Providian Ordered to Pay Cardholders $300-Million Refund

Providian Financial Corp., the credit card giant accused of slapping customers with bogus and deceptive charges, got hit itself Wednesday with a giant fee when federal regulators ordered the San Francisco-based company to refund $300 million to cardholders.

The settlement between the nation’s sixth-largest credit card issuer and the Office of the Comptroller of the Currency represents the largest-ever restitution order imposed by a banking regulator on behalf of consumers.

About 1 million current and former Providian customers are expected to receive checks within three months; individual refunds will likely range from a few dollars to a few hundred dollars.

“When a bank engages in unfair or deceptive marketing practices, it damages its most precious asset: the trust and confidence of its customers,” said John D. Hawke Jr., comptroller of the currency. “We will not tolerate abuses that breach that trust.”

Industry analysts said the stiff penalty would send shock waves through the credit card industry, which in recent years has been relying on higher fees, stricter terms and more aggressive marketing tactics to boost revenue in an increasingly competitive market.

Officials at fast-growing Providian denied any wrongdoing and said they made a business decision to settle rather than incur the costs of additional litigation. But Chief Executive Shailesh Mehta conceded in a conference call Wednesday that the controversy served as a “wake-up call” and that many of the practices called into question have been stopped.

The company said the settlement will reduce its second-quarter earnings by about two-thirds, but would not hurt long-term profitability. Providian shares rose 2.5% in New York Stock Exchange trading, closing at $85.07, up $2.07 a share.

Even before the Providian settlement, credit card issuers had been feeling the heat of a customer backlash against the industry’s more aggressive and questionable practices. Bank One, for example, lost thousands of customers and saw its stock price halved after its First USA unit imposed a new late-fee policy. The company abandoned the policy, but still faces numerous lawsuits from customers who say they were improperly charged fees.

The Providian investigation was launched last year by the San Francisco district attorney’s office, which received numerous complaints from customers who said they were unfairly assessed late fees, had been charged for products they did not want to buy, or had not received the interest rates they were promised.

Complaints peaked last summer at four per 100,000 customers each month. Since then, Providian, which has 13 million customers nationwide, has adopted a series of customer service and disclosure policies that have reduced complaints by 40%.

“We hope to serve as the model for the entire industry in customer communication and customer satisfaction,” Mehta said Wednesday.

Earlier this year, amid the government investigation, the company refunded $20 million in late fees, which it said were improperly assessed because of a computer error.

The OCC investigation, which also included the California attorney general, focused primarily on two Providian products: a balance-transfer program that guaranteed customers a lower interest rate, and a credit insurance policy that promised to suspend payments if a customer became disabled or unemployed.

Regulators said Providian failed to adequately disclose the terms of the balance-transfer program, which in some cases resulted in higher, not lower, rates. Providian terminated the balance-transfer program, know as the “guaranteed savings rate” plan, earlier this year.

Numerous customers also complained that they were unaware that they had purchased the $156-a-year credit protection policy, which regulators say was secretly bundled into Providian’s “no annual fee” credit card offer. In the future, the company agreed to provide written disclosure of the terms of the credit policy before finalizing a sale.

As part of the settlement, Providian also will pay a $5.5-million civil fine to the San Francisco district attorney’s office and agreed to hire independent auditors to help determine which customers are entitled to refunds.

Consumer groups were pleased with the size of the settlement, but called upon federal banking regulators to step up their enforcement efforts at other banks.

“We would hope that the elements of this settlement will become the industry standard, so it’s not just Providian cardholders who benefit,” said Ken McEldowney, executive director of Consumer Action, a nonprofit advocacy group in San Francisco. “Providian’s tactics were typical of what we are seeing in the industry.”

It was unclear how the settlement would affect the private lawsuits against the company in state and federal courts. The actions were consolidated last year in San Francisco Superior Court and U.S. District Court in Philadelphia.