Bankers used to be trustworthy, but threw their reputation out the window – a reprise

In 2014, I wrote the following post which was predicated on yet another huge fine of a large bank for inappropriate activities in selling products. Just yesterday, per The Charlotte Observer in an article called “Bank settles with feds over claims it ‘misused’ 401(k),” Wells Fargo was fined $145 million (after earlier fines for unethical and some illegal practices) for cheating its own employees and retirees with higher stock transaction fees in the company 401(k). This latest fine was forthcoming from the Department of Labor as they govern employer sponsored 401(k) plans. It should be noted the bank settled the case without admitting guilt.

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Last week, Bank of America was the latest bank to be penalized for fraudulent or aggressive marketing practices. They have had so many fines for malfeasance or aggressive marketing practices that it is hard to keep track of their sins. The latest penalty fined Bank of America $783 million for selling credit card consumers products and services they did not request. The Consumer Financial Protection Bureau (CFPB), which was newly created a couple of years ago by the Dodd-Frank Act under the tutelage of now Senator Elizabeth Warren, said the $738 million of that fine is used to restore money to those customers who were fraudulently sold these products.

In its first two fiscal years of operations ending June 30, 2013, the CFPB has fined banks and financial entities $942 million of which the significant majority goes to the consumers who were harmed or defrauded. The banks and financial institutions that were penalized include, but are not limited to American Express, Capital One, Discover, and JP Morgan Chase. While the significant majority of the penalty goes to the consumers, the remainder, which is usually less than 10% of the overall fine, goes into a Civil Penalty Fund, which has the following purpose as stated in the CFPB 2013 Annual Report:

“Under the Act, funds in the Civil Penalty Fund may be used for payments to the victims of activities for which civil penalties have been imposed under the Federal consumer financial laws. To the extent that such victims cannot be located or such payments are otherwise not practicable, the Bureau may use funds in the Civil Penalty Fund for the purpose of consumer education and financial literacy programs.”

What is interesting to me is why certain politicians are against this agency? I want them to tell me why an agency designed to protect the average Joe’s and Josephine’s is a bad thing. To state the obvious, these politicians tend to be Republican and tend to be supported by bankers. Senator Richard Shelby, who Chaired the Senate Banking, Housing and Urban Affairs Committee from 2003 – 07 is one of the key critics of the CFPB. (Sidebar – under president Donald Trump, Mick Mulvaney was appointed to lead the CFPB to hobble it).

This is one area where people who don’t want regulation need to explain how we would be better without it. Would it be OK for bankers to have full license to sell their customers services they do not need? Is it OK for banks to screw people over? I find most people confuse unwieldy bureaucracy with regulation. We need the latter, but need to guard against the former. I also find people who don’t want to be regulated tend to be those who need to be regulated more. The fossil fuel industry comes to mind, but that would be a large digression.

Having worked in Human Resources within a bank back in the 1990s, what I have witnessed is being a banker used to be one of the most trusted professions. Now, it ranks much lower in trust.  And, they only have themselves to blame. Truth be told, bankers used to be trustworthy, but threw their reputation out the window.

The slippery slope began in earnest with the repeal of the Glass-Steagall Act in the late 1990s. This act had been put in place at the time of the Great Depression and was designed to assure that banks would be banks and not investment banks, security traders or insurance companies. With the feeling everyone learned their lesson and cooler heads would prevail, the repeal of the Glass-Steagall Act reopened the can of worms. The real reason for the repeal was banks wanted the fee income that usually came with those products and services. Yet, to add another metaphor, the can of worms became a Pandora’s Box.

What transpired after that repeal is banks pushing the envelope more and cross selling products and services to unsuspecting customers. Two marketing trends emerged. “Bundling” and “Tying.” Bundling represents the concept if you do more business with us, we will give you better terms. By itself, that is not necessarily a bad practice. Yet, when married with tying, it becomes unethical and illegal. Banks started tying business marketing together, so that you had to business with them in one area to get a better deal on another service which was more vital to the buyer. Usually these offers were not made in writing, as some tying can be illegal.

But, the larger trend that occurred is a selling push to reward employees for selling you services you may or may not need. The unscrupulous ones would push the hardest and do things that now get the attention of the CFPB. One of the key reasons the mortgage crisis hit is the better mortgage market dried up and banks had all of these mortgage bankers with nothing to do.

