Discover to refund $200 million to credit card customers

It is very good to see the Consumer Financial Protection Bureau taking action to protect the consumers from the financial institutions continued efforts to evade the law and take a little bit from millions of consumers. This type of behavior has been tolerated previously, and should never have been. The financial institutions strategy to take small amounts from millions of people was a wise way of dealing with the tendency of law enforcement to ignore such “small infractions” – they didn’t seem to bother seeing that taking small amounts from millions of people results in hundreds of millions of dollars in ill gotten gains.

Far too much of the bad practices are continuing. And when they are caught the consequences are far too small (which is why they keep behaving unethically). Discover is only being charged $14 million in civil penalties for their lapses (and has to return $200 million it took unfairly).

It is good to have police to try and catch literal pickpockets. And it is good to have the Consumer Financial Protection Bureau to catch financial institutions that take far more than pickpockets can dream of away from the wallets of consumers.

Related: Capital One Bank Agrees to Refund $150 Million to 2 Million Customers and Pay $60 Million in Fines – Very Bad Customer Service from Discover Card – Credit Card Regulation Has Reduced Abuse By Banks – Continued Credit Card Company Customer Dis-Service – I Strongly Support the Consumer Financial Protection Bureau

It will take much more than this small, good step, to catch and reserve their bad behavior, before they will modify their ethical compasses or be replaced by those that treat customers honestly (as the costs of the un-ethical behavior are too much too tolerate). Undoubtably the ethically challenged “leaders” will attempt to pay politicians enough cash to stop enforcement of the laws and get even more lax laws then they have already paid for.

As I have stated before you can’t count on the system providing trust-worth financial institution that behave with integrity. If you don’t want to be ripped off you have to assume your financial institution is going to try everything they can to trick you out of your money and think of them as you would someone you see picking the pockets of others all around you. If you are nice, ethical and have a desire to help you might try to stop the pick-pocket (you might even tell the police to stop this person that is taking others money). At the very least you will be very protective anytime you are close to the pick-pocket.

Even with congressional attempts to stop the CFPB from being able to enforce laws against their big donnors, the CFPB has announced their first public enforcement action: an order requiring Capital One Bank to refund approximately $140 million to two million customers and pay an additional $25 million penalty. This is a good, small step that is helping creating a rule of law instead of a rule of those capturing regulators and giving lots of cash to politicians. But it is a very small step. The system is still mainly about captured regulators and giving lots of cash to politicians.

This action results from a CFPB examination that identified deceptive marketing tactics used by Capital One’s vendors to pressure or mislead consumers into paying for add-on products such as payment protection and credit monitoring when they activated their credit cards.

“Today’s action puts $140 million back in the pockets of two million Capital One customers who were pressured or misled into buying credit card products they didn’t understand, didn’t want, or in some cases, couldn’t even use,” said CFPB Director Richard Cordray. “We are putting companies on notice that these deceptive practices are against the law and will not be tolerated.”

Consumers with low credit scores or low credit limits were offered these products by Capital One’s call-center vendors when they called to have their new credit cards activated. As part of the high-pressure tactics Capital One representatives used to sell these add-on products, consumers were:

• Misled about the benefits of the products: Consumers were sometimes led to believe that the product would improve their credit scores and help them increase the credit limit on their Capital One credit card.
• Deceived about the nature of the products: Consumers were not always told that buying the products was optional. In other cases, consumers were wrongly told they were required to purchase the product in order to receive full information about it, but that they could cancel the product if they were not satisfied. Many of these consumers later had difficulty canceling when they called to do so.
• Misinformed about cost of the products: Consumers were sometimes led to believe that they would be enrolling in a free product rather than making a purchase.
• Enrolled without their consent: Some call center vendors processed the add-on product purchases without the consumer’s consent. Consumers were then automatically billed for the product and often had trouble cancelling the product when they called to do so.

