As Bob Dylan noted many years ago, “You don’t have to be a weatherman to know which way the wind is blowing.” You also don’t have to be a banker today to know that consumers are furious about overdraft fees and to see that Congress and federal banking regulators are going to do something about them.
In an obvious effort to position themselves ahead of that regulatory curve, some large banks have recently changed their overdraft policies, eliminating at least some of the practices consumer advocates have decried.
Taking the lead, Bank of America and J.P. Morgan Chase have both said they will no longer charge a fee for small overdrafts totaling less than $10 in a day for B of A and $5 or less for Chase. The two banks are also capping the number of overdraft fees they will levy in a single day at 4 (vs. the current limit of 10) for B of A and 3 rather than 6 for Chase. Wells Fargo has recently joined this queue, capping daily overdrafts at 4 and waiving fees on daily overdrafts of $5 or less.
Beginning October 19th, B of A will also allow existing customers to “opt-out” of overdraft protection programs and beginning in June next year, the bank will require new customers to “opt-in” to the programs rather than enrolling customers automatically, as B of A and many other banks do today. Going even further, Chase is asking existing customers if they want to opt-in and is changing its billing practices to process transactions chronologically rather than according to size. Critics contend that the current practice – booking larger transactions first – maximizes the number of overdrafts and the overdraft fees banks collect.
Rep. Carolyn Maloney (D-NY) has proposed legislation in the House that would mandate many of these changes, among others. Sen. Christopher Dodd (D-CT), chairman of the Senate Banking Committee, is drafting what is expected to be similar legislation and the Federal Reserve is considering new regulations mirroring many of the changes legislators are proposing.
In announcing B of A’s revised policies, bank officials insisted that the changes were motivated not by the prospect of legislative and regulatory restrictions but by a desire to help consumers. “We are doing this because we have customers under stress and we can help a lot of them right now,” Brian Moynihan, president of consumer and small business banking for B of A, told the Wall Street Journal.
Charles Scharf, chief executive in charge of retail financial services for Chase, was somewhat less disingenuous, acknowledging the bank’s awareness of the consumer backlash against overdraft fees. The decision to change the bank’s policies, Scharf the New York Times, “was another logical item for us to look at that we know has gotten a lot of attention….There have been some legitimate issues raised,” Scharf added, “and we’ve tried to be very thoughtful about what we think is the right thing to do for our customers.”
Industry analysts say the moves by Chase and B of A are likely to pressure other banks to make similar changes in their overdraft policies but are unlikely to prevent action by Congress, the Fed, or both.
“They are going to town with this stuff,” Chris Low, chief economist for First Horizon National Corp., said of the pending legislative and regulatory proposals. Like the credit card reform legislation approved earlier this year, restrictions on overdraft programs “[are] just too tempting,” Low told American Banker, “because [they are] so clearly popular. There is so much outrage, I don’t think anyone can stop it.”
Ed Mierzwinski, consumer program director for U.S. PIRG, agreed. If the strategy is to “deflect Congressional criticism,” he told reporters, the changes Chase and B of A have announced are “too little too late.”
Sen. Dodd gave the banks credit for attempting to address concerns about overdraft programs, terming the changes they have announced “positive….But the system has gotten completely out of whack,” he told American Banker. While promising to “take a close look” at the new policies B of A and Chase have announced, Dodd also pointed out, “We wouldn’t need legislation if the industry had acted responsibly in the first place.”
Banking industry executives, defending their existing overdraft programs, insist that consumers appreciate them as a means of avoiding the embarrassment and cost of bouncing checks. But overdraft fees also represent a significant source of revenue for banks —$38.5 billion this year, according to one study, with 90 percent of the fees coming from 10 percent of card holders, the Center for Responsible Lending estimates.
The Credit Union National Association has emphasized that providing overdraft protection is consistent with the credit union mission “to serve members’ financial needs and help them resolve short-term problems.” But the trade group has also urged its members to adopt “best practices” and to avoid policies “inconsistent with the philosophy and principles that are unique to the credit unions system.”
Press reports indicate that the legislation Dodd is drafting will likely include key features of Maloney’s House Bill, among them: An opt-in requirement (consumers would have to request overdraft protection instead of asking to eliminate it if they don’t want it), clearer and more detailed disclosure of overdraft costs, and changes in billing practices (prohibiting banks from “manipulating” accounting to maximize overdraft charges). Dodd’s bill, like Maloney’s, is also expected to give consumers an opportunity to cancel a transaction at an ATM or point of sale if it would trigger an overdraft charge.
Sen. Charles Schumer (D-NY) has said he intends to support a Senate bill similar to Maloney’s. Changes in overdraft billing practices and either an opt-in requirement or a “much easier” opt-out process are essential, he said in a recent speech. “Bottom line,” he added, “debit card holders are getting creamed by their banks….It’s time to stop them in their tracks.”
COST OF FRAUD PREVENTION
Mortgage fraud is a multi-million-dollar problem for the mortgage industry, but the cost of preventing it is about to go up. The Social Security Administration announced recently that the cost of verifying the identity of credit applicants through the SSA’s “Consent-Based Social Security Verification” program is going to rise from 56 cents to $5 for each verification.
