In mid-July the recently-created Consumer Financial Protection Bureau issued its first-ever fine, hitting Capital One with a $165 million penalty for misleading consumers into buying extra credit card products. While good news in one sense, CFPB's action also illustrates a serious flaw in our financial regulatory system that has yet to be remedied.
The fine is good news because Capital One has a long record of predatory behavior toward its credit card customers. In this case, the company pressured those customers into buying additional services like credit monitoring and payment protection. In its announcement, CFPB noted that other institutions engage in similar practices, and they can all expect a crackdown.
Good. That's exactly the sort of thing CFPB should be doing.
But a much more extensive history of unsavory behavior by Capital One came to light last year, when the Federal Reserve Board considered Capital One's application to take over ING DIRECT, a major Internet bank. The Greenlining Institute joined scores of other community representatives in testifying against the merger at Fed hearings in three cities. Regulators heard a succession of horror stories describing tricky marketing and shady practices in the bank's subprime credit card business, practices seemingly designed to generate millions in fees at the expense of low-income customers.
In a system that made sense, this sorry record would have been enough to block the merger. It's bad enough that the joining of Capital One and ING created yet another too-big-to-fail bank; that it created a too-big-to-fail bank with a record of abusing and exploiting customers struck us -- and many other consumer advocates -- as beyond the pale.
But the merger received approval in February. It was able to go through because of a flaw in the system that can now be easily fixed.
The Bank Holding Company Act requires the Fed to consider whether bank mergers and acquisitions "produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects." To evaluate these factors, the law instructs the Fed to review, among other things:
- Implications for market competition
- Financial and managerial resources of the companies involved
- Convenience and needs of the community to be served
- Risks to the stability of U.S. banking or financial system
- Public benefits of the proposal
- Compliance with the Community Reinvestment Act and state community reinvestment laws
The massive consumer complaints about Capital One logically belong in any discussion of "public benefits," but consumer issues seem to get minimal attention. The Fed found consumers could benefit from the deal since Capital One customers would be able to access ING Direct's services, including its robust Internet banking platform, and vice versa. But rather than investigate those complaints from customers, the Fed simply stated that Capital One's "consumer complaints processes... could be improved" and directed the newly-merged bank to come up with a process for improving them.
If this is the best the system can do when a bank appears to be cheating and gouging customers, we have a problem.
Bank mergers and acquisitions are a rare opportunity to press the "pause" button and take a look at how financial institutions are serving both their customers and the overall financial system. It's one thing to say there is public benefit from a bank takeover because the banks' customers will have access to new options, but it's quite another to ensure that those options are safe and trustworthy. We now have a simple way to do that.
The Consumer Financial Protection Bureau wasn't fully operational at the time of the Capital One/ING hearings, but it is now. So here's a modest proposal: Let's have the agencies actually talk to each other.
Specifically, when the Federal Reserve Board considers a bank merger and receives public comments indicating possible mistreatment of consumers, it should ask the CFPB to investigate. After all, investigating consumer complaints is a major part of CFPB's job.
CFPB has a database of consumer complaints that it recently made available to the public, which could provide valuable fodder for such an investigation. One financial blogger crunched the numbers from this database and found that Capital One drew more complaints than any other credit card issuer, even though other banks do more credit card business.
This kind of information should be part of the discussion when banks ask for permission to swallow up other banks. When huge financial institutions are making multibillion dollar deals, the customers who will have to live with the results deserve to be heard.