One of the less obvious costs of a poor credit rating these days is large companies see you as someone to take advantage of. They often target those with poor credit for extremely lousy deals that they wouldn’t try to sell to those with good credit. The presumption, I would imagine, is someone able to maintain a good credit rating is much less likely fall for our lousy deals.

Related: Protect Yourself from Credit Card Fraud (facilitated by financial institutions) – Anti-Market Policies from Our Talking Head and Political Class – Banks Hope they Paid Politicians Enough to Protect Billions in Excessive Fees

Enforcement Action
Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB has the authority to issue Consent Orders and take action against institutions engaging in unfair, deceptive, or abusive practices. To ensure that all affected consumers are repaid and that consumers are no longer subject to these misleading and high-pressure tactics, Capital One has agreed to:

• End deceptive marketing: Capital One has ceased all marketing of these products, and will not resume doing so until Capital One submits a compliance plan, acceptable to the Bureau, which helps ensure these unlawful acts do not occur in the future.
• Complete repayment, plus interest, to two million consumers: Capital One will pay approximately $140 million to all of the estimated two million consumers who feel victim to this scheme.
• $25 million penalty: Capital One will make a $25 million penalty payment to the CFPB’s Civil Penalty Fund.

Today’s action is being taken in coordination with the Office of the Comptroller of the Currency (OCC), which is separately ordering restitution of approximately $10 million from Capital One. The OCC’s order has restitution for additional consumers harmed by unfair billing practices taking place between May 2002 and June 2011 in violation of Section 5 of the Federal Trade Commission (FTC) Act. For the combined activity, the OCC is assessing a $35 million civil money penalty against Capital One.

Sadly we have been (and continue to be) forced to suffer through an massive imbalance in power. Large financial companies, through large cash payments to politicians and capturing regulators, have been able to create a system where widespread illegal actions go unchecked. The CFPB has been able to make some progress, even while those in congress try to prevent such enforcement against those giving them cash. You might think the politicians would care more about protecting those who will vote from organizations trying to rip them off, but the evidence shows you would be wrong. If we start voting for people that have that attitude it will be a very good day for the USA.

Chart showing loan delinquency rates from 2000-2011, shows seasonally adjusted data for all banks for consumer and real estate loans. The chart is available for use with attribution. Data from the Federal Reserve.

Residential real estate delinquency rates increased in the first half of 2011 in the USA. Other debt delinquency rates decreased. Credit card delinquency rates have actually reached a 17 year low.

While the job market remains poor and the serious long term problems created by governments spending beyond their means (for decades) and allowing too big to fail institutions to destroy economic wealth and create great risk for world economic stability the USA economy does exhibit positive signs. The economy continues to grow – slowly but still growing. And the reduction in delinquency rates is a good sign. Though the residential and business real estate rates are far far too high.

Related: Consumer and Real Estate Loan Delinquency Rates 2000-2010 – Real Estate and Consumer Loan Delinquency Rates 1998-2009 – Government Debt as Percent of GDP 1998-2010 for OECD

Notes: these data are compiled from the quarterly Federal Financial Institutions Examination Council Consolidated Reports of Condition and Income. Charge-offs are the value of loans and leases removed from the books and charged against loss reserves. Charge-off rates are annualized, net of recoveries. Delinquent loans and leases are those past due thirty days or more and still accruing interest as well as those in nonaccrual status.

Charge-offs, which are the value of loans removed from the books and charged against loss reserves, are measured net of recoveries as a percentage of average loans and annualized. Delinquent loans are those past due thirty days or more and still accruing interest as well as those in nonaccrual status. They are measured as a percentage of end-of-period loans.

Secondly, you should have long ago severed any ties with the large banks (that not surprisingly are the ones announcing the huge fees, so far). They provide lousy service and extract exorbitant fees whenever they can sneak them by you. Choosing to do business with companies that you must remain hyper vigilante to abuse from is just not sensible. Small banks unfortunately get bought out by the large banks to prevent competition. So while using small banks is ok, you keep having to go to a new one as the large ones buy out your bank to prevent the competition.

