Did Capital One Target Deployed Soldiers for Foreclosure?

Capital One  bank
Capital One bank

Until recently, the U.S. Army had a recruiting slogan: "Army of One." The Obama administration is now concerned that slogan may have been a bit too accurate, and wants to know whether, when American men and women shipped out to serve their country overseas, anyone was "watching their six" back home.

Case in point: Last week, the Department of Justice wrapped up an investigation of Capital One (COF), in which it accused the bank of violating the rules of the Servicemembers Civil Relief Act -- specifically, rules that forbid:

  • Charging more than 6% interest on loans and credit card debt incurred prior to a servicemember's being called up for active duty, during the period of service.

  • Foreclosing on a servicemember's home for missing a mortgage payment.

Capital One cooperated with the investigation, ultimately concluding that it was in the wrong, and agreeing to pay $7 million to compensate servicemembers for motor vehicles and homes it foreclosed upon while they were overseas.

At a minimum, servicemembers who lost their homes to Capital One will receive $125,000 each in compensation, while those who had cars repossessed will get at least $10,000. The bank further agreed to pay $5 million more to cover anyone for whom it failed to reduce interest rates on credit card debt as required by law.

And then ... a miracle happened.

Banker With a Heart of Gold

Going one step further than what its deal with the government required, Capital One announced it is lowering the interest rate on servicemembers' card debt to 4%, and holding it there for as long as a year after returning from their tours overseas.

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That hardly sounds like the kind of action you'd expect a guilty bank to take. Conspiracy theorists will surely disagree -- pointing to similar settlements that DOJ has inked with Bank of America (BAC), which in November, agreed to a $20 million-plus settlement for offenses similar to what Capital One was accused of, and with JPMorgan Chase (JPM), Wells Fargo (WFC), Citigroup (C), and Ally Financial, which in February set up a similar compensation fund at government request -- in the amount of $25 million.

Attorney General Eric Holder is spinning all this as a "fight for our service members, [using] every available tool, resource and authority to hold accountable those who engage in discriminatory practices targeting those who serve."

But if you look at the numbers, they actually tell a different tale.

Tempest in a Teapot?

Consider: Over the past decade, some 2 million American servicemen and women have served in Iraq and Afghanistan. How many of them have been foreclosed upon, though?

  • In the November Bank of America settlement, DOJ alleged that "approximately 160 servicemembers ... were illegally foreclosed on between 2006 and the middle of 2009." The investigation is "ongoing," but that's still a slow start.

  • The February settlement with JPMorgan, Wells, Citi and Ally, 25% larger than the settlement reached with Bank of America, suggests perhaps 200 persons were affected by SCRA violations there.

  • As for Capital One, the bank says its settlement with the DOJ relates "predominantly" to card customers who were charged too-high interest rates. Improper foreclosures on servicemembers' homes, says the bank, totalled precisely four.

That brings the total count of victims to 364. That's 364out of 2 million servicemembers who cycled through foreign theaters over the past 10 years, resulting in a foreclosure rate of approximately 0.02% (as in, fewer than two incorrect applications of SCRA out of every 10,000 servicemembers).

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The Upshot

As conspiracies go -- if this is one -- then it has to be one of the least widespread cases of consumer fraud in recent memory. Tally up the payrolls at all these banks, and you're talking easily 1.1 million employees. Collectively, these folks probably make more than 364 paperwork errors on a typical Monday, before the coffee pot gets put on.

In short, while we should all cheer the fact that the government is doing its job and making sure servicemembers get a fair shake from the nation's bankers, it really does look like this was already happening before DOJ ever got involved. Over a multiyear timespan, 364 errors across a population of 2 million banking customers -- that's not a scandal. It's a rounding error.


Motley Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Citigroup, Bank of America, and JPMorgan Chase. Motley Fool newsletter services have recommended buying shares of Wells Fargo. Motley Fool newsletter services formerly recommended JPMorgan Chase.

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