Arnold Kling  

Capital One's Actuals

Avent and Yglesias Reinforced... Poverty and Behavior: Generali...

Bryan writes,

Was Capital One's sales pitch fraudulent in this sense? No; at minimum, they're missing element #3 (falsity).

As commenter Thomas DeMeo pointed out, the actual allegation may differ from Bryan's hypothetical.

consumers were:
  • Misled about the benefits of the products: Consumers were sometimes led to believe that the product would improve their credit scores and help them increase the credit limit on their Capital One credit card.
  • Deceived about the nature of the products: Consumers were not always told that buying the products was optional. In other cases, consumers were wrongly told they were required to purchase the product in order to receive full information about it, but that they could cancel the product if they were not satisfied. Many of these consumers later had difficulty canceling when they called to do so.
  • Misled about eligibility: Although most of the payment protection benefits kicked in when consumers became disabled or lost a job, some call center representatives marketed and sold the product to ineligible unemployed and disabled consumers. Despite paying the full fees, they could not get all the benefits of payment protection; some later filed claims that were denied because their "loss" (e.g. loss of job or onset of disability) occurred prior to enrollment.
  • Misinformed about cost of the products: Consumers were sometimes led to believe that they would be enrolling in a free product rather than making a purchase.
  • Enrolled without their consent: Some call center vendors processed the add-on product purchases without the consumer's consent. Consumers were then automatically billed for the product and often had trouble cancelling the product when they called to do so.

Bryan points out that he still does business with Capital One, and so do I. My hope is that as a Ph.D economist and student of the financial system, I can avoid being scammed by a bank. But that does not mean that I approve of a bank that preys on the weak.

By the way, when I read that "consumers were wrongly told they were required to purchase the product in order to receive full information about it," I could not help but be reminded of Nancy Pelosi on Obamacare.

COMMENTS (18 to date)
Jeff writes:

If you wanted to, you could probably squint real hard at the first three bullet points and say that those might be unethical sales techniques, but don't quite rise to the level of fraud. The last two, at least in my opinion, are pretty open and shut cases of fraud.

Seth writes:

Arnold, Could you clarify your rationale for gov't intervention here?

Is it because the product aren't good or because the sales practices were fraudulent, or something else?

ThomasL writes:

How many of these practices are already illegal? Point (1) sounds fishy, but might be legal if worded sufficiently vaguely. All the rest I would have thought violate existing laws.

FWIW, being illegal often does not stop large companies. I know a person that had a similarly horrid experience with AT&T once. Many years ago he ordered a cell-phone as they were promotion to buy the the phone for $99 plus and then you got some number of "nationwide" minutes for something around $100 or $130/mo. These were good prices back then.

He signed up directly with AT&T, who quoted him the advertised price, but then charged his credit card $600 for the phone and some similarly outrageous price for the first month. He was naturally not pleased and called to cancel (that was another thing, "try it risk free..."). They agreed to cancel the contract, but insisted he buy the phone for $600 anyway.

The kicker is that the AT&T rep on the phone plainly admitted that what they had charged him was not what had been quoted at the time of purchase. The rep followed that up with the explanation that if he disputed the charges with his credit card company, even if they lost the dispute they would still report it as an unpaid debt on his credit score, and ultimately, "It is going to cost you way more than $600 to fight it."

A bit of a long story, but it always stuck with me for two reasons. The first is that I never would have expected such a well-known company to be so flagrantly dishonest, particularly since this was dealing with AT&T directly, not an affiliate or local shop. They never tried to hide it or deny that they had overcharged, they just tried to extort the money. I recall reading of them losing a class-action lawsuit on similar lines a short time later.

The second reason was because I was the one that had recommended the phone and plan to the person as a good fit for their needs. Which it would have been, had the deal been honest...

ThomasL writes:

Ugh, editing nightmare. That should read:

Many years ago he ordered a cell-phone as they were running a promotion to buy the the phone for $99 plus some number of "nationwide" minutes for something around $100 or $130/mo.
ThomasL writes:

Recalled one bank related. I knew another person that had trouble with her bank delaying processing deposits until an account was overdrawn, assess overdraft fees, and then take the fees out of the deposits already on hand.

That makes perfect sense, of course, if the person really is overdrawn. Not so much if they dropped off their paycheck in person at the bank well in advance of the checks that are currently "overdrawing" their account.

This happened twice to her before she switched banks. Again, I later read about that bank getting slapped by the banking commission for spurious fees, but of course that did not get her her money back.

Aaron McNay writes:

Reading the CFPB press release that Arnold provided a link for, and assuming the CFPB information is accurate, it does sound like people within Capital One may have engaged in fraudulent practices. The question I would have if such fraudulent actions did occur is: why did the CFPB need to get involved in the first place? After all, it seems like the entire point of having a court system is to determine when fraud has occurred and punish those that engage in such practices.

