Citibank Overcharging on Credit Cards Has a Takeaway

(Bloomberg Gadfly) -- It's no secret: President Donald Trump's administration has been clear that it intends to ease the regulatory burden for banks. But on Friday, Citigroup Inc. offered up a real-world example showing how oversight can encourage good behavior and protect consumers.

Thanks to a periodic review, the New York-based lender discovered it had overcharged on some 1.75 million credit-card accounts and will refund them an average of $190 each -- or $335 million in total -- by the second half of this year. The lender "self-reported" the issue to regulators including the Consumer Financial Protection Bureau, and by doing so should be able to mitigate penalties that may have arisen if regulators had discovered it first.

The gaffe was uncovered as part of an internal review of the bank's methodology used to comply with the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009, which is overseen by the CFPB, as well as Regulation Z, which was implemented by the Federal Reserve. The Trump administration hasn't signaled its intention to reverse the Card Act, which was signed into law by President Obama, but an ongoing shift in tenacity at the CFPB begs the question -- what would have happened if Citi hadn't caught the mistake and chosen to remediate its customers? 

Consider this: The CFPB -- once determined to “empower consumers” and encourage appropriate financial-industry practices -- has undoubtedly become more banker-friendly. In the fall, the Trump administration repealed a rule that would have made it easier for customers to sue banks. This year, it dropped a lawsuit against payday lenders and has been stripped of some of its enforcement powers by the Trump administration. Acting director Mick Mulvaney even penned a Wall Street Journal op-ed in which he said the agency's days of "aggressively 'pushing the envelope'" are over. Meantime, the Trump administration has proposed cutting the CFPB's funding by roughly $150 million, or a quarter of its budget, which may not be met with much pushback given that Mulvaney requested no funding for the second quarter of 2018. Yes, $0.

To be fair, the CFPB hasn't hit the brakes entirely: Its probe into the data breach at Equifax Inc. is ongoing, Mulvaney has said, despite contrary reports. The outcome of that will be closely watched. During the Obama-era, Wells Fargo & Co. was fined $100 million by the CFPB for improper sales practices that impacted more than 2 million customers. Citi's recent misstep -- which doesn't initially appear intentional -- extends to 1.75 million credit-card accounts. So although the two situations are different, it'll be curious to see if or how the CFPB sanctions the lender.

Any fine is unlikely to be in the magnitude of what was paid by Wells but could instead be closer to the $20 million penalty paid by JPMorgan Chase & Co. to the CFPB in 2013 after the bank was ordered to refund roughly $309 million to 2.1 million customers for unfair credit-card practices. Inaction may be interpreted by other banks as weakness, which could lead to a more relaxed approach to adhering to regualtion -- a negative for consumers and shareholders alike. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

To contact the author of this story: Gillian Tan in New York at gtan129@bloomberg.net.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.

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