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Feds shut down small-biz credit firm
Advanta credit card
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TEXT OF STORY
TESS VIGELAND: It's been less than two months since Congress passed all those new rules making it tougher for credit card issuers to change the rules on their customers. But the law doesn't take effect until February. And in the meantime, banks are doing everything they can to make a buck before it gets harder to do so.
This week Sen. Chris Dodd warned credit card companies about hiking interest rates in anticipation of the new rules. But one bank took steps that surprised even the FDIC.
And now the agency is basically shutting it down.
Marketplace's Steve Henn has the story.
Steve Henn: Just two months ago, Advanta Bank was one of the largest suppliers of small-business credit cards in America.
But on June 10 the bank cut off credit to all of its 1 million customers. And overnight, shop owners across the country lost their short-term credit.
Gillette Kempf: My name is Gillette Kempf and I own Borealis Bookstore. It's a small independent book store in Wadena, Minn.
Kempf was one of Advanta Bank's customers. And losing her credit card wasn't the only surprise with her online account. Advanta also raised the interest rate on her balance from 7 percent to 34 percent.
Kempf: I got to the bottom of that electronic statement and looked at that and I just felt ill. I felt like I had been betrayed.
The FDIC was flooded with complaints. And last week it forced Advanta Bank to pay back $35 million to customers like Kempf.
Richard Newsom: They basically accused them of cheating their own customers out of $35 million dollars.
Richard Newsom is a fraud investigator and former bank examiner. He says the default rates on Advanta's credit cards skyrocketed recently -- hitting 20 percent -- and the banks finances are precarious.
Apparently, federal regulators agree. Last week, they also ordered Advanta Bank to create a plan to stop accepting new deposits, pay its existing depositors back and then to terminate its FDIC insurance
Newsom: The bank is essentially being forced out of business by the FDIC.
But Newsom says the FDIC can't legally can't shut down the bank's parent company. And that parent company, Advanta Corp., is still trying to attract new investors -- aggressively advertising short-term investment notes that offer rates as high as 11 percent.
Newsom: But these are securities that are actually advertised in the San Francisco Chronicle. The target of these securities is actually like moms and pops. They are designed to be sold to unsophisticated people.
Newsom's studied the company's public filings. He believes that because Advanta Bank is being pushed out of business, soon the only money Advanta Corp. will have to pay off old investors will have to come new investors.
Newsom: Practically speaking, it has aspects of a Ponzi scheme.
Several former securities officials and banking law experts agree. But Art Wilmarth, a law professor at George Washington University, says it isn't clear if anyone has the legal authority to shut Advanta Corp. down.
Art Wilmarth: This is an industrial loan company which is essentially a loophole institution.
Wilmarth says these industrial loan companies are not directly regulated by anyone. The Obama administration would like to shut all of these firms down, but until Congress changes the law, it can't.
So in the meantime Richard Newsom has this advice for anyone thinking of investing in Advanta Corp.
Newsom: Run for the exits.
Advanta's executives did not respond to repeated requests for comment.
In Washington, I'm Steve Henn for Marketplace.
I am a small business owner.
Advanta raised my interest rate from 8% to 28.99% after they closed their credit card. When I called them, they just told me a generic excuse of evaluating my credit. I have never been late on any payment not to Advanta, nor to any creditor. I certainly am sure my credit rating is in far better shape than theirs is.
Unfortunately, they seem to be able to increase interest rate to any level they can. Can anybody help me and thousands of people like me?
I too have CD/ Investment Notes with Advanta scheduled to mature between 2010 and 2014. Do you suggest I withdraw these funds and incur penalties? Is there any reason to believe Advanta Corporation is about to fail and not meet their obligations considering they have never defaulted since they opened in 1951?
I welcome your response.
Advanta was a major contributor to my small business demise. In January of 07 ,I opened my statement to a 30% interest rate. After luring me with a balance transfer at 7% fixed rate . The explanation I received after calling, was " We have reviewed your Portfolio , and based on this we have increased your interest rate" I ask on what criteria ?
The response I received was evasive and rude.
They are now suing me and had the audacity to tell me NOW was the time to turn to family and friends for financial help in paying my balance. The call from the their attys. came on Friday the 11th. I was given until Monday the 13th to pay the balance. I am still so angry and,was relieved to find this article on the website.
Don't any of these CEO's remember Business Ethics 101
In answer to the comment re the individual who called the FDIC- First your FDIC insured deposits are totally safe, no matter what, if they are deposits, not the uninsured notes issued by the Advanta Corporation-Then check the 7-1- 2009 SEC filings by Advanta Corp. The filings include two Consent Cease and desist orders; one orders Advanta Bank to make restitution for the $35 million cheated from its customers. That C&D was made public by the FDIC with its press release ordering restitution.
