Citigroup Inc. will pay roughly $770 million to settle allegations that it misled customers about its credit cards, leading them into buying extra products that they didn’t need or didn’t understand.
The bank on Tuesday agreed to settle with the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency, which accused it of misleading customers into buying “add-on” products that promised to protect them from identity theft or in circumstances where they couldn’t pay their bills.
How Dodd-Frank Changed Banking
The Dodd-Frank Act, which created the Consumer Financial Protection Bureau, is five years old Tuesday. Here’s a look at how it has changed banking regulation.
The bank or its vendors also misled customers about an extra fee that allowed them to pay their bill more quickly, not always clarifying that the fee was optional, according to the CFPB.
The case is one of the largest enforcement actions announced by the CFPB since it was created by the 2010 Dodd Frank financial law. Roughly 8.8 million customer accounts were affected, according to the CFPB, and Citigroup will spend about $700 million refunding them. The bank will also pay a combined $70 million to the CFPB and the OCC.
The bank didn’t admit or deny wrongdoing. It said it has already axed all the products in question, and has already refunded two million of the affected customers, which will count toward the relief tab.
The bank said that affected customers will receive a credit to their account or a check. Customers who have left Citigroup will be mailed a check. The bank said it is fully reserved for the costs of the settlement.
The bulk of the affected customers, about seven million, bought the extra products without knowing their true cost or without receiving their full benefit, the CFPB said. Banks ramped up marketing of add-on products around 2009, as customers became more concerned about their credit standing during the recession and as banks looked for new avenues to generate revenue.
But regulators have grown wary of the products, and other big financial companies including American Express Co., Bank of America Corp. , Capital One Financial Corp. and J.P. Morgan Chase & Co., have settled similar allegations brought by the CFPB.
The Citigroup products meant to protect customers from identity theft, with names such as IdentityMonitor or DirectAlert, generally cost between $7 and $13 a month and promised to monitor customers’ credit reports for signs of fraud. But telemarketers didn’t always make clear that customers who signed up for a $1 monthly trial would have to cancel to avoid future charges, according to the CFPB.
The bank also marketed the product online as “Access to 3-in-1 credit reports,” implying that the product monitored the customer’s report at the three main credit-reporting bureaus. Instead, the products monitored only the credit information provided by a third-party vendor, the CFPB said. Sometimes, because of “various service delivery errors,” customers would pay for the credit-monitoring products but not receive all their benefits.
The other type of product in question offered customers the ability to defer their monthly payments in certain circumstances, such as a job loss or divorce, or to cancel their payment or balance. The products, with names such as Credit Protection and Balance Protector, also charged a monthly fee. Customers often signed up for them when they enrolled for credit cards at stores. The regulator found the bank didn’t tell some customers, including those who were unemployed or disabled at the time of enrollment, that they would be ineligible for certain benefits that accompanied this product.
According to the CFPB, the text on the PIN pads at the stores that sold the cards didn’t make clear that customers were opting in for a separate product. Instead, the text could be interpreted as merely asking customers whether they had received information about the product. The bank also failed to make sure that store employees were clear about the terms.
Another 1.8 million accounts were charged unfair payment fees, the CFPB said. For example, a bank vendor would call customers who had fallen behind on payments, and offer them the chance to spend $14.95 to pay their credit-card bill by phone that day, according to CFPB. The vendor wouldn’t always clarify that there were ways to pay the bill without incurring a fee, the CFPB said.