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Corporate Responsibility and the Credit Card Industry: Why Is Congress Backing These Guys?

Congress is currently close to final passage of a draconian anti-consumer amendment to the nation's evenly-balanced bankruptcy laws at the behest of the credit card industry. Below are examples of what some credit card banks have been accused of in courts and by regulators. Instead of passing the unfair, draconian bankruptcy bill, S. 256, to help the credit card companies gouge consumers even more, Congress should enact legislation to rein in the credit card companies. More information here.

Examples of recent litigation or regulatory action against ten largest credit card banks or parent firms as well as significant action against other, smaller firms: Litigation includes Unfair and Deceptive Practices, Truth In Lending Violations, Secruities Fraud, Unsafe and Unsound Banking practices, etc.
Recent Lawsuits Against Top Ten Credit Card Companies Or Parent Firms

Recent Regulatory Sanctions Against Credit Card Companies

Update 2005: Minnesota Attorney General Mike Hatch sues Capital One for " using false, deceptive and misleading television advertisements, direct-mail solicitations, and customer service telephone scripts to market credit cards with allegedly “low” and “fixed” interest rates that, unlike its competitors' rates, will never increase."
  1. Citigroup Deceptive telemarketing to credit card holders- 27 state consent decree; Numerous securities fraud allegations.
  2. MBNA Consumer class action litigation
  3. Bank One/First USA Several multi-million dollar consumer settlements
  4. FleetBoston Adverse decision for "misleading" credit card customers by US 3rd Circuit Court of Appeals in Truth In Lending Case
  5. American Express Truth In Lending settlement
  6. Discover Arbitration clause "unconscionable"
  7. Capital One Securities fraud allegations
  8. JP Morgan Chase Securities fraud allegations
  9. Household International Mortgage fraud lawsuit filed by ACORN
  10. Bank of America Predecessor paid $7 million civil penalties and settled class action over securities fraud.
  • In a new proposed guidance (July 2002) the four bank regulatory agencies accuse credit card industry of extending additional credit to consumers at risk of bankruptcy and of setting minimum payments so low consumers would never pay off credit cards (negative amortization).
  • Providian (When action taken, Providian was a Top Ten Credit Card Bank) $300 million minimum restitution.
  • Direct Merchants Bank $3.2 million restitution
  • First National Bank of Marin Restitution order
  • NextCard Shut down

1. Citigroup
$118.8 billion receivablesSettlement between Citibank and 27 states and Puerto Rico over deceptive telemarketing practices of its marketing partners, including billing credit card holders for products not ordered: 27 February 2002 From National Association of Attorneys General Settlement between Citibank and 27 states and Puerto Rico over deceptive telemarketing practices of its marketing partners, including billing consumers for products not ordered: 27 February 2002

"The agreement with Citbank bans deceptive marketing and requires: bank review and approval of all marketing materials; compliance with all consumer protection laws by telemarketers; clear approval by cardholders prior to any charges; and clear and conspicuous disclosure of the identity of the telemarketing company if the script makes reference to the bank. Citibank also agreed to pay the states $1.6 million to cover their legal costs."

