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Bank Liability in the News

by Mary Beth Guard, BOL Guru

Some of the headlines recently haven't been pretty. "$71 million awarded in bank suit." "Providian to Cease Unfair Practices, Pay Consumers Minimum of $300 Million." "Bank Agrees to Pay $3.2 Million in Restitution." What's behind the mind-boggling numbers?

A jury socked Washington Mutual Finance Group, LLC, a Seattle-based financial company which operates consumer and commercial banking, mortgage lending, consumer finance and financial services offices around the country, with a verdict of more than $71 million after it found the company had persuaded customers to renew loans with undisclosed additional charges. The verdict included $69 million in punitive damages and more than $2.2 million in compensatory damages.

The practices Washington Mutual allegedly engaged in sound like textbook techniques for predatory lending. After borrowers had made payments on existing loans, the company enticed them into renewing. The 23 plaintiffs asserted the lender did not disclose insurance premiums included in the renewals.

The $300 million payout in the Providian case comes under a settlement reached between Providian and the OCC and San Francisco District Attorney. The OCC and San Francisco DA had accused the bank of engaging in a pattern of misconduct in which it misled and deceived consumers in order to increase profits. OCC believes hundreds of thousands of consumers were harmed while the bank profited.

The authorities claimed the bank's conduct involved unfair and deceptive practices in violation of the Federal Trade Commission Act, was unsafe and unsound within the meaning of the Federal Deposit Insurance Act, and violated the Fair Credit Reporting Act and the California Business and Professions Code.

Specifically, OCC alleged:
The bank failed to adequately disclose to consumers the significant limitations in a credit protection program it marketed. While consumers were told they would not have to make card payments for up to 18 months in the event of involuntary unemployment, hospitalization, accident, sickness or disability and that interest would not accrue, late fees would not be charged, and the account would not be reported to credit bureaus, they were not adequately informed about several important coverage limitations. For example, benefits would be limited to the number of months in which the consumers had paid credit protection fees, rather than the advertised 18 months. Benefits for involuntary unemployment could not be used until three months of fees had been paid. The bank could deny benefits if the credit card was not current or was over the limit.

Providian urged consumers to transfer credit card balances to a Providian-issued credit card, promising them lower rates than they had been receiving, but Providian's marketing meant that customers did not find out how much they would save until after they signed up and transferred balances, and in some cases the customers actually ended up with higher rates, then learned that if they wanted to transfer balances out they would incur a 3 percent "balance transfer fee". Those who did receive a lower rate had savings that amounted to just 3/10ths of a percentage point in one promotion and 7/10ths in another.

The bank advertised a "No Annual Membership Fee" credit card, but failed to adequately disclose the card required the purchase of credit protection at a cost of $156 per year.

The bank's "Real Check" program promised a check for $100 or $200 to those who transferred credit card balances and said in some of its ads "We want to give you $200! Why? It's simple. . . We want your business now." While that may have sounded good on the surface, Providian failed to tell customers they would be required to transfer specific balances ($10,000 in one promotion!) in order to receive the $200. Employees were even instructed to contradict customers who claimed they weren't told of the balance transfer requirement.

Under a voluntary settlement reached without Providian admitting or denying wrongdoing, Providian must pay out at least $300 million to its customers. It must also changes its policies and telemarketing scripts to ensure all fees, charges and product limitations are fully and accurately disclosed to consumers before they purchase any of Providian's products. Not only must Providian refrain from making any misleading or deceptive representations to consumers, they must also give consumers the right to cancel purchases up to 30 days after the first bill.

In the third case, the OCC accused Direct Merchants Credit Card Bank, Scottsdale, Arizona, of violating Regulation Z and of engaging in unfair and deceptive practices in violation of the Federal Trade Commission Act. The bank entered into a consent order. In part, the consent order requires it to:
Pay restitution and reimbursement to cardholders who were downsold, refund any application or processing fee the consumer had to pay because he was downsold, plus any annual fee or higher interest rate for the first year, if the consumer would not have had to pay the fee or higher interest rate if he had been approved for the more favorable fee;

Change its marketing practices and disclosures;

Reimburse consumers for any application or processing fees that should have been disclosed as "finance charges" but were not.

Total tab - approximately $3.2 million in restitution to 62,000 consumers.

OCC claimed:
The bank engaged in unfair and deceptive practices in connection with "downselling" consumers by prominently marketing to consumers one package of credit card terms, but then approving those consumers only for accounts with less favorable terms, and touting the approved account in a fashion designed to mislead the customer about the fact he or she had been "downsold." OCC pointed to three types of objectionable downsells: l) processing fee downsells; 2) unsecured to partially secured downsells; and 3) partially secured to fully secured downsells.

The Bank violated the Truth in Lending Act (TILA) and Regulation Z by failing to disclose certain application or processing fees as "finance charges," and by failing to disclose in a table the rate, fee, and cost information for any account for which the consumer may be charging a processing fee to customers who were "downsold" credit cards. The bank charged application or processing fees only to approved applicants. Since it didn't charge them to all applicants, the fees should have been treated as finance charges, and the failure of the bank to do so violated the Truth in Lending Act and Regulation Z. The bank also allegedly failed to provide rate, fee, and cost information in a table in its solicitations as required by TILA and Regulation Z.

Expensive lessons. What can you learn from them? What practices might your institution be engaging in that could be considered unfair and deceptive? Look for them. And if you find them, make them cease immediately.

Originally appeared in the Oklahoma Bankers Association Compliance Informer.

First published on 12/10/01

First published on 12/10/2001

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