GE Capital became the subject of the largest federal credit card discrimination settlement last week after the Consumer Finance Protection Bureau (CFPB) charged the bank $225 million in fines and consumer relief. The charges, which involved deceptive telemarketing and discriminatory practices, stemmed from violations of both Dodd-Frank and the Equal Credit Opportunity Act (ECOA).
The latest of six significant actions regarding credit card and debt-settlement activity, the CFPB has netted roughly $1.5 billion in relief for borrowers. A clear sign of danger for any company neglecting strict compliance standards, financial institutions must closely watch the Bureau’s wide-ranging investigations as it continues to exercise and enforce its authority.
Much can be learned from watching GE Capital. After examining the discriminatory practices the retail bank conducted for over four years via their “Statement Credit Offer” and “Settlement Offer”, there are three principles financial institutions can apply to their own business.
The Issue
During the course of their 2012 supervisory quarterly monitoring, GE Capital reported to the CFPB that it had participated in discriminatory practices involving two of their credit card debt-repayment programs. The “Statement Credit Offer” and “Settlement Offer” created incentives for eligible borrowers to make payments on their debt by providing credit to their accounts. In some instances, borrowers were able to settle as much as 55% of their debt through these programs.
GE Capital determined borrower eligibility by several factors including the amount of debt, number of missed payments, and length of time in debt. Between January 2009 and March 2012, the retail bank offered these programs through approximately 400,000 letters, which contained the following verbiage:
“During a quality assurance audit your account was identified to participate in an account credit offer. GE Capital Retail Bank would like to offer you an account credit.”
The complaint filed against GE Capital claimed that approximately 108,000 borrowers who indicated “Spanish-preferred” or listed their mailing address in Puerto Rico did not receive this letter and were denied the opportunity to participate in either program. After it was revealed to the CFPB in March 2012, the Bureau conducted over a year of review in connection with the Department of Justice and determined the practice had been a violation of ECOA.
What We Learned
1. Discrimination can be hard to identify
Harmful practices have the ability to remain unnoticed because the discrimination can be isolated to a particular geographical area or demography. Borrowers, separated by a language and not knowledgeable about the company’s programs, can easily be misled or denied services. Despite the large concentration of victims, GE Capital had managed to operate under these policies since the first quarter of 2009. This willful and intentional discrimination is is a direct violation of ECOA law 15 U.S.C. § 1691(a)(1).
2. Preventing compliance risk is a top-down initiative
Restricting full enjoyment of ECOA rights, whether purposefully or accidentally, is a violation of the law (15 U.S.C. §§ 1691-1691f). Although GE Capital was prepared to offer debt-settlement programs to their customers, their exclusion of Hispanic borrowers proved their regulatory negligence and lack of resolute leadership. When company leadership fails to take affirmative steps toward preventing discrimination it cannot be expected that employees will fill the gap. The law is clear: borrowers should have an equal opportunity to seek, obtain, and manage their accounts on a nondiscriminatory basis and with nondiscriminatory terms and conditions. The importance of compliance should be communicated from the top-down and forward-thinking leaders should create policies toward the full enjoyment of rights.
3. Complying will ultimately cost less.
GE Capital’s discrimination was based on national origin; the exclusion was not justified by a legitimate need of the business. Despite their reasons for exclusion, however financially sensible they may have been, the bank is now ordered to restore the victims of their conduct to the position they would have been in but for the discriminatory conduct. To date, the company has paid back $169 million in remediation. If they had excluded Spanish-speaking or Puerto Rican residents for the sake of minimizing risk, they now have credited 4 years worth of accounts without the incentive of settling debt. At the end of the day, GE Capital’s decision to cut corners has cost them more than if they had shared their program freely. Thankfully for them, however, no additional penalties were imposed on the bank for this violation because they self-reported and initiated remediation.
“Consumers… deserve to be treated fairly no matter where they live or what language they speak.” said CFPB Director Richard Cordray in a June 19th press call. “The 108,000 borrowers who did not receive debt relief offers simply because they prefer to speak Spanish or have a mailing address in Puerto Rico will receive or have received $169 million in remediation. They will receive checks or credits to their accounts. If GE Capital had already written off or sold their debt, that debt will be forgiven. The bank will also work with the credit reporting agencies to ensure that any negative credit history that resulted here is deleted. No penalties were imposed for this violation based on the fact that GE Capital self-reported the violation and initiated remediation for the harm done to affected consumers.”
This is not the first time the $39 billion retail bank has been charged with violating regulatory law. Late last year the bank was also charged $34.1 million to refund more than 1 million customers for their credit card enrollment tactics. GE Capital now joins the ranks of other CFPB targeted companies along with Bank of America, JP Morgan Chase, American Express, Discover, and Capital One. As the Bureau continues to ramp up efforts, it is clear that whatever they deem a violation must be noted – and complied with.