Citigroup Faces 7 Securities Fraud Class Action Suits Regarding Enron, Global Crossing, Worldcom and Winstar 2 August 2002
Seven class action suits allege financial misconduct on the behalf of Citigroup, Inc. In Albert Fadem Trust v. Citigroup, Inc., the plaintiffs allege that the CEO and the CFO made deliberate misrepresentations, including failing to disclose that Citigroup misrepresented a 1999 transaction with Enron that was structured as a commodity trade but served the same purpose as a loan to help Enron keep $125 million in debt off of its books. The complaint also alleges that the bank misrepresented Citigroup's potential Enron-related exposure in its 2001 Annual Report and elsewhere, and failing to disclose the true extent of Citigroup's potential legal liability arising out of its 'structured finance' dealings with Enron. Another class action suit regarding Enron was filed on Aug. 7, in Burton v. Citigroup, Inc.
In five other pending class action suits, Salomon Smith Barney, a subsidiary of Citigroup, faces allegations of knowingly issuing false and misleading analyst reports regarding Winstar, Global Crossing and WorldCom. The complaints allege that the defendants failed to disclose significant conflicts of interest between their investment banking and research departments. The allegations charge that Salomon Smith Barney issued very favorable analyst reports regarding WorldCom to the public when they allegedly knew that the positive recommendations were unwarranted. Unbeknownst to the investing public, Salomon Smith Barney's buy recommendations and price targets for WorldCom were influenced by its efforts to be retained as a financial advisor for WorldCom and other telecommunications companies. Such lucrative investment banking engagements were worth millions of dollars in fees to Citigroup.
Alvarado v. Citigroup - (Unfair Mortgage Practices By Subprime affiliate-Associates First Capital)
Class action suit filed in Aug, 2001 Back to top 2. MBNA
$95.4 billion receivablesBroder v. MBNA (Credit Card Case - March, 2001) 722 N.Y.S.2d 524
Class action against MBNA certified for breach of contract, fraud, and other claims. Back to top3. Bank One/First USA
$64.8 billion receivables
First USA faces multiple class action settlementsFirst USA, also known as Bank One, has recently settled several class action suits. Public Citizen reports that FIRST USA recently paid $84.9 million to settle class action suits over charges that the bank had illegally hiked interest rates on consumers. Their credit cardholders were promised a particular fixed interest rate and later received higher variable rates.
A court also recently approved a settlement in Mangone v. First USA Bank (206 F.R.D. 222) requiring First USA to pay the amount of $39.9 million for faulty finance charges and late fee payments made to consumer credit card accounts. First USA is currently facing an additional class action suit, Prata v. Bank One (111 Cal.Rptr.2d 296) alleging that the credit card financing plan marketed by Bank One used false and misleading advertising. The "Same-As-Cash" policy was deliberately marketed without advising consumers that the program required minimum monthly payments. Back to top4. FleetBoston
$64.8 billion receivablesOn February 8, 2002, the US Court of Appeals for the Third Circuit (No. 01-1094) reversed a lower court in a Truth In Lending class action case: "In this Truth in Lending Act case, we must interpret the "no annual fee" provision of a credit card solicitation. Months after plaintiff Paula Rossman responded to a solicitation offering this term, defendant Fleet Bank changed the operable credit agreement and imposed an annual fee. Rossman brought this putative class action alleging, inter alia, that Fleet violated the TILA by failing to disclose the fee later imposed. The District Court dismissed plaintiff 's TILA count for failing to state a claim upon which relief could be granted. We will reverse and remand."From the court: "A statement, therefore, that a card has "no annual fee" made by a creditor that intends to impose such a fee shortly thereafter, is misleading. It is an accurate statement only in the narrowest of senses--and not in a sense appropriate to consumer protection disclosure statute such as the TILA. Fleet's proposed approach would permit the use of required disclosures--intended to protect consumers from hidden costs--to intentionally deceive customers as to the costs of credit."
PAULA E. ROSSMAN, individually and for all others similarly situated v. FLEET BANK (R.I.) NATIONAL ASSOCIATION, a nationally chartered bank; FLEET BANK CREDIT CARD SERVICES, L.P., a Rhode Island limited partnership; FLEET CREDIT CARD HOLDINGS, INC., a Delaware corporation; FLEETBOSTON FINANCIAL CORPORATION, a Massachusetts corporation Back to top5. American Express
$59.9 billion receivables American Express agreed to settle in Green v. American Express Co., (200 F.R.D. 211, S.D.N.Y., 2001) which alleged that the bank failed to properly disclose the periodic rate used to compute finance charges at variable rates rather than at a fixed rate on the monthly account statements. In 2001, a judge approved the settlement.Milberg Weiss Announces Class Action Lawsuit Against American Express Co
New York - The law firm of Milberg Weiss Bershad Hynes & Lerach LLP announces that a class action lawsuit was filed on August 8, 2002, on behalf of purchasers of the shares of American Express Co. ("American Express" or the "Company") (NYSE: AXP) between July 26, 1999 and July 17, 2001, inclusive. <SNIP> Back to top
6. Discover (Morgan Stanley)
$49.6 billion receivablesCourt finds Discover Arbitration Clauses "Unconscionable" 22 April 2002
In a California appellate court, a consumer brought a class action against Discover (Morgan Stanley) for negligent misrepresentation as well as deceptive business practices in Szetela v. Discover Bank (118 Cal.Rptr.2d 862, Cal. App. 4 Dist., 2002). The bank argued that such legal issues needed to be dealt with solely through private arbitration. In a strong judgment for consumer protection, the court found that the arbitration clause was not only procedurally and substantively unconscionable, but that Discover's anti-class action provision was void under public policy. Back to top