So it is more sensible to just pick a credit union. Credit unions are decent overall. Some can still be bad choices but it is almost impossible to do worse than any of the large banks. If you use ATMs a good deal make sure you minimize ATM fees when selecting a credit union (their policies in that area – waived fees, network ATM access… are significantly different between your options).

The free checking we have grown accustom to may well be on the way out. That seems fine to me. Essentially the government’s subsidy to the large banks and financial institutions in repressing short term interest rates (at the expense of course of savers and retirees) has greatly reduced the value of checking and savings balances at banks. I am sure the large banks will be the most customer unfriendly as fees are added to accounts, based on their track record.

Obviously you should not carry credit card balances, with high interest rates.

There really is almost no excuse for dealing with the large banks (other than a mortgage that was sold to them without your permission where you have no option but to put up with their behavior as their customer). Many of the other extremely bad customer service industries (cable TV, internet access providers, airlines) have monopolistic powers than often make it extremely difficult to avoid dealing with them. Of course the large banks make huge anti-competitive moves that shouldn’t allowed in any capitalistic system. But then our system is more about what you can buy with your cash payments to congress than capitalism. And you can’t accept the proponents claims of capitalism as a reason to do what they ask; more often then not those playing the capitalism over government argument are asking for anti-capitalist measures (allowing anti-competitive practices etc.) in support of special interest at the expense of society (markets require regulation to have the benefits of competition provide a dividend to society).

Related: Credit Card Regulation Has Reduced Abuse By Banks – Credit Card Issuers Still Seeking to Take Your Money – More Outrageous Credit Card Fees

Because financial fraudsters are allowed to continue without much fear of prosecution: thousands, or tens or thousands, or hundreds of thousands and then maybe something will be done, of course that is a lot of people to suffer before action is taken. For that reason we are subject to long standing schemes to take money fraudulently go on for a long time. I wouldn’t even be surprised if most companies found to have taken money that isn’t theirs are left off when they refund money to those people that caught them and that is seen as ok.

Given this state of affairs, many have discovered just sending bills to people and companies and billing your credit card for things you didn’t order is a good way to steal money. Since law enforcement is extremely lax about stopping this. It is in your interest to protect yourself.

Bill Guard is a new service to watch your credit card charges and alert you to potentially fraudulent charges. It seems like a pretty good idea. Like Google flagging spam email for you. I really would think credit card companies should do this (they do but I guess not nearly well enough – no surprise there). I don’t so much love the idea of sharing credit card info with these people. And I don’t charge much so I can review my bill easily, myself. I can imagine lots of others though have difficulty remember every charge. If so, this may well be wise.

If you are as skeptical as me, you might think this is a sponsored post or something. Nope, I just read about this and it seemed like a good idea for some people, not me, but some others. Also it has positive externalities. If lots of people use this, fraudulent charges will become less appealing as a strategy for stealing money and drive down the prevalence of such activities in general. One of the segments of the population especially venerable to charges for services they didn’t order is the elderly (again why the attorneys general refuse to act more forcefully and let them suffer is a very sad situation) but this service could help them, and could help shut down those targeting them (even when that person doesn’t use this service).

Related: I Strongly Support Elizabeth Warren and the Consumer Financial Protection Bureau – Banks Hoping they Paid Politicians Enough to Protect Billions in Excessive Fees (they didn’t – yay) – Tips for using your credit card

Why can a company tell you to hand over money you don’t owe under threat and for them just apologizing (after you spend lots of time and energy) is ok. But if some random person on the street does it that isn’t? I’ll even accept the argument that well occasionally mistakes will be made – fine if the company makes an rare mistake and responds reasonable to the person saying “I don’t owe you the money, don’t demand for what isn’t yours” and let it slide. Many companies seem pretty obviously to fraudulently demand what isn’t theirs and only if you waste your time fighting with them to they relent and allow you not to pay. And they are allowed to operate in this way very profitably.