“Nobody is going to pay $5 for a name-search only,” complained Jay Meadows, chief executive of Rapid Reporting Verification Co., which provides identify verification and other fraud prevention services to financial institutions.” That’s like paying $50 for a bottle of water,” he told American Banker.
Introduced about seven years ago, the SSA’s verification program allows private businesses, state, local or federal agencies to check names and Social Security numbers against the Administration’s vast database. There are other databases, including those maintained by credit reporting agencies; but the SSA’s database is believed to be the most comprehensive and most accurate.
“Basically, the Social Security Administration has said they don’t care about fraud,” Bill Canfield, president and general manager of Talx, another fraud prevention service, told American Banker. If the increase stands (it is scheduled to take effect this week), Canfield said, “we will have to pass the [whole amount] on to our customers, and they will go to cheaper and riskier products.”
SSA officials say the verification program has turned out to be more expensive to operate and has generated less revenue than anticiapted, leaving the Administration with no choice but to increase the fee. The program also “is not part of our mission,” an Administration spokesman told American Banker, pointing out that the agency does not receive funding in its budget to cover the operational costs.
U.S. Rep. Granger (R-TX) has asked SSA Commissioner Michael Astrue to delay the increase for 60 days and to reconsider the need for that change, but Astrue has not, as yet, indicated any willingness to do so.
DEMANDING CREDIT
No one is going to accuse the National Association of Realtors of being too subtle. A recent call to action for members featured a wave of stars – suggesting an American Flag – as background for this message: “Don’t let America’s real estate recovery expire.”
The focus of that message is an $8,500 tax credit for first- time homebuyers that is scheduled to expire at the end of November. The NAR, the National Association of Home Builders (NAHB) and other housing industry executives are doing all they can to persuade lawmakers to keep the program in place.
According to the IRS, 1.4 million homebuyers have already claimed the credit since it became available in July. The NAR estimates that of the 2 million first-time buyers expected to purchase homes this year, 350,000 of them will so solely because of the tax credit; the NAHB’s more conservative estimate attributes 165,000 sales to the federal program. Both organizations warn that eliminating the credit will threaten the nascent housing recovery.
Those arguments got something of a boost from recent data indicating that existing home sales declined in August, ending four consecutive monthly gains, while new home starts slowed for the first time in five months. The impending November 30 end of the tax credit was to blame for the downward trend, industry executives contend.
“The window is basically closed for being able to start a new home that can be completed in time for purchases to take advantage of the tax credit,” NAHB Chairman Joe Robson said in a press statement. As a result, he said, builders “are pulling back on new construction.”
The credit’s positive impact on home sales is evident in the steady gains recorded this year, Jerry Howard, president of the NAHB, agreed, and the risk of ending the program is also clear. “If we don’t extend and expand the program,” he told CNNMoney, “the seeds of growth planted could [die.]
Eliminating the credit won’t doom the housing recovery, Walter Molony, a spokesman for the trade group, told reporters. “But the [market] will come back faster and stronger with [the credit] than without it,” he insisted.
Mark Zandi, chief economist for Moody’s Economy. Com, agrees that the tax credit will provide a helpful bridge over still troubled financial waters until the economic recovery takes hold. “It’s a relatively cheap way to keep sales strong through the middle of next year, when the job market will hopefully improve,” he told the Washington Post.
These arguments are resonating in Congress, where at least half-a-dozen bills extending the credit are now pending in the House and Senate, many of them attracting bi-partisan support. The most ambitious measure, sponsored by Sen. Johnny Isakson (R-GA), would not only extend the tax credit program for a year, it would also increase the amount from $8,500 to $15,000 and make the tax break available to all home buyers, not just to first-time buyers. A less expansive measure, expected to have a better chance of passage, would keep the credit in place until June of 2010. That bill, sponsored by Sen. Benjamin Cardin (D-MD), also has the support of the Senate Majority Leader, Harry Reid (D-NV).
On the House side, Rep. Charles Rangel (D-NY), chairman of the House Ways and Means Committee, has lined up 28 co-sponsors for his more limited bill, extending the credit for a year, but only for members of the armed services. Rangel’s bill would also waive for service personnel the requirement that buyers occupy a home as their primary residence for at least three years to avoid a pro-rated repayment requirement.
Although proposals to extend the tax credit have strong support, they also are encountering strong opposition from critics on both sides of the political spectrum, who question both the cost and the need for the housing boost.
Mark Calabria, with the conservative Cato Institute, thinks it would be better to let the housing market find its own level naturally instead of artificially supporting it with the tax credit. “If you had just let the prices fall by $8,000, you probably would have gotten the same number of people to buy,” he told the Washington Post. The primary beneficiaries of the credit, Calabria and others contend, are the banks that are selling foreclosed properties for prices higher than they could get otherwise. Far better, Calabria says, to force the banks to take a larger hit – a reasonable trade-off, he contends, for the federal bail-out funds they received.
