Consumers Wage War Against Banks
Consumers have coined this upcoming Saturday, November 5th as “Bank Transfer Day.” In an effort to show banking institutions that the people hold the power and, in a sense, to punish banks for their greed, the plan is for participants to transfer money from big banks and into a credit union or local bank. Although the movement is independent of the Wall Street protests, it has gained much popularity within those groups and has even received a definition on Wikipedia. The movement is still scheduled to take place even though big banks have announced the cancellation of their debit card fees.
Opinion without Substance
Media outlets and blogs seem to be very guilty of expressing opinions as facts, especially without any proof or documentation to validate a claim. And perhaps I’m guilty of it too, but I do make an effort to preface my opinion-only statements with,”in my opinion.” I certainly don’t expect everyone to share my thoughts, concerns, and views but I do assume that people have the capacity to exercise logic and rationality when forming opinions and decision making. Furthermore, I believe that paid, professional journalists have an ethical and professional obligation to be objective and to know the details before concluding about the bigger picture. Since much of my experience pertains to lending and the alternative financial services industry, I spend a considerable amount of time following those topics and I find that many “authors” have formulated an opinion based on their own personal feelings.
Today, I came across yet another article in which the author makes gross assumptions about short-term lending without any stats to back-up his claims. One of the assumptions made in the article that I actually see made on a regular basis is, “any decent banker ought to be able to make a living at 36%.” Well sure, however, if your business is based off of lending people $100 for 2 weeks, then you absolutely cannot make a living off of a 36% annual percentage rate even if you have no overhead. At 36%, one could expect to gross $1.38 on every $100 transaction, and the average business owner has plenty of expenses that cut into profits, including the staffing of personnel to man the company.
The author also writes, “Under the new law, if a loan is renewed three times, the annual APR on the typical $300 loan would reach 459 percent.” Let’s be clear, an individual would have to take out a loan every payday for an entire year for a 459% APR to be valid, otherwise, it’s just the fee for the two weeks that they had the loan outstanding. I don’t think it’s asking too much to have the facts listed.
Click here to view this article.
Bank of America Headlines Again
I know that I’m considerably late on this topic, so you’re probably aware that Bank of America has been in the news again. Unfortunately, it’s never positive press. I’m starting to wonder if BofA even has a real Public Relations team or perhaps consulting their PR person is always an afterthought. Several weeks ago we caught wind of Bank of America’s plan to cut up to 10,000 jobs to make up for lost fees from overdrafts, merchants, credit card interest and more. Although I don’t believe it was truly a shock to the public, it was still unwanted news symbolizing more economic chaos and uncertainty. Shortly after, we learned that Warren Buffet had agreed to invest $5 billion into Bank of America which I assumed should have pacified Bank of America and softened the blow of whatever anticipated financial woes were to come for them. We soon learned that this wasn’t the case.
Now, Bank of America is instituting a $5 monthly service fee for debit card users. It’s certainly not news that the debit card is one of the most used modern day conveniences but banks may be forcing customers to choose between convenience and disposable income. While $5 doesn’t sound that hefty, when you think of it as $60 a year just to spend your own money, it sounds a bit absurd. But the jury may still be out as to whether consumers will view this new $5 fee as just the cost of services rendered or whether it’s an act to be outraged by. Personally, I wouldn’t pay Bank of America $5 per month for a debit card when I can have the exact same service for no charge at my local credit union. Hopefully, this isn’t another train wreck waiting to happen in which Bank of America loses thousands of customers from its effort to overcompensate.
Missouri Initiative
The Missouri office of the Secretary of State has approved for a ballot initiative for the 2012 elections which will significantly reduce the amount of interest that alternative lenders may charge. So much, that lenders will be forced out of business in Missouri if passed. While the Missourians for Responsible Living may have good intentions, they may also be missing the bigger picture; loss of credit availability, demolition of alternative finance in Missouri, elimination of approximately 10,000 Missouri jobs, disregard for consumer education and full disclosure, and the subsequent economic devastation. This is absolutely an initiative in which the cons significantly outweigh the intended pros. Two lawsuits have already arisen from this initiative in part because of the vague wording that was approved for the measure and the proposed costs pointed out by supporters of the plan.