7. Capital One
$48.6 billion receivablesCapital One Also Faces Securities Fraud Class Action 19 July 2002
According to the complaint filed by law firm of Milberg, Weiss, Bershad, Hynes & Lerach LLP, Capital One falsely issued press releases regarding the company's financial performance. The press releases stated that Capital One was experiencing record earnings and revenue growth while maintaining "stringent risk management practices' and adequate loan loss reserves". The complaint also alleges that these statements were false and misleading because they did not disclose that Capital One was in violation of federal guidelines in respect to levels of capitalization and loan loss reserves and that it was not effectively managing its rapid growth. Capital One insiders then profited by selling a total of over $8.2 million in Capital One common stock at artificially inflated prices. Back to top
8. J.P. Morgan Chase
$48.0 billion receivables
J.P. Morgan Under Enron Scrutiny 15 February 2002
J.P. Morgan Chase now faces a securities fraud class action suit alleging that the dissemination of false and misleading statements caused the J.P. Morgan Chase stock price to become inflated. The complaint alleges the company did not fully disclose dealings and interactions with the Enron Corporation. J.P. Morgan Chase published its liability for the Enron collapse at $900 million, not at the later reported $2.6 billion. Later, J.P. Morgan Chase reported that it also had losses in 'non-performing' assets of $1.3 billion. . Back to top9. Household International
$29.7 billion receivablesACORN v. Household Intern, Inc. (June 21, 2002)
2002 WL 1563805, N.D. Cal, 2002.
Household faces Consumer Group Challenge 21 June 2002
The consumer rights organization, ACORN, has filed suit against Household International, Inc. (2002 WL 1563805, N.D. Cal, 2002) alleging predatory lending practices for misleading borrows into refinancing their home mortgages by telling consumers they would save money through the loans. ACORN argues that Household "trapped" consumers in expensive loans through a variety of financial schemes, including pre-payment penalties. A California District court has upheld jurisdiction and the litigation is currently continuing.Back to top10. Bank of America
$26.6 billion receivables$14,500,000 from Bank of America (formerly NationsBank) to investors in securites fraud case-- investors deceived into purchase of securities they were led to believe were federally insured. (Apr-30-02) Nationbank had previously paid a combined $7 multi-million dollar civil penalty to the SEC and other regulators. Back to topProvidian Civil Penalties and restitution order by Comptroller of the Currency and San Francisco Distrct Attorney:Excerpt from statement of Comptroller John D. Hawke Jr. June 28, 2000Statement of Comptroller of the Currency John D. Hawke, Jr."For the past year, the Office of the Comptroller of the Currency and the
San Francisco District Attorney's Office have been investigating
complaints lodged by customers of Providian National Bank. We found that
Providian engaged in a variety of unfair and deceptive practices that
enriched the bank while harming literally hundreds of thousands of its
customers. I am pleased to announce that we have entered into a consent order with
the bank that ensures not only that these practices will come to an end,
but that customers who were harmed will be compensated by Providian. The
order provides that the bank will pay at least $300 million in restitution
to its customers. ....
When a bank engages in unfair or deceptive marketing practices, it damages
its most precious asset -- the trust and confidence of its customers.
That relationship of trust and confidence is central to the bank’s safe
and sound operation. We will not tolerate abuses that breach that trust
through unfair and deceptive practices.Consumers should not have to become detectives to find out the true terms
and conditions of their credit card agreement. They should not discover
after they receive their monthly statement that they have purchased a $156
credit protection policy that they neither want nor need. And if they are
promised a promotional bonus for transferring credit balances, they should
receive that bonus -- and not be told after the fact that the program
requires a balance transfer of $10,000..."OCC Providian Fact SheetOCC Providian Consent Order Back to topAdditional Private Litigation Against Providian Results in $105 Million settlement:Proposed Settlement Approved for Litigation Filed on Behalf of Providian Credit Card Holders The settlement proposed for the Providian Financial class actions has been approved by the Court, and necessary follow-up procedures in related cases have taken place. The settlement therefore will proceed, and Class Members can expect that the settlement benefits will be distributed/credited in approximately July 2002. After nearly 18 months of intensive discovery and motion work in the case, a proposed settlement was reached, which will allow for payments to certain Class Members, who are the present or former cardholders of Providian. Under it, Providian will pay $105 million (in cash and credit benefits) to class members to reimburse them for inappropriate fees and charges. This supplements a settlement with government entities under which Providian has paid approximately $337 million to cardholders. Under the settlements in the government and private class actions, Providian also agreed to change certain business procedures and enforce processes to confirm that similar false charges and fees will not be incurred by card holders in the future. Back to topDirect Merchants BankOn 3 May 2001, The Office of the Comptroller of the Currency (OCC) entered into a consent order with Direct Merchants Credit Card Bank, N.A. The consent order requires the bank to cease certain practices in the marketing of the bank’s credit cards and to pay approximately $3.2 million in restitution to 62,000 consumers.
