Capital One will pay $12 million to thousands of military customers it overcharged for loans and improperly foreclosed upon, as part of a settlement with the Department of Justice and the Office of the Comptroller of the Currency.
The agencies on Thursday announced a lawsuit and an enforcement action against Capital One over violations of the Servicemembers Civil Relief Act, a law that bars lenders from foreclosing on active duty military members and caps their interest rate on all pre-existing consumer debt at 6%.
Over a five-year period, Capital One employees failed to apply the interest-rate cap for some eligible credit card and auto loan customers and initiated foreclosure and car repossession proceedings against some active duty servicemembers, according to the Justice Department.
"Today's actions by the OCC and the Department of Justice help assure that servicemembers receive every benefit they are entitled to under the law in the future and serve to correct past violations of SCRA," said Comptroller of the Currency Thomas Curry in prepared remarks during a conference call.
He added that the two agencies' actions are "a good example of where government is working to ensure financial institutions not only operate in a safe and sound manner but in a way that treats all of their customers fairly."
It is the second recent big-dollar regulatory action against Capital One, which last week found itself the target of the Consumer Financial Protection Bureau's first enforcement action. The McLean, Va., bank agreed to pay penalties totaling $210 million in that case, to settle claims that it improperly marketed its credit card add-on products, including payment protection plans.
About 4,000 Capital One customers were affected by the SCRA violations, assistant attorney general Thomas Perez said during the conference call. That compares to the roughly two million people who were affected by the bank's marketing of its credit card add-ons.
Industry members called the new settlement important, but less significant than the bank's earlier run-in with the CFPB.
"This is really enforcing a statute and a regulation that has been outstanding for some time. It's smaller in dollar amount, largely because … there were fewer accounts involved," since military customers are only one subset of a Capital One's borrowers, said Stacie McGinn, a partner at Simpson Thatcher & Bartlett and a former deputy general counsel at Bank of America.
Capital One is only the latest big bank to face charges of mishandling military customer accounts. Last year, Bank of America (BAC) agreed to pay $20 million in restitution to SCRA borrowers as part of a similar deal with the Justice Department.
"This really should put banks on notice, if they aren't already, that compliance programs are going to be held to a very rigorous standard with respect to protecting the rights of service members," said Barak J. Sanford is a managing director at Promontory Financial Group.
Capital One announced its own military lending practices overhaul Thursday as part of the settlement. Starting August 1, the bank will lower the interest rate for all SCRA-eligible accounts to 4%, below the 6% cap mandated by the law. It will apply SCRA benefits to new loans taken out while the military customer is on active duty, not just before their duty begins, and the bank will also extend the 4% cap on all loans for a year after the military customer's duty ends. (SCRA requires that the cap be extended for a year on mortgages only.)