A subprime credit card company in Delaware will pay nearly $3 million in refunds and penalties for allegedly charging fees that the Consumer Financial Protection Bureau says violated federal law.

The CFPB ordered Continental Finance Company LLC to issue refunds to approximately 98,000 consumers who were charged illegal credit card fees. The agency found that the company's "fee-harvester" subprime credit cards misrepresented certain fees and hit consumers with illegal charges. The order to refund $2.7 million also requires the company to pay a civil penalty of $250,000.

"Continental Finance misled consumers and charged them illegal fees,” said CFPB Director Richard Cordray. "These excessive fees are especially harmful because the cards were targeted to consumers with subprime credit who are often economically vulnerable. We will act to protect people who are wronged in this market.”

According to the CFPB, Continental Finance credit cards often have low credit limits and impose high upfront fees. Credit cards with such features are often referred to as fee-harvester credit cards. The company partners with banks or credit unions to issue its credit cards.

The CFPB investigation found violations occurred in connection with Continental cards issued between April 2012 and July 2013. Specifically, Continental Finance:

    •    Misled consumers about credit card costs: Continental’s materials indicated that consumers would only be charged a monthly paper statement fee if they “elected” paper billing. In reality, Continental automatically required certain consumers to pay a monthly $4.95 fee unless they opted out through an online process.

    •    Charged consumers illegal credit card fees: These paper statement fees also violated the ban on credit card companies from requiring fees more than 25% of the consumer’s credit limit during the first year after opening an account.  Specifically, Continental charged some consumers up to an additional $49.50 in “paper statement fees” for providing paper billing statements during that time. When added to the $75 maintenance and setup fee, the paper statement fees constituted as much as 42% of the consumer’s $300 credit limit during the first year after account opening.
 
   •    Misrepresented account insurance: Continental stated in some consumer cardholder agreements that security deposits consumers provided for certain credit cards would be “FDIC insured” when, in reality, for a time period many funds were not FDIC insured.
 
The CFPB found that Continental Finance engaged in deceptive acts or practices by misrepresenting the paper statement fee and whether security deposits would be “FDIC insured.”

The company also violated the Truth in Lending Act, according to the CFPB, by requiring consumers to pay fees more than 25% of the credit limit during the first year after account opening.

To address these violations, along with the fine, the CFPB’s consent order also requires Continental Finance to:
 
    •    Conveniently repay consumers: Consumers will receive a credit to their account, a check in the mail, or both, depending on their circumstances. Consumers are not required to take any action to receive their refund.

    •    Stop engaging in illegal practices: Continental is prohibited from charging illegal fees that exceed 25% of a consumers’ credit limit in the first year of the account. Continental is also prohibited from making misrepresentations about the fees associated with their credit cards, as well as whether consumers’ funds are covered by FDIC or other deposit insurance.   

    •    Submit to federal supervision for the first time: Continental will be subject to the CFPB’s supervisory authority for the first time, allowing the CFPB ongoing oversight of the company to ensure harmful practices do not reoccur. This supervision can include examinations of the company and monitoring by the CFPB for compliance with consumer financial protection laws.

In 2009, Congress passed the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act, to increase protections for consumers against unfair credit card billing practices. This law included a fee-harvester provision to increase consumer protections for predatory cards with high upfront fees.

The rules under the CARD Act ban credit card companies from charging consumers fees that exceed 25% of the credit limit during the first year after opening an account. That means for a card with a $300 credit limit, consumers generally can’t be required to pay more than $75 in fees the first year the account is open.

Continental offered the following credit cards: the Cerulean Card, the Matrix Card, and the Verve Card. Consumers that signed up for these Continental credit cards typically received a $300 credit limit and were charged an upfront fee of $75 which immediately met the 25% fee limit under the CARD Act. During the next twelve months, Continental then charged certain consumers fees that exceeded the fee cap.

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