With only two enforcement actions under its belt, the Consumer Financial Protection Bureau is already sending a clear message to institutions that run afoul of consumer protection laws: get ready to pay big.
Discover Financial Services on Monday became the second firm in the past three months to pay more than $200 million in restitution and civil money penalties for using deceptive practices to market payment protection products.
The payout is substantially higher than the typical settlement between a lender and a banking regulator and confirms what many observers have predicted since the CFPB officially opened its doors last year: that it wants to significantly raise the financial cost of violations.
"It would appear that the hundred-million-dollar judgments, instead of being the exception, are tending to be the rule, which is unusual," said Stacie McGinn, a partner with Simpson Thacher & Bartlett LLP.
In a joint enforcement action, the CFPB and Federal Deposit Insurance Corp. ordered Discover to pay $200 million in restitution to roughly 3.5 million customers who were charged for one or more payment protection products between Dec. 1, 2007, and Aug. 31, 2011. The order also requires Discover to pay a $14 million civil money penalty, which will be split between the CFPB's civil penalty fund and the U.S. Treasury.
"We want to make it more expensive to break the law than to abide by it," CFPB Enforcement Director Kent Markus said on a conference call with reporters Monday.
On the same call, CFPB Director Richard Cordray issued a stark warning to other institutions.
"We continue to expect that more such actions will follow," Cordray said. "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."
The Discover order comes on the heels of a $210 million penalty against Capital One Financial Corp., which included a $25 million civil money penalty to the CFPB, and $35 million penalty to the Office of the Comptroller of the Currency.
Although the civil money penalty to be paid by Discover is smaller, especially as a proportion of the overall penalty, observers said it is still enough to make other institutions sit up and take notice.
"In all likelihood, we probably will see another one or two of these," Anand Raman, a partner with Skadden Arps, said of the large penalties. "Some card issuers have big customer bases, and if you're talking about refunds to a sizeable percentage of those customers, that can easily add up to a big amount."
Discover first disclosed in January that it was bracing for an enforcement action by the bureau and the FDIC, and it is facing a wave of shareholder lawsuits related to the marketing of such products.
Nearly all of the customers who were charged for the products will receive some restitution — except for customers that actually used the payment protection product — with the amounts varying depending on how long the consumer held the product, and when they purchased it.
Approximately two million customers will receive full restitution for all of the fees paid — ranging from $2.99 to $9.99 a month, depending on the product — and every consumer will be refunded at least 90 days’ worth of fees paid.
As part of the order, the company also agreed to eliminate deceptive practices from its telemarketing, such as implying that products were an added benefit that came with being a Discover customer, rather than an additional product for which they would be charged.
Investigators from CFPB and FDIC also said telemarketers spoke "unusually fast" when explaining the products' costs and terms, and in some cases even processed purchases without consumers' consent.
The company must submit a compliance plan to the CFPB and FDIC for approval, and will be monitored for compliance by an independent auditor.
On a conference call with reporters, officials were careful to say that the investigation focused merely on the marketing of such products, and refused to say whether the products were inherently unfair.
"When consumers are given a chance to understand what they're purchasing and that they are actually purchasing a product, they have the opportunity to make good decisions with that information," Markus said.
Isaac Boltansky, an analyst with Compass Point Research and Trading, noted that regulators have been focusing on the products since March 2011, when a Government Accountability Office report found that "cardholders received 21 cents in tangible financial benefits for every dollar spent in debt protection product fees among the nine largest issuers in 2009."
"I don't think that there's any interest to completely regulate these products out of existence," Boltansky said. "Because if structured properly, there can be a consumer benefit. This is much more of a focus on how these products are presented to customers."
Still, some issuers are rethinking the business line. Bank of America, for example, ceased selling all payment protection plans to credit card customers in August.
Unlike Capital One, which used a third-party vendor to market the add-on products, Discover has its own, in-house marketing department that promotes its payment protection products. According to the company's 10-K filing this year, the products generated $428.2 million in income in 2011.
"This is a core tenet of their business practice, which is why I believe they intend to carry on with it, unlike Capital One, which washed its hands of it," said Boltansky.
A spokesman for the company confirmed Monday that "Discover's current intention is to continue to offer and market these products."