Just when secured credit cards were winning over some of the industry's biggest players, hints of their unsavory past recently resurfaced.
The secured card program of Farrington Bank of New Brunswick, N.J., a one-branch operation, has been the focus for a year of an investigation by the state's banking department.
More than 700 consumer complaints fueled the probe. Angry consumers wrote to the consumer affairs division of the state's Department of Law and Public Safety, primarily complaining that the tiny thrift was not explicit about the product it offered.
And when consumers requested refunds for money sent to the bank, Farrington told them that their request came too late. Some of the complaints date back to 1991.
The $65 million-asset thrift sent out misleading direct mail solicitations to consumers, according to the New Jersey Banking Department's findings. In addition, the thrift's marketing partner, U.S. Liberty Inc., of Cherry Hill, N.J., violated state law by collecting advance fees from prospective customers.
New Jersey law stipulates that a company must be licensed or chartered by the state before it may accept money from consumers for the purposes of extending a loan or credit.
While relations between the card issuer and the state regulator appear to be amicable as the thrift follows the state regulator's suggestions, James Carr, assistant commissioner of banking, said that he will "continue to monitor" its activities. Moreover, 150 unresolved complaints are still under examination.
So far, 575 of the 730 consumers who filed formal complaints against the bank have received $29,982 from Farrington. The refunds cover primarily processing and application fees paid to the bank.
John E. Pellizzari, president of Farrington, prefers to talk about the "thousands" of thank-you letters that the bank has received from satisfied customers.
"I get more thank you letters than letters of complaint," he said.
Mr. Pellizzari pointed out that the bank always provides refunds to applicants who are turned down for credit.
But most consumers who take issue with Farrington say that they did not know they had applied for a secured credit card and when it became clear to them that the bank was offering only secured products, they wanted their money back.
Farrington requires customers to ask for a refund within 10 days of mailing the bank a check.
Mr. Pellizzari and his marketing partner, Steve Guarino, president of U.S. Liberty, maintain that the bank's marketing material has always been clear.
Nevertheless, since the state banking department began overseeing the bank's secured card marketing, U.S. Liberty no longer collects fees from consumers. Checks are made payable now to Farrington Bank.
In addition, there is a significant change in the way Farrington describes its offer in letters to consumers.
In 1993, for example, direct mail solicitations promised consumers that Farrington Bank "guaranteed credit lines from $350 up to $5,000," but nowhere in the actual letter did the bank mention secured credit cards.
A small asterisk after "guaranteed" told customers to refer to the back of the letter for "card requirements," where it was disclosed that a deposit was required to secure the line of credit.
Today, Farrington's letters do not bury pertinent information about the terms on the back of its letters and it no longer guarantees that everyone will get a credit card. Now the letters state that "the majority of applicants are approved."
Mr. Guarino questioned the legitimacy of the 730 complaints.
"The majority of people who have complained are using some excuse, because they don't want to pay (the fee)," he said, adding that over four years, 730 complaints is not a bad record.
Others disagree. One industry source said that number of complaints "about an issuer the size of Farrington Bank is devastating, and even a larger bank should be concerned about such numbers."
Still, most observers do not believe that Farrington's experience is indicative of a larger problem in the marketing of secured cards.
"The product has shed many of the questionable tactics of the past," said Brian J. Schwartz, MasterCard International's director of new market development.
MasterCard, for example, requires all secured card issuers of its brand to submit their advertising and marketing material for approval.
