Providian gets $300 million spanking,
ends suit over "deceptive" practices
By Libby Wells • Bankrate.com

Consumer advocates are hoping that a precedent-setting financial settlement by one of the country's leading credit card companies will prompt other issuers to take a hard look at their own operations.

Following a yearlong investigation by the Office of the Comptroller of the Currency and the San Francisco District Attorney, Providian National Bank and its parent company, Providian Financial, recently agreed to reimburse at least $300 million to customers who were victims of misleading sales pitches and charged for products they did not want.

The settlement is the largest the OCC has ever negotiated in an enforcement case and marks the first time a bank regulator has used the Federal Trade Commission Act to penalize a business for "unfair and deceptive" practices.

Time for a change
Providian has been ordered to change its policies and marketing pitches so that product fees and terms are fully and accurately disclosed and consumers are given 30 days after the first bill to cancel purchases. The San Francisco-based issuer, which has 13 million customers, did not admit or deny wrongdoing.

"Because of this settlement, every consumer who does business with Providian will receive complete and understandable explanations of the bank's products and will therefore be able to make an informed choice about their financial dealings," said Julie L. Williams, first senior deputy comptroller and chief counsel, when the June 28 settlement was announced.

"We intend to monitor the terms of this consent order very closely to make sure that happens."

Industry watchdogs say some tactics the government objected to are common within the industry, and they hope the crackdown on Providian will scare other issuers into revising how they sell and explain their products.

"In some ways, Providian has been singled out," says Linda Sherry, editorial director for San Francisco-based Consumer Action. "Other credit card companies are doing some of the same things. This should send a message that these are things the whole industry needs to take a look at."

For example, the OCC found problems with a Providian balance-transfer program called "Guaranteed Savings" in which the customer did not find out the interest rate on the switch until it was complete. The OCC said some customers ended up paying more than they would had they not transferred a balance.

Keeping customers in the dark
Giving a wide range of possible rates -- and not disclosing the actual rate until the customer has signed up for the product -- is a routine practice called "risk-based" or "tiered" pricing. "That's widely done and we always feel that's unfair," says Sherry.

Regulators also objected to a no-annual-fee card that required the purchase of a pseudo-insurance product called Credit Protector, for which Providian charged $156 a year. Many customers did not know they were obligated to buy the add-on, which highlights a common ploy called negative enrollment: Unless you tell the issuer you don't want the product, you're consenting to buy it.

The OCC said Providian also failed to fully disclose the benefit restrictions of Credit Protector, which closely resembles insurance but does nothing more than suspend a customer's card debt for a limited time without accruing interest. Credit insurance, which pays a customer's card bill should the customer get sick or lose a job, is considered a lousy deal for most cardholders, and debt suspension is worse because no benefits are paid.

Providian was the first to offer debt suspension, but in recent years the product has caught on with other leading card companies such as Citibank and Fleet Financial. Banks love it because they don't have to follow state insurance regulations, and they pay no benefits but charge customers about the same as they do for insurance.

"It sounds like the same old dog with a new face on it," says Luther Gatling, founder of Budget and Credit Counseling Services, which has offices in New York and New Jersey. "You're buying something that's not going to protect you. If it skirts legal recourses it's something consumers need to stay away from."

Providian promises improvement
Providian chairman Shailesh Mehta says the company has taken steps to revise its business practices. "We've already instituted a number of measures that have greatly enhanced our customer satisfaction and quality control programs," he said in a prepared statement.

Alan Elias, vice president of corporate communications for Providian, said the company rectified most of the problem areas a year ago when it launched an enhanced customer satisfaction initiative. Providian began extending grace periods for late payments, clarifying telemarketing scripts and mail solicitations, and requiring all service representatives to end their conversations by asking customers: Are you satisfied?

"Some of the issues cited by the OCC date back five years," said Elias. "The vast majority of them were proactively and previously handled over the course of our year-old customer service enhancement."

Elias said about 3 million customers would be receiving compensatory checks from Providian, accompanied by a letter from the OCC.

He said the settlement was separate from the $20 million the company agreed to refund about a year ago to on-time payers who were hit with late fees or blotches on their credit report. "That was paid out a long time ago," he said. "We discovered the computer error and corrected the problem."

Providian clearly wants to put its troubles behind it and move on. The company also recently reached a settlement with the Connecticut Attorney General's Office, agreeing to pay $1.6 million to the state, part of which will go toward consumer education.

"We made the business decision to look to the future and look at 2005 rather than 1995. We're going to end up a stronger company as a result," said Elias.

Keeping the banks in line
Robert Green, a San Francisco attorney and a member of the National Association for Consumer Advocates, says he wants the OCC investigation to scare the credit card industry into self-examination, and hopes it means that government is going to get tougher.

"I hope it signals an intent by the OCC to crack down on products that are abusive to consumers and for banks to refund those monies. The credit card companies have been pretty fast and loose," he says, "particularly those non-bank banks."

Green's law firm, Girard and Green, is handling two class-action lawsuits pending against Providian in federal court. "They are the worst I've ever seen, and certainly the worst on a large scale," he says of the company.

Experts emphasize that most problems with credit cards can be avoided by reading the fine print of contracts and monthly mailings, and asking the issuer to clarify terms and fees before filling out applications. Most card companies do put the particulars in writing, albeit in microscopic legalese that even lawyers sometimes have trouble understanding.

Regardless of whether the Providian settlement brings about changes in the industry, Green says consumers have a responsibility to know what's going on.

"If you don't know the bank and the terms, they can promise you the world and one month later you get an agreement with a 25 percent interest rate and high fees. The message is: Be careful who you do business with in the banking world."

Libby Wells is a freelance writer based in Kentucky
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-- Posted: July 17, 2000