ThomasL writes:

Hmm, one more. I recall a bank accusing my (at the time) 80y old grandmother of stealing $100 from their ATM a few years ago.

That was interesting. It simply didn't spit out the money; but it did debit her account. She asked for it to be corrected and they refused, and plainly suggested she should not be doing such things.

My uncle helped her out, finally, by asking some rather direct questions like, "Did the cash in the ATM tally or was it $100 over?" Interestingly, they admitted that it was $100 over, but insisted that was in no way related to her missing $100.

What finally brought it around was when he got them to admit that the machine had not processed any transactions since that one, several days before, and that a repair crew was scheduled to fix the machine. After admitting that to him, they finally agreed to credit her account back the $100.

ThomasL writes:

I don't really have a point to these stories other than, "everybody lies." Not really sure a new bureau will fix that.

Joe Cushing writes:

Why on earth would you continue to do business with a firm that is actively trying to trick people out of their money? There are better places to do business. There are places where you are treated like a person with respect. There are places where you aren't punished for making a mistake In a system that is not designed to cause mistakes. With that, I'll give a plug to my credit union, 1st Liberty. They are located in ND/MT. I live in MI but have kept my accounts with them because they treat me like no other. I once got a hand written note saying that they took money out of my savings account and made a minimum pmt on my credit card because I forgot to pay. In doing so, they reversed a $20 free and set up a free service to prevent this from ever happening again.

ThomasL writes:


Yeah, I canceled my HSBC accounts over their role in the forcible dispossession of some villagers in Uganda in order to plant carbon-offset trees on their land. Something of a mess that ultimately culminated in the murder-by-arson of a small child.

Admittedly, that does trump shifty marketing on the scale of horror though.

Mike writes:

Timothy Taylor's post today on reverse mortgages is worth reading, in light of this debate. I say this because he is not concerned about fraud, but is concerned about widespread poor decision-making.

Bryan Caplan writes:

The key weasel word in the quoted allegations is the word "some." Why doesn't the government offer ballpark percentages? I.e. "13% of customers were lied to"?

We're talking over a $100M in modest transactions. It would be amazing if precisely *zero* misrepresentations occurred - no matter what business you're in.

Think about how many waiters give slightly incorrect information to customers on a typical day.

The presumably small percentage of customers who personally received false information have a reasonable complaint. That's no reason to give all customers their money back.

Steve Sailer writes:

Well said.

And, we don't just need to fine financial institutions, we need to shame individuals. People with three digit IQs who devote their careers to misleading people with two digit IQs should be ashamed of themselves.

andy writes:

"Consumers were not always told that buying the products was optional."

That isn't wrong, is it?

rpl writes:
People with three digit IQs who devote their careers to misleading people with two digit IQs should be ashamed of themselves.
Precisely. Most of the people defending these shady practices would recoil at the notion of allowing the physically strong use their strength to take from the physically weak, but apparently it's a-ok for the mentally strong to use their strength to con the mentally weak.

I see Bryan seems to have abandoned his argument that we shouldn't punish a bank for conning people because we can't be sure that the alleged victims didn't privately want to be conned. He's now going with the (slightly) less dubious line that the scheme wasn't a total fraud because the bank might have told the truth to someone, somewhere. Maybe. Baby steps, I guess. At least it shows that this discussion hasn't been a complete waste of time.

Jeff writes:
The presumably small percentage of customers who personally received false information have a reasonable complaint.

As you pointed out, the report didn't offer any info as to the percentage of cases where misrepresentations occurred. How then, can you presume it was small?

It could, I suppose, have been just a few rogue middle managers pushing these unethical practices. On the other hand, call center and customer service employees, when they give sales pitches, are typically working from some kind of script or have received instructions and training on how to push certain products/services. They aren't just winging it, in other words. It seems entirely plausible to me that these misrepresentations were pervasive.

J Mann writes:

A few observations:

1) Incentives being what they are, my baseline assumption is that the allegations in a regulator's complaint that the most extreme story you can tell with the data at hand. In this case, my guess is that at least several customers allege that Capital One misrepresented facts, and that the CFPB took them at their word.

2) That said, inequality of information is challenging to a libertarian. Let's just assume that Capital One sold cards and services to people even though the executives and sales people knew that the vast majority of their customers could get a better rate with a minimal effort to shop around. Is that an unethical practice? (My intuition is yes, which is troubling).

Ken writes:

I called one of my credit card companies last year and they hit me over and over with a sales pitch for a similar product ( by recording ) and worded as if I would talk to a live person much faster if I accepted the product and 'you can always cancel later'.

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