Rebuilding Credit

San Francisco's Providian Financial was once the most despised company in the credit card industry. Now, after a humbling fall, it just wants to be loved.

A benefit for subprime lenders is the ability to charge the highest rates and fees on the market, to compensate for the risk of a loan defaulting. Customers with blemished credit don't have a lot of credit options, and they're willing to tolerate astronomical interest rates.

It was a dramatically successful recipe for growth: Within 10 years, the company was managing more than $14 billion in accounts, and it would double in size again during the two years that followed. Providian was swimming in money, and so were its executives. (Mehta's most garish display of wealth: moving his family into a 17,000-square-foot Hillsborough replica of the White House -- modeled by Hearst Castle architect Julia Morgan during the 1930s so that William Randolph Hearst's sons could entertain dignitaries.)

But little did anyone realize back then that the real secret to Providian's success was its timing. During the mid- to late 1990s, the nation experienced the longest period of sustained economic growth in its history, and few loans went bad. More Americans than ever were garnering credit, and many of those new customers were in the subprime market, which was paying off so handsomely that other companies -- particularly Capital One -- moved in on it. But none of the other companies was willing to go quite so far as Providian, which was doing a third of its lending to the subprime sector.

New CEO Joe Saunders now emphasizes "decency" and "clarity."
New CEO Joe Saunders now emphasizes "decency" and "clarity."
Warren Wilcox, Providian's top marketing executive.
Brandon Fernandez
Warren Wilcox, Providian's top marketing executive.

With all its growth success, however, the firm was developing problems on the service side. By 1999, Forbes reported, Providian's 10 million customers were generating nearly 50 percent more Better Business Bureau complaints than up-market rival MBNA's 35 million customers. By May 1999, the San Francisco district attorney had begun investigating whether Providian was deliberately overcharging and deceiving its customers.

Providian suddenly had an image problem. To deal with it, the company turned to Konrad Alt, a former official with the Senate Banking Committee and the Office of the Comptroller of the Currency (the federal agency that regulates banks), and Chris Lewis, also formerly of the OCC, to handle its broadly empowered public policy office.

Alt, who today heads Providian's 60-person department of risk management and reputation, is a trim man with a slender face and short hair who tells the story of his time at the company with a delicious deadpan.

"It's hard in the credit card industry," he says. "As a general rule, the public believes credit card lenders are sneaky, deceptive, and use small print. ... These things don't make it easier."

Essentially, the investigation launched by the San Francisco District Attorney's Office and, later, Alt's former employers at the OCC accused Providian of taking every negative industry stereotype to grotesque levels.

Among other things, Providian was alleged to have offered a "no annual fee" card that required customers to pay a $156 annual "credit protection fee." (Consumers could cancel the credit protection -- if they were willing to pay an annual fee.) Even if consumers wanted the costly credit protection -- which would supposedly pay a customer's bills for 18 months, interest free, if the person were hospitalized or became unemployed -- the company allegedly concealed the fact that the policy strangely wouldn't apply to "involuntary unemployment" (such as being fired or laid off) unless the consumer had paid three months of advance premiums. Nor would the protection -- insurance, essentially -- apply to hospitalization caused by a pre-existing condition. Unless, that is, the customer paid six months of premiums in advance and had an account that was current, not over-limit. Providian also yanked the insurance policy if the company found out that the customer had submitted more than a minimum payment on any of his other, non-Providian credit cards.

None of this, of course, was adequately disclosed during telemarketing calls, which investigators charged were based on scripts that deliberately withheld specifics from customers. All in all, Providian's name took a beating.

The investigation concluded in June 2000, when the company signed a "consent order" with the OCC, forbidding specific marketing behavior Providian was alleged to have engaged in. As part of the settlement, Providian paid out $300 million -- without admitting guilt. It was the single largest fine in the OCC's history.

Announcing the settlement, Comptroller of the Currency John D. Hawke Jr. said: "Consumers should not have to become detectives to find out the true terms and conditions of their credit card agreement. They should not discover after they receive their monthly statement that they have purchased a $156 credit protection policy that they neither want nor need. And if they are promised a promotional bonus for transferring credit balances, they should receive that bonus -- and not be told after the fact that the program requires a balance transfer of $10,000."

Looking back on the affair, Alt says flatly: "That was certainly a reputational challenge."

On Wall Street, however, the company escaped practically unscathed. Four months after paying the OCC penalty, its stock price hit an all-time high. So life went on at Providian, where growth rates continued to accelerate. The company's effort to improve its behavior earned it USA Today's Quality Cup award for customer service only a year after the investigation closed.

"When we won the Quality Cup, it was wonderful," Alt recalls, allowing himself a rare smile. "On the public relations front, I think we felt like we were finally coming out from under it."

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