Although credit card delinquencies were expected to drop, the data released today shows credit card delinquency rates improving by more than at any other time since the recovery began in 2009, both on a quarter-over-quarter basis (-18.9%) and on a year-over-year basis (-34.8%).

“National credit card delinquency rates have fallen to levels not seen since 1994 as consumers continue to tighten their spending,” said Ezra Becker, vice president of research and consulting in TransUnion’s financial services business unit. “TransUnion believes that the recovering economy is only indirectly impacting delinquency rates. More important and impactful to the decline in bank card delinquency are that consumers are using credit cards more responsibly; a large number of delinquent accounts have moved to charge-off status; and lenders remain conservative in their underwriting.”

The record low-level of credit card debt that has continued post recession is supported by a separate TransUnion credit card deleveraging analysis released in July. The analysis found that consumers made an estimated $72 billion more in payments on their credit cards than purchases between the first quarters of 2009 and 2010.

This is good news. We still need to reduce pay off much more of the excessive debt we took on living beyond our means the last few decades, but at least this is a small positive step. Overall consumer debt increased in the 2nd quarter, according to the Federal Reserve, and stands at over $2.45 Trillion. Revolving debt (credit cards) decreased slightly but non-revolving debt increased more. Consumer debt peaked near $2.55 Trillion in 2009 and recently bottomed just below around $2.4 in 2010. Consumer debt totals still need a great deal of improvement.

Related: Consumer and Real Estate Loan Delinquency Rates 2000-2010 – Consumer Debt Down, but Still Over $2.4 Tillion in the USA –

Why I Support Elizabeth Warren and the CFPB

There are few political appointments I care much about. They normally are so co-opted even if they have good ideas they can’t get anything done. Don Berwick is a great person to have lead health care reform. The system is so messed up I am skeptical he can actually get much done, but I also strongly support him.

Elizabeth Warren is excellent and wise enough to actually accomplish things even with those who will attempt to thwart and improvements in the financial system that move forward capitalism at the expense of a few nobles that are protected by political allies. I have no doubt those in power will still thwart most efforts to stop politically sanctioned distortion of markets to enrich a few people that then pay a portion of their gains to the politicians that let them ruin free markets for their own huge personal gains.

Very few political appointees make much difference. If Elizabeth Warren gets this position she will have a good chance and making a huge difference o the quality of life for hundreds of millions of people and the economy overall. That is true even though she will have to continually fight those politicians seeking to protect the anti-competitive benefits they have lavished upon those that pay them to enact policies that benefit them at the expense of everyone else.

Related: If you Can’t Explain it, You Can’t Sell It – Middle Class Families from 1970-2005 (webcast of Elizabeth Warren) – What the Financial Sector Did to Us – Politicians Again Raising Taxes On Your Children

Banks want a favor — at your expense

David Frum, special assistant to President George Bush, is exactly right.

The caps were part of the huge bailout taxpayers gave banks and were meant to be a partial watering down of a few of the smaller favors their bought and paid for politicians had given them over the years (as “punishment” for their misdeeds).

Why we need to wait for us to bail out the banks to stop having us hand over $230 each every year to banks that have anti-competitive pricing power (due to favors congress and administrations have given them at the expense of everyone else) is beyond me. But we keep electing politicians that only decide to water down the favors given top donors when millions of Americans are thrown out of their jobs. And when less than 10% of those jobs have been added back to the economy they already are looking to favor their donors at out expense.

It will be another in the long line of congress siding with those that pay the congressmen lots of cash against the interest of the country if they allow these banks to exploit their oligopolistic position (which congress has granted them for large amounts of cash). The country can’t afford to keep paying billions to those that pay congress a few tens of millions.

On a personal finance note, you should just use credit cards and pay them off each month and avoid all the downsides of debit cards.