With the push out of the second Bush White House that home ownership was good, the higher risk mortgage market became the target. It was at this time you saw mortgage-in-a-box retail stores competing against banks to sell mortgages to people who did not understand fully what was being sold to them. Variable mortgages and the dreaded Pic-a-payment mortgages that brought Wachovia down after their acquisition of Golden West, were being sold to people who were in over the heads, both economically and educationally. People should have been asking more questions, but trusted the men and women in nice suits that told them they could afford the American Dream. They failed to mention or fully explain terms like “negative amortization” and “variable mortgages” especially what transpires when the rate goes up by 200 basis points.

So, bankers used to be trustworthy, but they threw it out the window. They earned these new stripes. You have to be the navigator of your customer service experience, in general, but especially with a bank. You have to ask questions about why you are being asked to do something. You need to ask why you need another credit card. You need to ask why is the salesperson pushing so hard on this issue. If you don’t, you may need the help of the Consumer Financial Protection Bureau.

With that said, I know many fine people who work for banks. They do their best to serve their customers. Yet, the higher-ups are pushing for sales and align incentives with that push. As a result, even well-meaning people will push the envelope even more. I have been a business for over 34 years and a truism I have learned is you make more money serving the needs of your client long term. You may make more money on occasion by pushing that envelope, but you may do so at the expense of a long term relationship which might come to an end.

For full disclosure, I am a shareholder (sidebar – I am no longer a shareholder of BofA) and customer of both Bank of America and Wells Fargo. These fines disappoint me. I want them to be accountable to their customers, employees and shareholders. But, they also need to be accountable to their regulators. They owe it to all of us.

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A new phone scam

One of the downsides about having a phone is getting phone scam calls. The latest scam is for the caller to leave a recorded message that does not include your name but says “You are a person of interest in a formal proceeding. We have tried to contact you several times, so please call this number to discuss this issue.”

This is a scam. I am certain someone at the number I am asked to call back would ask me to wire money to make it go away. If I was a person of interest, they would not be calling me.

This serves as a reminder of other scams. Top of mind, here are a few to watch out for:

– IRS Scam: Someone will call leaving a message that you owe back taxes and the IRS will seek legal action to collect. The IRS will send you a letter if there is an issue with your taxes.

– Grandparent scam: The caller will pretend to be a grandchild and wait for the person to give the caller a name of a grandchild. The caller then assumes that identity. Typically, the faux grandchild says they have been in an accident and need money wired.

– Microsoft scam: This scam uses a caller who says Microsoft has detected that you are having computer problems. They want access to your computer at which time they will glean important financial information and passwords.

This does not address aggressive marketing attempts where the caller appears to be your credit card company. They are not really, but just want to issue you another credit card. It also doesn’t address other unscrupulous schemes where callers pretend to be who they are not to sell another product. Nor does it address the email phishing attempts that will allow someone to commandeer your computer.

Be on the look out. People want your money. Too many will lie, cheat and steal. All it takes is one bite to get hooked on a bad deal for you. What are some of the other scams you have come across?

Tell me why the CFPB is a disaster

In the current fued over who should lead the US Consumer Financial Protection Bureau, what should be focused on is why the President and Republicans are calling the CFPB a “joke” or a “disaster.” This agency has penalized banks, credit card companies, lenders, etc. almost $12 billion for aggressive marketing practices, selling products people did not ask for and outright fraud.

Over 90% of this money goes to the affected customers who have been cheated. A good example is Wells Fargo being fined $150 million for setting up accounts for people that did not authorize them, so employees could meet a bonus goal. Another is Bank of America being fined over $780 million for selling services customers did not ask for. Other brand name organizations have also been fined for bad practices.

The organization has also helped over 29 million people with issues and education on financial matters. Since, financial issues are complex and so many were harmed during the housing crisis, the CFPB seems to be a big help to everyday Americans.

The reason for the comments by the President and Republican legislators is the CFPB is working too well and banks don’t like this. It is far from a joke or a disaster, so reporters need to ask the speaker of such a comment as to why they say this? The pat answer is the CFPB has too much authority and too little oversight. Yet, it was set up to be removed from the political process for these reasons. Banks, et all don’t want to be fined for their business practices, so they fund politicians to diminish the CFPB’s clout.

My strong advice to banks is to stop screwing people over and maybe you won’t get fined. Stop selling people products they don’t understand such as variable or pick-a-payment mortgages. Stop selling them products and services they did not authorize. My sister is dealing with one of these banks right now on a credit card account she did not open.

