Federal regulators are seeking $200 million in restitution for consumers from a major credit card marketer and two banks for how they marketed and issued subprime credit cards.
Later story: See FTC: Subprime credit card marketer must repay $114 millionFederal regulators are seeking $200 million in restitution for consumers from a major credit card marketer and two U.S. banks for alleged unfair and deceptive marketing tactics on so-called “fee harvester” credit cards. Potentially, hundreds of thousands of consumers could be eligible for compensation, regulators said Tuesday.
The announcement is just the latest in a number of actions taken by regulators to crack down on the credit card industry. In May, the Federal Reserve Board announced sweeping changes to credit card regulations to curb unfair and deceptive trade practices and beef up disclosure requirements.
Following a two-year joint investigation by the Federal Deposit Insurance Corporation (FDIC) and Federal Trade Commission (FTC), the agencies Tuesday said they were seeking restitution from Atlanta-based CompuCredit Corp., a major marketer of fee harvester credit cards. Also cited: two banks that had third-party agreements with CompuCredit to issue the credit cards. These banks were First Bank of Delaware, Wilmington, Delaware, and First Bank & Trust, Brookings, South Dakota.
Who would pay what?
$200 million in total restitution:
- $150 million CompuCredit
- $35 million First Bank of Delaware, Wilmington, Delaware
- $15 million First Bank & Trust, Brookings, South Dakota
In addition, the FDIC is also seeking civil money penalties of $6.2 million against CompuCredit, and a total of $431,000 against First Bank of Delaware and First Bank & Trust.
A third bank — Columbus Bank and Trust, Columbus, Ga. — agreed to a settlement with regulators and will pay $2.4 million in civil penalties and contribute $7.5 million toward a limited guarantee fund in the event that CompuCredit cannot make good on its restitution obligations.
The final amount of restitution and who qualifies for compensation must be determined by a federal judge, regulators said.
CompuCredit, which claimed to have 5.7 million customer accounts as of Dec. 31, 2007, issued a statement just before the announcement challenging the federal complaint as “untrue and without merit.”
“CompuCredit intends to vigorously contest these unsupported allegations and is confident that it will prevail,” David Hanna, the company’s CEO, said in a press release.
The credit cards involved in the CompuCredit probe included: Aspire, Aspire A Mas, FreedomCard, Tribute, Imagine, Majestic, Aspen, Emerge and Fingerhut Credit Advantage, according to the FDIC. Columbus Bank issued a statement saying it believed the credit card disclosures were clear and complied with the law. Still, the bank “immediately suspended offering Aspire credit cards when it received notice of the FDIC inquiry in the summer of 2006,” according to the statement.
First Bank of Delaware officials said, “The bank believes that the FDIC claims are unfounded and unfair.”
First Bank & Trust officials said they suspended marketing the CompuCredit credit cards in the second quarter of 2007 but denied the FDIC’s accusations of misleading solicitations.
Consumer advocates applauded regulators for taking enforcement action.
“We believe these cards unfairly target low-income and minority communities,” said Keith Corbett, spokesman for the Center for Responsible Lending, a Durham, North Carolina-based consumer advocacy group. “We see CompuCredit a lot at the minority events marketing to the minority community.”
“We’re happy to see that they took some action,” said Chi Chi Wu, a National Consumer Law Center attorney and co-author of a November 2007 report called “Fee Harvesters: Low-credit, High-cost Cards Bleed Consumers.” The study includes several sections on CompuCredit, its history and marketing tactics. “Ultimately, the fundamental problem is that these companies are permitted to charge these outrageous fees.”
Fee harvester credit cards — also called subprime cards — are marketed to people with bad credit who wouldn’t qualify for traditional loans. The cards advertise $500 credit limits, but issuers deduct hefty upfront fees from the available balance. The cardholder may have only a fraction of the $500 left.
Often many of the people with these subprime cards are trying to build their credit scores by showing responsible borrowing and repayment habits.
“The commission believes that it is important for all consumers, including those in the subprime market, to have access to credit cards,” said Lydia Parnes, director of the FTC’s Bureau of Consumer Protection. The FTC cited a Visa card marketed by CompuCredit with a $300 limit and advertising no up-front fees. After account-opening and maintenance fees were deducted, however, the account had only $185 in available credit. “The marketing of these cards must not be misleading,” Parnes said.
“Certain subprime marketing tactics are designed to be unclear about the fees,” FDIC board member Thomas J. Curry said during an afternoon press conference.
Debt collection practices
In addition, the FTC filed suit Tuesday in U.S. District Court in Atlanta charging that CompuCredit and it’s subsidiary, Jefferson Capital Systems LLC, violated the Fair Debt Collection Practices Act. According to Parnes, the companies engaged in harassing, abusive collection tactics with subprime cardholders. The companies “made collection calls in excess of 20 times a day, and sometimes 20 to 30 minutes apart” trying to collect debts, Parnes said.
In his statement, CompuCredit CEO Hanna denied any wrongdoing by Jefferson Capital and said its collection practices are “fully compliant” with state and federal laws.
“We are disappointed that the agency has yet to share with us any factual support for these claims,” Hanna added.
It’s not the first time banking regulators have sought enforcement action against fee harvesters and issuers of subprime credit cards. After an investigation by the Office of the Comptroller of the Currency (OCC) in 2000, Providian, a now defunct subprime credit card issuer that was acquired by Washington Mutual in 2005, agreed to pay $300 million in restitution to consumers.