The CRL Hates Everyone
If the Center for Responsible Lending spent more energy on educating consumers than fear mongering and bashing all financial products, perhaps they’d be taken more seriously. After years of keeping up with the CRL I’ve come to the conclusion that the CRL seems to hate all credit products- mortgage loans, credit cards, overdraft loans, payday loans, title loans, refund anticipation loans, auto loans and whatever else you can think of. They often demonize products by “researching” how much is spent by Americans annually in fees and how much companies profit off of the services that they provide. Nevermind the fact that these companies also provide a necessary service and aid in the overall economic development of the country by also employing people and paying taxes. That’s not to say that there aren’t entities which knowingly use deceptive practices but the CRL makes it a point to lump all businesses which offer similar services. Assessing a product solely based on cost and associated fees should never be an accepted practice, and basing the usefulness of a product on the worst-case scenario of blatantly irresponsible consumer is absurd. If I were a person who believed in and trusted the CRL I would be completely afraid to use any type of credit product.
I often wonder if the CRL really provides a useful “service” for consumers or if they just force individuals to second-guess every credit encounter they’ve ever had. In my opinion, their resources would be better utilized by providing fact-based financial education and perhaps the pros AND cons of various services instead of always focusing on the negative. Or maybe even working with various financial institutions in the states in which they have offices to offer classes on fiscal responsibility.
And We’re Live!
Much of the news relating to the state of financial services these days still revolves around the status of the Consumer Financial Protection Bureau. The leading controversial topics include:
- the level of regulatory power that the organization will have in restructuring and/or “cleaning up” financial services and products
- the real necessity for yet another government agency when one of the several existing agencies could have possibly been placed with the task of rewriting and managing financial products
- the costs associated with starting and running such an entity and from where the money will come -especially with the current state of the economy
- who will be responsible for heading the agency and whether or not Republicans would approve of the pick
Undermining Economic Security? Really?
There have been several mentions of an economic security study conducted on Virginian’s use of alternative financial services by the Weldon Cooper Center for Public Service. The study mentions the steady increases in the cost of living which include the rising cost of healthcare, food and gas and like many other studies, it doesn’t give any realistic or viable choices for alternatives to utilizing short-term loans. Although the study “credits” payday lending for enabling consumers to pay for basic necessities such as rent, food, and transportation it also suggests that fees associated with high-cost loans can lead to other crises such as eviction. Immediately, I laughed out loud at that assessment primarily because people have a sense of hierarchy of needs and as well as a hierarchy of priorities. This hierarchy would dictate that a person would pay their rent or mortgage to keep a roof over his/her head prior to taking care of other financial responsibilities. If someone is so far behind on their financial obligations that they’re close to eviction then a short-term loan certainly isn’t the solution to their problems nor the cause of their problems. Remember, the maximum short-term loan in Virginia is $500…hardly an amount capable of “undermining economic security.”
Quite frankly, consumers should be offended that advocates continue to write articles and produce “studies” that in one way or another portrays the average alternative financial services user as significantly less than savvy. If anything, consumers who live on a limited budget and have to stretch their dollars, or make other lifestyle sacrifices to get bills paid are clever at the least for consistently being able to adapt. And in many cases, it’s not financial illiteracy which forces individuals into a sticky financial situation-but random, unfortunate events that have happened in their past. It’s pretty obvious that in today’s economic environment families are losing income as businesses have downsized, closed their doors, outsourced to other countries, laid-off employees, eliminated positions, decreased pay, decreased hours and generally cut whatever expenses necessary in order to realize profits. Not to mention the slew of natural disasters over the past decade which may have forced households to take in other friends and family members indefinitely. In my opinion, the study was just another attempt at pointing fingers instead of addressing the real problem of the absence or limit of credit availability by traditional financial institutions.
