Cap One to Pay Military Borrowers $12M in Justice Settlement

Capital One (COF) will pay $12 million to thousands of military customers it overcharged for loans and improperly foreclosed upon, as part of a settlement with the Department of Justice and the Office of the Comptroller of the Currency.

The agencies on Thursday announced a lawsuit and an enforcement action against Capital One over violations of the Servicemembers Civil Relief Act, a law that bars lenders from foreclosing on active duty military members and caps their interest rate on all pre-existing consumer debt at 6%. Over a five-year period, Capital One employees failed to apply the interest-rate cap for some eligible credit card and auto loan customers and initiated foreclosure and car repossession proceedings against some active duty servicemembers, according to the Justice Department.

"Today's actions by the OCC and the Department of Justice help assure that servicemembers receive every benefit they are entitled to under the law in the future and serve to correct past violations of SCRA," said Comptroller of the Currency Thomas Curry in prepared remarks during a conference call.

He added that the two agencies' actions are "a good example of where government is working to ensure financial institutions not only operate in a safe and sound manner but in a way that treats all of their customers fairly."

It is the second recent big-dollar regulatory action against Capital One, which last week found itself the target of the Consumer Financial Protection Bureau's first enforcement action. The McLean, Va., bank agreed to pay penalties totaling $210 million in that case, to settle claims that it improperly marketed its credit card add-on products, including payment protection plans.

About 4,000 Capital One customers were affected by the SCRA violations, assistant attorney general Thomas Perez said during the conference call. That compares to the roughly two million people who were affected by the bank's marketing of its credit card add-ons.

Industry members called the new settlement important, but less significant than the bank's earlier run-in with the CFPB.

"This is really enforcing a statute and a regulation that has been outstanding for some time. It's smaller in dollar amount, largely because … there were fewer accounts involved," since military customers are only one subset of a Capital One's borrowers, said Stacie McGinn, a partner at Simpson Thatcher & Bartlett and a former deputy general counsel at Bank of America.

Capital One is only the latest big bank to face charges of mishandling military customer accounts. Last year, Bank of America (BAC) agreed to pay $20 million in restitution to SCRA borrowers as part of a similar deal with the Justice Department. In early 2011, JPMorgan Chase (JPM) also overhauled its lending practices to military customers, after acknowledging that it had failed to enforce the law.

"This really should put banks on notice, if they aren't already, that compliance programs are going to be held to a very rigorous standard with respect to protecting the rights of service members," said Barak J. Sanford is a managing director at Promontory Financial Group. "It's the perfect storm from a Washington point of view, in terms of supervisory, consumer advocacy and political interest in protecting servicemembers."

Capital One announced its own military lending practices overhaul Thursday as part of the settlement. Starting August 1, the bank will lower the interest rate for all SCRA-eligible accounts to 4%, below the 6% cap mandated by the law. It will apply SCRA benefits to new loans taken out while the military customer is on active duty, not just before their duty begins, and the bank will also extend the 4% cap on all loans for a year after the military customer's duty ends. (SCRA requires that the cap be extended for a year on mortgages only.)

Perez praised Capital One for those efforts, saying during the call that the bank "cooperated fully with our investigation into its practices and has on its own initiative recently adopted several policies that actually go beyond the SCRA."

Under the terms of the settlement, Capital One will also repair the credit of military customers whose credit was damaged as a result of the bank's actions, Perez said: "Everyone can understand how important good credit can be to a service member, especially given the fact that a service member has to keep a security clearance."

The deal also requires Capital One to hire an independent consulting firm to identify all the borrowers who were eligible for SCRA benefits and financially harmed by the violations. The firm will conduct a comprehensive review of the bank's treatment of servicemembers who were eligible for or requested SCRA benefits, for the period between July 15, 2006 and July 25, 2012. The consulting firm will also review credit card accounts that Capital One now issues on behalf of Kohl's (KSS) department stores, after buying the loans from JPMorgan Chase last year.

Bank spokeswoman Tatiana Stead would not identify the firm Capital One has hired, but said the Justice Department agreed to its selection. The review is already underway, she said.

Stead says Capital One found "operational errors that led to the mishandling of some SCRA accounts" between July 2006 to November 2011. She said that bank employees improperly initiated foreclosure proceedings against four active-duty military homeowners.

"We sincerely apologize and are providing restitution to our impacted customers, and will be providing lower rates and greater benefits than the law requires to all eligible servicemembers," John G. Finneran, Jr, Capital One's general counsel, said in a statement.

As with its CFPB deal, Capital One did not admit wrongdoing as part of the settlement with the Justice Department. The bank will pay approximately $7 million in damages to affected servicemembers, including at least $125,000 in compensation plus reparation for lost equity to each affected customer whose home was foreclosed upon, and at least $10,000 in compensation plus reparation for each affected customer whose car was repossessed. An additional $5 million will be paid to military customers whose loans were not capped at the 6% rate. The bank will pay an additional $55,000 penalty to the Justice Department.

The agency said in a press release that Capital One has agreed to pay more than $12 million if audits turn up violations in the assets it bought from ING Direct and HSBC.

The settlement is subject to court approval, and was filed on Thursday in federal court in Alexandria, Va.