Ted Gayer, a senior fellow at the liberal-leaning Brookings Institution, also doubts that the credit has done much, if anything, to increase home sales. More likely, he says, the credit simply pushed people who would have purchased anyway to move more quickly and, he warns, “we’ll have a price to pay for that later.”
Even supporters of the tax credit acknowledge that its cost will be a major obstacle. The credit to date has cost an estimated $15 billion; extending it through May would add another $15 billion to that total. Isakson’s bill, extending the deadline and expanding the credit, would cost from $50 billion to $100 billion, according to some industry estimates. Finding the budget offsets on which many legislators are insisting won’t be easy. Even so, Isakson thinks Congress will extend the credit, in some form. “I don’t believe either this Administration or the current [Congressional] leadership will look the November 30 [deadline] in the eye and let this thing die,” he told reporters recently.
Scott Talbott, the top lobbyist for the Financial Services Roundtable, also thinks the odds of improving an extension of the credit are improving as its expiration date looms.
“Congress works best on deadlines and crisis,” he told the industry blog, “Home Front” recently. “And [with the tax credit], we sort of will have both.”
FORECLOSURE MEDIATION ISN’T HELPING
More than a dozen states have enacted legislation requiring lenders to go though pre-foreclosure conferences or formal mediation with troubled borrowers before completing foreclosure actions. But those programs have done little to stem foreclosures and nothing to help borrowers modify their mortgage loans, a study by the National Consumer Law Center (NCLC) has found. The problem, according to the NLCC: most of the programs are voluntary, have no consistent operating rules, and impose no obligations on lenders. In short, the NLCC contends, the mediation programs “suffer from the same lack of industry accountability that has plagued federal mortgage modification programs.
The study, financed by the nonprofit Open Society Institute (supported by activist billionaire George Soros) reviewed 25 mediation programs in 14 states, finding cause for concern “about the kinds of expectations these programs may be encouraging.” Specifically, researchers said they found “no data, as yet, to confirm that foreclosure mediation programs anywhere have led to a substantial number of affordable and sustainable loan modifications.”
The study identified the same serious problems in all the programs: “They routinely fail to impose significantly obligations on mortgage servicers; they do not require servicers to provide information substantiating a right to foreclose; they do not mandate analyses of loan modification alternatives; and many set unreasonable procedural barriers that restrict large numbers of homeowners from participating.”
Under most of the programs, the study’s author, Geoffrey Walsh, said, servicers “have all the discretion and homeowners have little or no power.” In theory, Walsh noted, mediation programs have “great potential to help homeowners,” but in practice, they are falling short and “will likely go the way of federal efforts to control foreclosures that have failed [similarly] as a result of relying on voluntary compliance by the lending industry.”
Although the study’s focus is existing state mediation programs, it is clearly intended in part to bolster the revived effort s to persuade Congress to enact legislation giving bankruptcy judges the authority to modify residential mortgages. “It is unfortunate that the [financial] industry has so far prevailed in blocking Congressional action on court-ordered loan modifications, the one step,” the report suggest, “that would level the playing field for consumers and ensure the necessary accountability from all parties.”
SAVINGS STILL LAG NEED
Much has been made recently of the increase in personal savings rates — a good sign, according to economists who have argued for years that Americans save too little – but ill-timed, they say, because of the extent to which the economic recovery depends on an increase in consumer spending. A new report suggests that while higher savings rates may, in fact, be clouding recovery prospects, they aren’t doing nearly enough to protect most families from financial disaster.
The survey, by HSBC Bank, found that if the primary breadwinner lost his/her income today, the majority of households (61 percent) could survive on their savings for only three months or less and 38 percent could not even cover their living expenses for one month.
Experts have traditionally recommended having an emergency fund that could last three to six months, but HSBC's new survey finds that only 39 percent of respondents met that goal. And, given current and projected employment prospects, many experts are now recommending that families have at cushion representing at least 12 months of expenses – a standard only 11 percent of households currently meet.
"While we have seen a robust increase in the personal savings rate in 2009, and we are moving in the right direction, what is clear is that it's not enough," David Godden, executive vice president in charge of personal financial services for HSBC, said in a press statement. "More than ever, Americans are aware of the importance of having an emergency fund,” he acknowledged. “Yet, despite this heightened awareness—and rising unemployment rates—there is still a sweeping lack of preparedness for the unexpected."
Although the length of time people can live off of their savings is broadly correlated with income, the lack of a sufficient emergency fund is a problem that transcends income levels, the survey results indicate. Specifically, the study found:
- Fifty-one percent of respondents with a household income of less than $50,000 could only live on savings for less than one month. (This group included families with children (44 percent) and adults age 55 and older (31 percent).
- 29 percent of respondents with a household income of more than $100,000 could only live on their savings for up to three months.
- Despite the savings shortfall, the study found that households at all levels have been adjusting their spending patterns. Over the past six months:
- 55 percent have cut back on leisure activities;
- 46 percent have cut back on travel; and
- 40 percent have cut back on electronics.
But it’s not clear that this represents a permanent change in attitudes toward spending and saving. Of the respondents who said they have reduced spending, most (93 percent) also said they will resume spending in at least one of the areas in which they have cut back when the economy improves.