So, Mr. President tell me again why the CFPB is a disaster? And, tell me how attacking this organization helps those voters who put you in office? To be brutally frank, when this President uses the word “disaster” it usually means he is being untruthful about something.

 

Tell me again how you care about us?

Many have confused our President’s campaign rhetoric of speaking to a disenfranchised audience with his actually protecting their interests. When you look beneath the bullying of companies which are more pomp than circumstance, he is doing an interesting low profile job of screwing over Americans.

What do I mean by this? Here are a few examples:

– He wants the Consumer Financial Protection Bureau unwound or made less effective. The CFPB has been hugely successful at punishing banks, credit card companies and other lenders for aggressive and fraudulent marketing. Over 90% of the fines go to the jilted customers. They have fined WellsFargo, American Express, Bank of America, e.g.

– Within hours of his inaugural speech to protect us Americans, he signed an order that reversed a mortgage premium reduction for homeowners that were required to buy mortgage insurance – this would have benefited over a million people who could not afford a lot down on their home.

– He wants to repeal the ACA which largely helps people making less than 4 times the poverty level. These folks will likely lose access to insurance on a guaranteed issue and renewability basis along with a premium subsidy. Access without either would be detrimental.

– Selecting an EPA cabinet leader who detests the EPA will create burdens on poorer Americans as they bear the brunt of environmental problems living closer to coal ash sites, supplied water by older pipes, and subject to more air and water pollution. We must protect our environment for all Americans, but we should be mindful of the strength and pace of job growth in the renewable energy industry.

– And, as a lightning rod, he tells people to buy American when the ball caps in the audience are mostly made in China, Vietnam and Bangladesh as are most of his and his daughter’s products. Do as I say, not as I do seems to apply.

There are other examples. The inanity of his words distract us from the agony of his pen and history. Pay attention to his actions. That is where the proof will lie. I do hope he does some good things, but we need to keep him as honest as we can.

What do these organizations have in common?

Based on the question asked above, I want you to think about the following organizations for a minute: Adelphia, American Express, Bank of America, Citigroup, Duke Energy, Enron, GM, Goldman Sachs, Healthsouth, Lehman Brothers, Lumber Liquidators, Marsh and McLennan, Massey Energy, Merrill Lynch, Penn State University, Toyota, Tyco, Volkswagen, and Wells Fargo.

What thoughts pop into your head? What do these organizations have in common? Yes, they have all been successful and many still are. The answer I am looking for is they have all been fined, publicly shamed or found guilty of some level of malfeasance, criminal neglect or fraud. The disappointing truth is I have been a shareholder in four of these organizations, so it hurts me both morally and financially, to see leaders forsake their roles as stewards of the company.

Volkswagen is the latest to join the infamous group. I was speaking with a Volkswagen owner the other day. While I was talking about the fine and decline in stock value around their purposeful fraud to avoid poor EPA emissions test results, he was thinking of it as a further depreciated car value. As with the others, what Volkswagen did was wrong and it will hurt them for a long while. The poor emissions will be hurting all of us until the cars are fixed. The CEO resigned earlier this week, and well he should, as a fraud like this has to be understood or even sanctioned at the very top. As of this writing, some car owners and shareholder groups are considering class action lawsuits against Volkswagen’s leadership.

Why do I bring this up today? Quite simply, we have politicians running on a platform of eliminating regulations so business can flourish. We often confuse bureaucracy with regulations. We need to investigate and remedy inefficiency in the latter, as bureaucracy can be antagonistic to efficiency. But, we need to also challenge ourselves to be smart with our regulations. If regulations are not efficacious, we should make changes, which might include their elimination. But, as evidence of the above well-known examples, which do not include countless others, doing away with regulations carte blanche would be unwise and foolish.

So, when you hear a statement like “we must do away with regulations,” ask yourself why? Who does that serve? The answer may be illuminating. I will leave you with a quote from Senator Elizabeth Warren who led the effort to create the hugely successful Consumer Financial Protection Bureau. This agency has fined several of the financial companies above for hundreds of millions for aggressive marketing and outright fraudulent practices, over 90% of which goes back to the impacted customers. In response to a question about why she does not like Wall Street, she said “I like Wall Street, I just do not like cheating.” Neither do I, nor should any of us.