Citigroup's (NYSE:C) consumer banking business is getting it into trouble again — and this time the problem isn't mortgages.
The third-largest bank's messy and disappointing fourth-quarter report included an unexpected $500 million reserve for legal and regulatory issues "related to U.S. consumer businesses," in the words of Chief Financial Officer John Gerspach. It also appears to be related to areas scrutinized by the Consumer Financial Protection Bureau, which last year took enforcement actions against three big credit card companies over their marketing of payment protection add-on products and related practices.
"I don't think it's any secret that the CFPB has been reviewing various consumer products, and in fact, they are currently reviewing us. But, you know, I'm not going to say anything more about individual regulator discussions," Gerspach told analysts during a Thursday conference call.
A source familiar with the review said it includes credit card add-on products.
Gerspach also said that the $500 million reserve was not tied to the wide-ranging mortgage problems that Citigroup and other large banks have spent years trying to settle, but he would not be much more specific.
"It's tied to the U.S. consumer business," he told reporters, before declining to comment "on reserving actions unless it's related to a specific settlement."
Such a settlement might not be official yet, but one of the likeliest targets appears to be the insurance-like payment protection plans that Citigroup and other banks sell to credit card customers. Capital One (COF) and Discover Financial Services (DFS) last year agreed to respective settlements of $210 million and $214 million over their marketing of those products, and the CFPB has warned other banks they will face similar scrutiny.
"We continue to expect that more such actions will follow," CFPB Director Richard Cordray said in September. "In the meantime, 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."
A CFPB spokeswoman declined to comment on Thursday.
Banks have scrambled to review their payment protection plans, identity-theft protection and other add-on products since the summer, when the CFPB announced its first action against Capital One. Bank of America (BAC) stopped offering its version of payment protection in August, but Gerspach said that Citigroup is still offering some versions of card add-on products.
"Like the rest of the industry, a lot of those products have been re-reviewed and rethought," he told reporters. "We've rethought our offerings. There are still add-on products that are being sold, and there are some that we've altered."
Citigroup could also be facing a regulatory action similar to the multi-agency settlement with American Express (AXP), which in October agreed to pay $112 million over its marketing, debt-collection and credit-reporting practices. Or it could be reserving against an eventual fine over anti-money-laundering issues, after the Office of the Comptroller of the Currency issued a cease-and-desist order against the bank in April for violating the Bank Secrecy Act. But industry members say it is unlikely that such an action would be directly tied to Citigroup's U.S. consumer business.
When confronted by investors during much of the last decade about predatory practices, Citi card executives usually stated that"if they did not do these things, then the equity analysts would be on their backs for underperformance". $500 million may be a small price to pay for a "lack of fortitude" per Gerspach's comments.