U.S. Bank National Association – the core subsidiary of U.S. Bancorp (USB) is set to shell out $57 million to resolve regulators’ claims of unfair billing practices on “add-on products” of some of the bank’s customers. Of the total amount, the company will pay $48 million to more than 420,000 affected customers, $5 million as penalty to the Consumer Financial Protection Bureau ('CFPB') and $4 million penalty charges to the Office of the Comptroller of the Currency ('OCC').
Apart from the monetary settlement, U.S. Bank is required to improve its oversight on third-party vendors. The bank neither accepted nor denied the claims.
The Issue
Between Feb 2003 and Aug 2012, U.S. Bank marketed certain add-on products – identity protection and credit monitoring services – and the bank’s third-party vendor were authorized for administration of such products. These products were designed to ensure proper monitoring of the consumers’ credit, as well as to alert them regarding any potential fraudulent activity.
A written authorization by the customers is required by a company for providing such services. However, U.S. Bank registered customers in those products without seeking the necessary approval from the customers. Hence the customers were unfairly charged by the bank for the services they did not receive. Also, at times customers’ credit card account limits crossed on account of such unfair billing, which led them to incur additional fees.
CFPB mentioned in its statement that “these services were either not being performed at all, or were only partially being performed”. Notably, U.S. Bank’s service provider ceased such unfair billing practices in Aug 2012.
Regulators’ Progress
This is the seventh time that CFPB has taken action to address unlawful practices related to credit card and other add-on products. CFPB Director Richard Cordray said “We have consistently warned companies about practices related to add-on products and we will do what is necessary to prevent further harm to consumers.”
Both OCC and CFPB had previously reached settlements on similar issues with banking giants including Bank of America Corporation (BAC), JPMorgan Chase & Co. (JPM) and Capital One Financial Corporation (COF).
Bottom Line
U.S. Bancorp’s earnings in the upcoming quarters would not be impacted owing to this settlement as the bank had set aside for regulatory issues in the prior quarters. The latest settlement follows the banks’ recent settlement with the U.S. Department of Justice ('DOJ') worth $200 million, resolving claims associated with origination of faulty mortgage loans insured by the Federal Housing Administration ('FHA').
We remain encouraged owing to U.S. Bancorp’s efforts to resolve the legal issues as it relieves the company from much of its legacy issues.
U.S. Bancorp currently carries a Zacks Rank #4 (Sell).
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