeted by the Consumer Financial Protection Bureau, many believe the CFPB's third enforcement action is its biggest statement yet.

The CFPB had previously cited Capital One and Discover for questionable payment protection plans, resulting in monetary penalties, respectively, of $210 million and $214 million.

But the set of coordinated orders and fines against American Express announced Monday — totaling over $112 million — targeted multiple violations of various laws, including improper debt-collection practices, discrimination against new customers based on age and failure to report consumer disputes to the credit bureaus.

The broad reach of the American Express action is clearly intended as a warning to other banks, observers said.

"This order is putting everyone on notice that the regulators are looking for any potentially misleading or deceptive practices when it comes to interacting with consumers," said Jaret Seiberg, a financial services policy analyst with Guggenheim Securities. "No one should have had any doubt beforehand that the regulators were actively investigating every interaction between card companies and consumers. But if you had any doubt, this erases it."

It was a sentiment seconded by Kent Markus, the CFPB's director of enforcement, who spoke to reporters on a conference call.

"This action is intended as a message to all entities that provide consumer financial products or services that there are consequences for violating the law," Markus said.

Also important was that the problems did not appear isolated to one area. In announcing the orders, CFPB said that violations were prevalent "at every stage of the consumer experience, from shopping for cards, to applying for cards, to paying charges, to paying off debt."

"Several American Express companies violated consumer protection laws and those laws were violated at all stages of the game — from the moment a consumer shopped for a card to the moment the consumer got a phone call about long overdue debt," CFPB Director Richard Cordray said in the press release.

All told, American Express must refund roughly $85 million to about 250,000 customers for alleged violations of several laws, including the Credit CARD Act, the Fair Credit Reporting Act and the Equal Credit Opportunity Act.

Although that is less than the amounts paid by Discover and Capital One on a total basis, the American Express action is significantly higher relative to the amount per consumer harmed.

Capital One was ordered to pay $150 million to about two million customers, or roughly $75 per customer, compared with $200 million in restitution Discover was required to pay to roughly 3.5 million borrowers, or $57 per customer.

In contrast, American Express must pay a required restitution of approximately $340 per customer.

The breadth of the orders may give other banks pause, observers said.

"If it only dealt with something unique to American Express such as their membership rewards program, then you could think this is only a one-off issue that just applied to American Express," said Anita Boomstein, a partner at Hughes Hubbard & Reed. "If it's a more broad-based effort to enforce a lot of existing laws … then you would take note of that because it might be indicative of a pattern of what they're going to be looking at."

Regulators said the card company promised borrowers bonus points with $300 in monetary value through the "Blue Sky" program, but then reneged.

American Express also charged certain late fees based on a percentage of borrowers' debt, violating the CARD Act, and used credit scoring that treated some applicants differently based on their age, thereby violating the Equal Credit Opportunity Act, the agencies said. The orders also accused the company of deceiving customers by promising benefits if they paid off old debts.

"The regulators went and pulled on one string, and they just kept finding other examples of wrongdoing and lack of oversight and lack of institution best practices throughout most facets of the products that American Express was offering," said Isaac Boltansky, an analyst with Compass Point Research and Trading.

Also unusual was the sheer number of agencies and entities involved. The CFPB acted in coordination with the Federal Deposit Insurance Corp., Federal Reserve Board, Office of the Comptroller of the Currency and Utah Department of Financial Institutions in its actions against American Express.

The orders named the card provider's subsidiary American Express Travel Related Services Company Inc. as well as two Utah-based bank subsidiaries: the state-chartered American Express Centurion Bank supervised by the FDIC, and the federally-chartered American Express Bank, FSB supervised by the OCC. (The Fed regulates American Express' holding company.)

In addition to seeking restitution for customers, the CFPB and other regulators released a consent order against each institution involved that totaled $27.5 million in civil money penalties. The fines were broken down in four buckets: American Express must pay $14 million to the CFPB, $9 million to the Fed, $3.9 million to the FDIC and $500,000 to the OCC.

In a statement Monday, American Express said it "cooperated fully" with the agencies.

"The company is strengthening its internal compliance processes and will continue to work closely with its regulators," the company said. "Reserves were established in previous quarters for a substantial portion of these fines and the estimated cardmember refunds. Separately, the company is continuing its own internal reviews and is also cooperating with regulators in their ongoing regulatory examination of add-on products in accordance with an industry-wide review."

In an email, a spokeswoman for the company said, "We worked closely with the regulators and cooperated fully with them through their reviews. We took responsibility for correcting the issues and are compensating customers where appropriate."

While the scrutiny of American Express appeared to predate the CFPB - which was created under the 2010 Dodd-Frank Act - observers said the agency's ability to coordinate consumer-compliance efforts among multiple regulators helped lead to such a far-reaching action.

The regulators' attention to the card company heightened following a joint exam of Centurion Bank by the FDIC and Utah state regulator. But the FDIC then transferred a large portion of the investigation to the CFPB after the new agency opened its doors.

"Would this action have occurred without the Dodd-Frank Act and the Consumer Financial Protection Bureau? The answer I come away with is, yes, but it would have been much more disjointed and most likely would have taken much longer to get restitution paid to the consumer," said Boltansky. "Now that we have the Dodd-Frank Act and a regulator who is for the first time charged with focusing on consumer financial issues, there was a driving force to get a coordinated and complete settlement action in place. I don't think that this action would have happened on the same scale or the same timeline without a Consumer Financial Protection Bureau."

Boltansky said all three credit card-related actions against Capital One, Discover and American Express have established the bureau's muscle.

"These are clear cut violations of the law, but they're also things that are very easily relatable to the average American," he said. "We're now at 5.75 million people who are getting restitution from these three actions. That doesn't account for any overlaps, but it's a headline number that's a huge positive for a brand new consumer agency. That's more relatable than other investigations that are out there from the CFPB, such as mortgage insurance premiums."

He added that the inclusion of American Express' debt-collection practices in the orders indicates a new area the CFPB may focus on in the future. In a recent rulemaking, the bureau proposed supervisory policy to monitor debt collectors as part of its broader powers to oversee nonbank sectors.

"This is the first time the CFPB has really dug into practical issues surrounding debt collection," Boltansky said. "The CFPB has been relatively quiet on the issue of debt collection ever since they designated debt collection firms as 'larger participants' earlier this year. … The work that they've done here on deceptive debt collection practices is a theme that we're going to see prominently from the CFPB in 2013."

But others said the CFPB's ability to coordinate such a broad set of actions reflects one agency having too much power.

"I'm not sure that the other regulators would have taken these actions independently. These are all big restitutions, big penalties, for things that have been going on for a while. You could say, 'Well, that's why we need the CFPB.' Maybe the CFPB has gone too far in the other direction, I don't know," said Ralph "Chip" MacDonald 3d, a partner at Jones Day in Atlanta.