CFPB hits Apple, Goldman Sachs over Apple Card failures

Daniel Acker/Bloomberg

UPDATE: This story includes information about Goldman Sachs' recent retreat from the consumer banking business.

The Consumer Financial Protection Bureau took action Wednesday against Goldman Sachs and Apple for a range of violations related to the tech giant's credit card, and has banned Goldman from launching a new credit card unless it can provide a credible plan that such a product will comply with the law.

The CFPB is ordering Goldman Sachs to pay at least $19.8 million in redress to harmed Apple Card users and a $45 million civil money penalty. Apple will pay a $25 million civil money penalty.

Both companies played unique roles in the Apple Card that resulted in widespread consumer harm, the CFPB said. Apple failed to send tens of thousands of consumer disputes to Goldman, and when Apple did send disputes, Goldman did not follow numerous federal requirements to investigate, and it also misled cardholders about refunds.

The CFPB said hundreds of thousands of consumers were affected and faced long wait times to get their money back for disputed charges. Some cardholders also had incorrect negative information added to their credit reports, the agency said. The two companies also misled consumers about interest-free payment options for iPhones and other Apple devices.

A Goldman spokesperson, Nick Carcaterra, said that the company is pleased to have reached a resolution with the CFPB.

"We worked diligently to address certain technological and operational challenges that we experienced after launch and have already handled them with impacted customers," said Carcaterra.

An Apple spokesperson said the company "is committed to providing consumers with fair and transparent financial products."

"While we strongly disagree with the CFPB's characterization of Apple's conduct, we have aligned with them on an agreement," the spokesperson said.

The CFPB's investigation revealed that key systems weren't ready when the partners launched the Apple Card in mid-2019. The companies received third-party warnings early on that Goldman's disputes system had technological problems, the bureau said.

"The execution was a mess," CFPB Director Rohit Chopra said on a call Wednesday with reporters. "These failures are not mere technicalities. They resulted in real harm to real people."

Chopra said that Goldman's board of directors was told about the problems four days before the launch of the Apple Card in mid-2019, but the investment banking giant "made the business decision to go forward anyway with the partnership."

Apple had negotiated a contractual provision that allowed the iPhone maker to penalize Goldman $25 million for every 90 days of delay with its systems, Chopra said.

The CFPB's investigation found violations of the Consumer Financial Protection Act and the Truth in Lending Act.

The CFPB described a cardholder dispute process that was plagued with issues. Apple Card users were directed to dispute transactions through a "Report an Issue" feature in the Wallet app. But for some disputes, Apple sent consumers a separate link in its Messages app asking for more information.

Apple also failed to send certain disputes to Goldman Sachs if a form sent to consumers was incomplete. The CFPB said that even after Goldman Sachs alerted Apple about the issues, the problem persisted. As a result, neither Apple nor Goldman investigated tens of thousands of disputes, and cardholders were held responsible for disputed transactions.

The CFPB said that when Apple did send disputes to Goldman, the bank failed to conduct reasonable investigations, to consistently send acknowledgment notices within 30 days, or to send resolution letters explaining the outcome of its investigations within 90 days, as required by law. The failures led to Goldman illegally reporting inaccurate information on consumers' credit reports and holding cardholders responsible for potentially fraudulent or unauthorized purchases.

Further, the CFPB said that Apple marketed an installment plan that allowed cardholders to purchase Apple devices through a series of interest-free payments over a period of six months to two years, but many cardholders were unknowingly charged interest because they were not automatically enrolled.

Apple only provided the interest-free payment plan to consumers who used Apple's Safari browser, the CFPB said. As a result, thousands of cardholders who used other browsers purchased Apple devices on interest-bearing revolving balances and incurring interest charges, instead of making interest-free payments, the bureau said.

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The companies also misled cardholders about refunds. The CFPB described the Apple Card monthly installments plan as having two card balances — the plan balance and an interest-bearing revolving balance.

For more than 10,000 cardholders, Goldman misled consumers about how it would apply certain refunds between the two balances. In addition, some of the refunds for unrelated purchases were applied to the interest-free plan balance instead of the interest-bearing revolving balance, resulting in consumers incurring additional and unexpected interest expenses.

The Apple Card was a partnership between Apple, based in Cupertino, California, and New York-based Goldman Sachs Bank that marked a significant expansion for both companies into consumer lending. The partnership allowed Apple to provide a financing mechanism to ratchet up sales of its devices, including iPhones and iPads, and to increase spending at its retail stores.

Goldman debuted its Marcus brand in 2016, and the Apple Card's launch three years later was part of the bank's foray into consumer finance.

More recently, Goldman has been retreating from the consumer banking business. Barclays is buying the General Motors credit card portfolio from Goldman, and CNBC reported last month that JPMorgan Chase was in talks with Goldman to take over the Apple Card program.

The CFPB said Wednesday that if Goldman makes another attempt to enter the credit card market, the bureau will "closely police the company to avoid repeat offenses."

But recent comments by Goldman executives suggest the investment banking giant is unlikely to launch another credit card program anytime soon.

"I think we've been pretty clear in our messaging that we are continuing to narrow our consumer footprint," Goldman CEO David Solomon said on an Oct.15 earnings call.