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.
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 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.