Related: Credit Card Regulation Has Reduced Abuse By Banks – Chose the Right Bank and Eliminate ATM Fees – Legislation to Address the Worst Credit Card Fee Abuse (2007) – Tips for using your credit card – What the Financial Sector Did to Us

The second half of 2010 saw real estate, agricultural, credit card and other loan delinquencies decrease. The rates are still quite high but at least are moving in the right direction. Residential real estate delinquencies decreased 138 basis points in the second half of 2010, to 9.94%, which brought them to just below the rate at the end of 2009. In the second half of 2010, commercial real estate delinquencies decreased 77 basis points to 7.97% (which was also exactly 77 basis points less than at the end of 2009. Agricultural loan delinquencies decreased 76 basis points, to 2.55% (down 53 basis points from the end of 2009). Consumer loan delinquencies decreased, with credit card delinquencies down 90 basis points to 4.17% and other consumer loan delinquencies down 27 basis points to 3.1%. The credit card delinquency rate decreased a very impressive 219 basis points in 210.

Related: Real Estate and Consumer Loan Delinquency Rates 2000 through June 2010 – Real Estate and Consumer Loan Delinquency Rates 1998-2009 – Bond Rates Remain Low, Little Change in Late 2009 – posts with charts showing economic data

Chart showing the loan delinquency rates from 1998-2009 by Curious Cat Economics Blog, shows seasonally adjusted data for all banks for consumer and real estate loans. The chart is available for use with attribution, data from the Federal Reserve.

Notes: these data are compiled from the quarterly Federal Financial Institutions Examination Council Consolidated Reports of Condition and Income. Charge-offs are the value of loans and leases removed from the books and charged against loss reserves. Charge-off rates are annualized, net of recoveries. Delinquent loans and leases are those past due thirty days or more and still accruing interest as well as those in nonaccrual status.

Charge-offs, which are the value of loans removed from the books and charged against loss reserves, are measured net of recoveries as a percentage of average loans and annualized. Delinquent loans are those past due thirty days or more and still accruing interest as well as those in nonaccrual status. They are measured as a percentage of end-of-period loans.

Revolving consumer debt now stands at $814 billion down $52 billion this year. That is on top of a $92 decline in 2009. Hopefully we can increase the size of the decrease going forward. As individuals we should aim to have no consumer debt and build up cash reserves instead (the way the debt figures are calculated though, even if you don’t really have any debt, say you pay off your credit card bill each month, I believe your balance is still seen as “debt”, it is credit extended to you).

On September 30, 2010 total outstanding consumer debt was $2,411 billion (a decline of just $8 billion in the 3rd quarter, after a decline of $21 billion in the 2nd quarter). This still leaves over $8,000 in consumer debt for every person in the USA and $20,000 per family.

Consumer debt grew by about $100 billion each year from 2004 through 2007. In 2009 consumer debt declined over $100 billion: from $2,561 billion to $2,449 billion. For the first 3 quarters of 2010 it has declined just $38 billion.

The huge amount of outstanding consumer and government debt remains a burden for the economy. At least some progress is being made to decrease consumer debt. Credit card delinquency rates have actually been decreasing the last couple of year (from a high of 6.75% in the 2nd quarter of 2009 to 5% in the 2nd quarter of 2010 (I would guesstimate the average for the decade was 4.5%).

Those living in USA have consumed far more than they have produced for decades. That is not sustainable. You don’t fix this problem by encouraging more spending and borrowing: either by the government or by consumers. The long term problem for the USA economy is that people have consuming more than they have been producing.

We can’t afford to seek even more short term spending powered by more debt. Government debt has been exploding so unfortunately that problem has continued to get worse.

Data from the federal reserve.

Related: Consumers Continue to Slowly Reduce Their Debt Level – The USA Economy Needs to Reduce Personal and Government Debt – Consumer debt needs to decline much more.