Is Your Bank Working For You or Against You?

Now that taxpayers have bailed out the banks, they are on your side, right? After all you’re not just a customer anymore, you’re an owner. But perhaps their responsibility to you as a “shareholder” is overwhelming their responsibilities to you as a customer?

President Barack Obama met banking executives at the White House Thursday where he demanded clarity, transparency and an end to what he termed as “abusive” rates and fees, especially from financial institutions bailed out by the Trouble Asset Relief Plan (TARP). “There’s a new sheriff in town,” says Ed Mierzwinski, consumer program director for US PIRG, the federation of state public interest research groups. “And we’re excited and encouraged. President Obama stepped in and said he wants stronger rules passed by Congress.”

On Capitol Hill, both the US House and Senate are pushing to pass consumer protection bills sooner, rather than later, such as the Credit Cardholders’ Bill of Rights (HR 5244).  According to the Office of House Speaker Nancy Pelosi, the key protections of the bill are:

• Ending unfair or arbitrary interest rate increases
• Letting consumers set hard credit limits to stop excessive over-limit fees
• Stopping penalties for cardholders who pay on time
• Requiring fair allocation of consumer payments
• Protecting cardholders from due date gimmicks
• Preventing companies from using misleading terms and damaging consumers’ credit ratings
• Shielding vulnerable consumers from high-fee subprime credit cards
• Barring issuing credit cards to vulnerable minors

The problem, say Mierzwinski and other consumer watchdogs, is that the new rules’ penalties won’t be applied until July 2010, so banks are using the economy as an excuse to raise as much money as possible through these tactics before that happens. “We think that’s wrong, dishonorable, unfair and disappointing,” he adds.

It’s not just credit card rates and fees that are going up and getting more complicated. The rules, services and charges associated with loans, savings and checking accounts are changing too. By some accounts, a number of large and small banks are now deriving as much as half of their income from fees and penalties.

For example, there was mostly outrage when Pacific Capital Bancorp, offered tax-refund anticipation loans, at annualized interest rates of more than 100%. Or when Wells Fargo introduced Direct Deposit Advance Service to access funds in anticipation of electronic deposits for a fee of $2 for every $20 advanced. That amounts to an APR of 120% (although the stated point of the DDA is to tide you over only until your paycheck clears). In essence Wells Fargo’s service is similar to a “payday loan” which is considered predatory enough to be banned for use by military families.

The banking industry insists such services are used entirely at the customer’s discretion. They consider these fees and penalties to be fair since it is the customer’s responsibility to keep track of balances and due dates. Consumer watchdogs argue that statement information is intentionally confusing and that due dates are arbitrarily changed so that customers will miss consequences and can be penalized for late payments.

The American Bankers Association (ABA) is the leading trade group representing the majority of large and small banks in the US. Nessa Feddis, ABA vice president and senior counsel emphasizes that none of these sometimes-controversial services fees and charges are forced on consumers. Nor should financial business be expected to provide services for free. “What people really want is for services to be free. But obviously there are fixed costs. We don’t pay a loan officer less salary to make a loan of $100 instead of $100,000. The credit report still costs $25 either way. Even if it is a short-term loan, there are fixed costs. So you don’t have to be a mathematician to figure out why the annual rate is high if the loan is less than annual.”

“The teller has to be paid; their benefits have to be paid. Cash has to be counted, sorted and protected. You can’t escape those costs,” Feddis points out. “Banks that have taken government loans can’t repay those loans if they operate at a loss.” And she says that TARP banks have already returned to the government-and taxpayers-about $2.5 billion in the form of dividends, according to ABA calculations of public information.

Regarding the rising fees, as well as climbing credit interest rates, Feddis compares the trend to insurance companies raising premiums based on risk and losses across the portfolio. “There is a certain collective aspect to it. In credit cards, all borrowers pay, in part, for the losses resulting when other borrowers don’t repay. You can’t lend $10 to 10 people, get $90 back and be around to lend again.” In that way she says, rising rates are similar to rising insurance premiums.

“I don’t cry for the banks, because so many of those people have paid interest on top of interest for so long that even if the principal is never repaid, the bank did well by the loan,” Mierzwinski counters. “You can make good money in credit cards. The problem is that over the last five to seven years they’ve been making bad money on top of the good and they got caught.”

“Everybody needs to make money, but if your basic business model is to make money on tricks, traps and gotchas, then your business model has been declared by the Federal Reserve Board of Governors unfair and deceptive,” Mierzwinski adds. “Banks can’t lie, cheat or steal anymore.”

Steve Barth blogs about work, play, society and politics at Reflexions.