The other Consent Cease and desist order was inexplicably not made public by the FDIC, but was included in the July 1, 2009 SEC 8-k filing by Advanta Corp. Check the SEC's public filings to confirm this yourself. The latter , in pertinent part, orders Advanta Bank Corp to submit a plan to retire all FDIC insured deposits in an orderly manner, precisely as described by Mr. Henn. This is serious stuff. The order also shuts off all dividend payments to Advanta Corp [without FDIC approval] which are the primary source of repayment to pay the investor notes which are unsecured obligations of the holding company which extend out to 10 years. At year end there were over $200 million outstanding of these investor notes on the holding company balance sheet at 12-31-08 and over half mature this year. These investor notes are not insured by the FDIC; they are unsecured obligations of Advanta Crporation, the parent holding company of the bank. These notes were advertised in todays San Francisco Chronicle on page D-2 in the Business Section with maturities out to 10 years. With the bank ordered to payoff all its FDIC deposits in an orderly manner, what will exist to service this debt in 10 years is conjecture. Roughly half the Bank's deposits mature in one year per the 10-k. The order also asserts that Advanta Bank Corporation has inadequate capital to support its risk profile and requires Advanta Bank to submit weekly liquidity reports to the FDIC.
On Friday July 10, 2009 Advanta Corp filed an 8-k that popped up on the SEC web site after Steve's story; the 8-k reported by Advanta that Advanta Corp is laying off half their staff. You may be aware of their credit card problems, however, if you pull up Advanta's web site today as a potential investment note purchaser and look at the linked prospectus dated 2-9-2009 , you will find that the prospectus was dated 2-9-09 and contains none of the subsequent adverse events disclosed in the 10-k, 10-Q for 3-31-2009, and in the July 1st 2009 Cease and desist orders. The prospectus describes a going concern. In fact the Earnings to Fixed Charge data reported by Advanta in the 2-9-09 prospectus is as of 9-30-08 and reports a positive 1.02 ratio implying erroneously an ability to service debt including term debt. An 8-k filing on 1-29-09 (2 weeks before the prospectus date) announced a large 4th quarter loss and a loss for the year which means the earnings/fixed charge coverage ratio for the whole year end 12-31-08 was negative. Advanta actually started losing money in the 3d quarter ending 9-30-08 and losses have accelerated since.
I filed complaints last week with the SEC and the California Department of Corporations precisely about this lack of accurate and complete disclosure of adverse events to potential investors.
Outside bank rating agencies tend to be driven by data including capital ratios. On paper Advanta Bank capital ratios look good but they have severe asset quality problem and $4 billion in off balance sheet assets per the 10-K's and 10-Q's. The FDIC order was consented to by Advanta Bank--it says capital is inadequate. Who are we to disagree with the bank and the FDIC's assessment of inadequacy? I wrote to FDIC Chairman Sheila Bair today and copied the letter to the SEC. I asked the FDIC to assist the SEC in addressing the disclosure problems. Hopefully, the FDIC can publicly explain why they didn't publicize the 2nd C&D and address with the SEC the disclosure problems. Perhaps the SEC will promptly review the prospectus disclosures and address the disclosure issue on its own. That summarizes why I believe this is a Ponzi like scheme.
Absent dividends going to the holding company which are blocked by the C&D order and implausible due to losses in any case, I didn't see a verifiable ability to repay these investor notes without selling new debt and I question whether truly informed investors would buy these investor notes. They are targeting moms and pops.
Your last program stated the Feds want Advanta Bank to close. I phoned FDIC and they know nothing of this. Neither does WSJ nor bankrate.com, which still gives *** rating to Advanta Bank. As I have CD's there, what is the source of your info? (I know about the credit cards.) Also, if FDIC closes a bank, it usually tries to get a buyer first. Please enlighten ASAP. Thanks.
I too had an Advanta credit card that went from 5.99% to 26.00% When I called them, Advanta said they had sent me a notice on 8/10/08 and I had till 8/20/08 to answer in writing. I finally found the letter attached to the back of checks they sent me every month. This company is the poster child for what credit card companies have done to people. Maybe if Advanta hadn't raised their interset rates so high, they wouldn't have had the big default rate and would still be in business.
Wow! It makes my day to hear this story! I am one of those small business owners who, virtually overnight, lost my short-term credit. Fortunately, I did not have a balance on my Advanta credit card, but unfortunately I had just purchased new equipment for my office and suddenly had no way to pay for it. Luckily, I do business in a small town and the people from whom I purchased my new equipment graciously waited until I was able to secure credit from my local bank. The local bank was so helpful, in fact, and so familiar with me and my business that I've decided to do business locally whenever possible. I'm so glad that Advanta has gotten what it deserves!