OCC Direct Merchants Fact Sheet
Proposed Settlement Announced in Class Action Filed For Direct Merchants Credit Card Bank Cardholders
March 29, 2002 - A proposed settlement has been announced in the class action lawsuit, originally filed on May 24, 2000, alleging that Direct Merchants Credit Card Bank, N.A. (sometimes known as "DMB") engaged in overly aggressive and unlawful business practices to cardholders nationwide. The website for the settlement, which provides all information on it and the full notice and claim form, is at www.creditclaims.com. Back to top
First National Bank of MarinOn 3 December 2001 the Office of the Comptroller of the Currency (OCC) settles case against the First National Bank of Marin, Las Vegas, involving misleading and deceptive marketing of secured credit cards. In a consent order, the bank agreed to cease practices that the OCC alleged are unlawful or unsafe and unsound and to pay restitution to customers harmed by those practices.
OCC Marin Fact Sheet Excerpt:First National Bank of Marin markets to consumers with poor or non-existent credit histories.
Many credit card lenders, as a matter of prudent underwriting, will require such consumers to
maintain a savings account large enough to secure the line of credit. Under the bank’s
program, the funds for the savings deposit are instead charged against the credit line,
reducing the amount of available credit until the charge is paid off.
In the OCC’s view, since January, 1998, the bank has used false and misleading statements,
in violation of the Federal Trade Commission Act, to induce these consumers to apply for its
credit card and to pay substantial fees. The bank’s marketing led consumers to believe that
they did not first have to submit funds for a savings deposit in order to receive a credit card
with a usable amount of available credit. In reality, due to the deposit requirement and fees
charged against the card, the vast majority of applicants received a credit card with little or
no available credit. Among the practices cited by the OCC:
• Under one program sponsored by the bank, credit card applicants were required to
pay up to $79 in cash to apply for a “guaranteed” card with credit lines between $250 and
$600. The credit line was secured by a savings deposit of $200 charged against the card
when it was first issued. In addition, other fees of up to $56 were charged to the card. Back to topNextCard OCC Closes Internet credit card bankEXCERPT: OCC Closes NextBank and Appoints FDIC ReceiverNR 2002-09 February 7, 2002WASHINGTON -- NextBank NA, Phoenix, Arizona, was closed today by the Office of the
Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) was
appointed receiver.The OCC acted after finding that the bank was operating in an unsafe and unsound manner and
had experienced a substantial dissipation of assets and earnings through unsafe and unsound
practices. The OCC also found that NextBank’s unsafe and unsound practices were likely to
deplete all or substantially all of the bank’s capital, and that there was no reasonable
prospect for the bank to become adequately capitalized without federal assistance. In
addition, the OCC found that the bank would be unlikely to be able to pay its obligations
or meet the demands of its depositors in the normal course of business.After being acquired by NextCard Inc. on September 16, 1999, NextBank pursued a strategy of
marketing credit cards solely through the Internet. However, the OCC found that the bank’s
risk management policies and procedures were inadequate and the bank’s assets were of lower
credit quality than initially projected in the bank’s business plan. The bank failed to
identify the extent of its credit quality problem or to implement effective corrective
measures.At the OCC’s insistence, the board of directors of the bank adopted a detailed board resolution
on October 26, 2000 that was designed to correct these deficiencies, but the bank was unable
to implement the resolution. The bank failed to achieve profitability, and the $300 million
in capital that had been provided by the bank’s parent company, NextCard, Inc., was
dissipated through credit losses and high operating expenses.During the bank’s most recent examination, the OCC determined that the bank was classifying
some delinquent accounts sold into a securitization trust as fraud losses, although the
delinquencies were actually attributable to credit quality problems. These assets were
being repurchased by the bank at par, a practice that constituted sale of assets with recourse...Back to top