SUB-PRIME CREDIT MAILERS, once among the hottest sectors in financial services marketing, are feeling the heat.
Several big players have had to change their offers, pay restitution or get out — all thanks to a series of probes by the Office for the Comptroller of the Currency.
Take First National Bank of Marin, which recently spent $100,000 to alter the 10 to 15 different packages it mails to 20 million prospects per year.
(First, a definition. BAIGlobal, which monitors financial mailings, defines sub-prime credit cards as those carrying an annual interest rate of over 19%. Such cards are usually offered to people with poor credit.)
First National's problems began in 2001 when it was targeted for a probe by the OCC.
The OCC found that the Las Vegas-based company had misled consumers to believe that they did not have to send in a savings deposit to receive a credit card with available credit. In reality, the applicants had to make payments to the bank before being able to use the card, according to the OCC.
In addition, the OCC said, applicants for one First National program paid up to $79 in cash for a “guaranteed” card with a credit line up to $600. But they had to post a $200 savings deposit when the card was issued.
These statements appeared not only on envelopes — one said, “You do NOT need to send a savings deposit to get your new Visa credit card, not one penny” — but in letters, according to the OCC.
“You do not have to send in money for a savings deposit,” said one letter. And another stated, “If you have credit problems or no credit history, and you want your own Visa card without having to send in hundreds of dollars for a savings deposit…this is it!”
First National, which has 550,000 customers and assets of $230 million, settled with the OCC last month. It agreed to refund application and other fees to consumers who received a credit card with less than $50 in available credit, and had cancelled the card within 60 days of being issued.
The firm also agreed to change its marketing practices, and stop using the phrase, “Send no money for a savings deposit” if the deposit is to be secured by a charge against the card.
But the firm wasn't happy with the settlement.
For one thing, the OCC only recently began scrutinizing credit card offers to see if they lived up to the FTC rules on unfair and deceptive trade practices, according to Robert DeJong, president and CEO of First National. (Prior to that, the standard had been the Federal Reserve's truth in lending requirements, he said.)
“Truth in lending has been every bank's bible to go by for the past 25 years,” DeJong argued. “And now [the OCC] has determined that there is another rule that we have to comply with.”
He added that First National was found to be in violation of only the FTC rules.
“We believe that the OCC lacks legal authority to enforce the FTC act and we believe that the OCC's interpretations of the act are incorrect and contrary to the interests of both financial institutions and consumers.”
The OCC countered that it has long reviewed promotional materials by FTC standards, but agreed that it had stepped up its efforts.
“The prohibition of [the FTC's] unfair and deceptive trade practices is something that has applied to banks for years,” said Dan Stipano, deputy chief counsel for the OCC. “It's not something that should come as a surprise to any banks that the OCC is enforcing that law in appropriate cases.”
DeJong noted that the OCC had helped First National modify its solicitations for compliance.
“We were quite alarmed when the OCC indicated it had concerns about the very solicitations it had reviewed,” he said.
But First National isn't the only sub-prime mailer targeted by the OCC over the past few years.
Providian, the nation's sixth largest issuer of bank credit cards, agreed last year to pay more than $300 million to customers over alleged deceptive sales practices.
As part of the settlement, Providian also agreed to suspend its marketing to prospective sub-prime customers. These consumers now make up 29% of Providian's total customer base, said spokesman Alan Elias. The agreement was reached with the OCC, the San Francisco District Attorney's office and the California Attorney General. Providian was also required to pay a $5.5 million civil fine to the DA's office, the company said.
And last May, Direct Merchants Credit Card Bank, the 11th largest U.S. credit card issuer, agreed to pay $3.2 million to 62,000 sub-prime customers. The firm came under fire for what it termed “a series of limited test marketing campaigns.” The tests, mailed between March 1999 and June 2000, targeted 13.5 million consumers (out of 84 million pieces mailed during the period).
Some were offered an unsecured card, and others a partially secured card.
The bank has 4.5 million credit card customers and reports more than $9 billion in managed assets.
Sub-prime mail volume fell off slightly in 2001, according to BAIGlobal, a mail monitoring service, but it is not clear if the OCC's actions had anything to do with it. In the first quarter of 2001, total volume reached 284.3 million pieces (265.8 million for unsecured cards, and 18.5 million for secured). But it dropped to 220.7 million in the second quarter, the most recent period for which statistics are available.
Whatever the cause of the falloff, big mailers like Direct Merchant are quick to defend what they do.
“We've made it very clear that our target is the moderate consumer,” said spokesman Mike Smith. “We're providing credit for an under served population made up of 50 million Americans who need access to a credit card.”
But such arguments are lost on critics.
“Clearly anytime a bank does anything that's deceptive from a consumer perspective, they're losing that consumer's trust and that business,” said Pat Faley, vice president of ethics and consumer affairs for the Direct Marketing Association.
While not commenting on specific firms, Faley noted that “offers have to be clear and honest and complete to the perspective of the consumer and not clear and honest and complete only to their attorneys. That's the issue we worry about.”
