Consumer Financial Protection Bureau Snares First Major Bank

By Tedra DeSue - July 23, 2012 | Tickers: BAC, COF, CSH, WFC | 0 Comments

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In a move that is more than likely to create more rumbles throughout the banking industry, the relatively newly founded Consumer Financial Protection Bureau (CFPB) has forced Capital One (NYSE: COF) to pay up for some unscrupulous practices that hurt consumers.

On Wednesday, the agency, a brain child of the 2010 Dodd-Frank Act, determined that Capital One “marketed certain fee-based services to credit card accounts in a way that violated the law.” Instead of raising sand and saying it did not, Capital One agreed to automatically refund $140 million to two million customers.

This is a small drop in the bucket for Capitol One, which has a market cap of $28 billion. However, the settlement is important because it marks the first time the highly scrutinized CFPB has flexed its muscle. It puts other banks on notice that more of their revenue streams could dry up as this agency kicks into high gear.

Another area the CFPB has set its sights on is the payday lending industry. Most of us will think of stores like Cash America, (NYSE: CSH), EZ Corp. and World Acceptance Corp. making up this group of lenders. They are referred to as non-banks because they do not have a bank, thrift or credit union charter. However, the industry is joined by Wells Fargo (NYSE: WFC), which does have a charter.

For the past several months, the CFPB has been accepting comments on its proposed rule that would outline procedures to supervise lenders that offer payday loans. Wells Fargo has particularly been singled out as being a part of this industry. The interest rates on its loans can exceed 200%. The deadline for comments is July 31.

Wells Fargo’s program, like others, is designed to provide short-term loans to its customers who have a financial emergency. Loans are made up to $500 and customers are charged $1.50 for every $20 borrowed. Wells Fargo does not deny that the service is expensive. Simply, there are some who can’t qualify for traditional loans and this service helps them. The CFPB wants to make sure the lenders are being crystal clear with customers about the terms.

Whether it is the unchartered lenders, or those with charters, they are all trying to carve out places in the lucrative payday lending industry as a way to increase their revenues. It would not surprise me at all if other big banks are considering marketing programs like these to their low income customers.

Observers of the wide wielding powers of the CFPB said that its authority would likely be challenged down the road as it implements more of its rules. Questions remain over the legality of many of the provisions of the Dodd-Frank Act, which created it.

In the meantime, Capitol One may find itself in the company of several of its peers when it comes to being on the wrong end of the law with the CFPB. Given one of its main purposes is to crack down on banks gone wild, charging customers astronomical fees, skirting the law and participating in other practices that consumers have complained about for years, the CFPB will be a force to be reckoned with. The CFPB stopped short of naming the other banks, like JPMorgan, Citigroup, Bank of America. However, officials did make it clear that others were being investigated for similar practices.

Capitol One may be a victory for the CFPB, but I don’t believe all banks will rollover and settle. They have too much, monetarily, at stake.

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