You can review the study in its entirety at www.coopercenter.org/demographics.
Who’s in the Lobby?
The truth is that lobbying may be a necessary evil whether or not we agree with it or how it’s done. We all have special interests even if we’re not appealing to politicians to lean more towards our point of view. The unfortunate reality is that many groups that pick apart other special interest groups for lobbying are themselves very guilty of doing the same. The Center For Responsible Lending for example likes to point out the fact that their lobbying costs are far less substantial than those industries that they rally against. As we’ve witnessed their activities throughout the years we’ve certainly learned that The Center For Responsible Lending has interests beyond what they claim in front of the media. The point is that the CRL can’t argue that their purpose is greater and yet also argue that they spend significantly less as an interest group while asserting that the less spent on lobbying, the lesser the evil.
However, given the recent financial reform climate, the financial services industry as an entity has been fighting hard and spending significant resources to gain favorability. As Frank-Dodd cuts into profits, banking institutions continue to lobby as they find ways to supplement losses in other areas. According to the Wall Street Journal, $27 million was spent by financial firms in lobbying efforts just in the first quarter of 2011. We’ll soon see how much Congress is swayed by lobbying efforts once the CFPB is finalized in July.
Warren, to be or not to be the Director?
The online news story and blog world are going crazy with reports and opinions on Elizabeth Warren and her anticipated contribution to the Consumer Financial Protection Bureau. With her extensive background in law in addition to her success as a writer, she continues to be a person of interest to lead the newly created CFPB. However, there’s been much controversy and even some attacks toward Warren and the CFPB surrounding the entity’s function. Although a permanent director for the agency hasn’t been named yet, there’s been discussion that Warren has taken liberties that haven’t been appreciated by constituents and Congressional leaders. Recently, Warren involved herself in a mortgage proposal that was distributed to five big lenders and was heavily criticized for her actions. The proposal talks about the settlement negotiations relating to the mortgage crisis. Warren was also hit hard by the House Financial Services Committee at last weeks hearing on the CFPB. The committee introduced numerous concerns including the appointment of a permanent head for the agency since it’s scheduled to go live in July. There’s also a bill to have a five person panel versus one director so it’s seeming less likely that Warren will be approved for the position.
As it was created, the bureau is expected to have the unbridled authority to regulate financial products including mortgages, credit cards, short-term loans etc. I certainly hope the cost of consumer protection isn’t the continued loss of available credit. Banks and credit card companies have already been finding ways to supplement their income.
Consumer Financial Protection Bureau Launches Website
It doesn’t seem like the newly established Consumer Financial Protection Bureau or CFPB is wasting any time creating an image and identity for itself-an identity complete with a logo. Still in its infancy, the Bureau just recently launched their website, www.consumerfinance.gov. The CFPB website focuses on consumer suggestions and encourages individuals to submit their feedback, experiences and opinions in various formats. Consumer feedback is definitely integral in shaping a new regulatory atmosphere but my concern with this kind of gung ho approach is that people are typically more likely to take the time to discuss and document experiences that have not gone in their favor, or actions that they don’t agree with. I think it will be very unlikely for someone to rave about how great their financial institution is or how they appreciate the availability of credit from their local alternative lender. My guess is that the CFPB will be overwhelmed with the nations worst-case scenario experiences with banks, mortgage companies, installment lenders and payday lenders. I, like many others have been wondering if the CFPB can create a balance between consumer protection and regulation, while still recognizing that businesses need to profit in order to survive.
The website also contains a consumer financial education section which provides resources and direction for those who are looking to learn about the options that are available to them or those who are looking to improve their current financial situation. While education is supposed to remain a primary focus of the CFBP, they will also be responsible for determining baseline standards and defining abusive practices for consumers to use as a gauge. Let’s hope these guidelines are still fair to businesses!