The Corporate Observer : Washington D.C. Class Action Lawyer & Attorney : Steven Berk Law Firm : Consumer Protection, Corporate Abuse : The Corporate Observer Blog

The banks are at it again!

Consumers’ deadline -- this summer -- for opting-in to overdraft programs on their debit accounts is rapidly approaching. Not surprisingly, banks are doing all they can to maintain this important revenue stream – and by whatever means necessary.

In an article published Monday February 22^nd, The New York Times reported that banks are focusing on “FEAR” as the key motivating factor for convincing consumers to retain overdraft protection. The advertisements and notices using fear are slick at best, but more often they are just downright deceitful.

According to the Federal Reserve rule changes passed last November, Banks are required to inform customers exactly what “overdraft protection” means and obtain written consent in order to legitimize these charges. The new rules take effect July 1, 2010. Needless to say, these rules do not continence scaring consumers into overdraft protection.

The banking industry made $24 billion from overdraft fees in 2008 and about $27 billion in 2009. What’s more? The banks aren’t the only ones on the hunt. The same Times article reported that a cottage industry of consulting firms like Raddon Financial Group and Strunk and Associates are moving fast to sell banks multiple solutions for retaining overdraft protection customers and its important revenue stream. Cynical examples of those solutions target users who frequently fall below their checking account threshold and pay overdraft fees 5 times or more per year. (See the Raddon Report). 

To be fair, we should not be surprised that the banks are fighting to keep every dollar possible, but is it too much to ask for honesty instead of trickery, and information instead of fear tactics? It is simply unacceptable that, in response to federal action to protect consumers, banks are running campaigns to push consumers into blindly agreeing to overdraft protection rather than publishing honest, non-biased, information and allowing them to make their own decisions.

Transparency is a critical starting point. Consumers need information to make the right decision for their own financial needs. There is not enough time before July 1 to change bank practices and it would be unwise to expect these scare tactics to cease. Instead, consumers are on their own. Wall Street has made its intentions clear. It is now up to the informed public to ignore fear tactics and use all available resources to make the best possible decision about overdraft fees.

Assisted by Zach Kady

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                The people of Massachusetts have spoken.  Change.  It’s not happening fast enough.   That sentiment was strong enough to elect an obscure, and a little known State Senator whose only claim to fame is a mostly nude centerfold in Cosmopolitan magazine. Oh poor Ted Kennedy must be rolling in his grave. 

 Well … these change seekers are not going to be particularly happy with Barney Frank and his steerage of H.R. 4173, which includes the Investor Protection Act of 2009. Is this really the best he can do?  It’s the classic inside the beltway compromise.  The lobbyists for the financial services industry sure had their say. At best, any protection for main street investors is subtle and at worst pyrrhic.

 This is a horrible conclusion to a story that should have turned out much better. One glaring example of this weak compromise is a provision seeking to curtail the lock that brokerage and securities firms have over any customer dispute:

Home field advantage

We all know its potential importance.  What football team wants to travel to hostile stadium for a crucial game? Well its worse for investors trying to recover for valid claims against their brokerage firms.  Not only must they play on the enemy’s turf but the enemy also gets to select the referee.

 As it currently stands, brokerage firms require customers by standard agreements to arbitrate their disputes over broker misconduct (like putting grandma in a deferred annuity that has limited liquidity and no tax benefits while reaping an excessive commission). 

The forum is the Financial Industry Regulatory Authority (FIRNA). The arbitrators are too often sympathetic to the industry and their attorneys.  So, in this season of change what does the great champion of the common man push for?  A ban on these one sided arbitrations?  Well no not exactly.  The reform we’re seeing in this area is a “punt” at best.  The legislation grants new powers to the SEC to control, limit and even prohibit the use of mandatory arbitration agreements in brokerage contracts.  The SEC?  The same SEC that missed Madoff even when he was delivered on a silver platter by the insights of Mr. Markopoulos? The same SEC that dawdled and debated as the financial sector headed toward the abyss?

            Take it from me – from someone who spent some time at the SEC and saw how slowly it works – nothing will change for years; and by the time it does, the result will be more of the same. 

             More is needed faster. 

 Private Pursuit of Accomplices:

              On the Senate side there is more room to be optimistic. In nearly all of the Ponzi schemes and widespread frauds of the last several years, the bad guys could not do it alone.  They were all helped by the blind-eyed or negligent banker and accountant who, recklessly or with actual knowledge, placed investors in harm’s way and too many times was integral in creating or hiding a fraud. Arlen Specter to the rescue. The Pennsylvania Senator has introduced a bill which states that those individuals who knowingly or recklessly provide assistance to fraudsters whose actions are in violation of securities regulations will be held responsible as if they were committing fraud themselves.

Lawyers and accountants who may unwittingly enable fraud will still be exempt from legal pursuit, but banks, traders, and other individuals whose actions have led to the loss of billions of investors’ dollars in the past may soon be held responsible.

Significant and fervent legal action against accomplices of securities fraud will lead to reform of industry practices. The expected provisions in the Senate bill will enable trial lawyers to protect consumers by forcing the industry to regulate itself for fear of prosecution by a vigorous private bar.

The Future

After a long healthcare battle, recent struggles with terrorism, and a battle with a still fledgling economy, we hope that Congress does not lose its steam in pursuing fairness and justice for American investors. We at The Corporate Observer know that the best reform is increased involvement of investors in the financial system. If the Senate passes the reforms that we are seeking, the investors of America can look to the future of investing with increased confidence in their own ability to pursue fraud and protect themselves from unjust practices.

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The New York Times reported yesterday that the Federal Reserve will move to restrict banks’ abilities to charge overdraft fees.

The Fed’s new rules will have multiple impacts on consumers’ relationships with banks:

1.      Most importantly, all consumers will be notified of debit card policies and fees in clear, easily comprehendible language.

2.      Starting July 1, 2010, banks will no longer have the ability to charge exorbitant overdraft fees on most common purchases.

3.      Customers will have to opt-in to overdraft protection policies in order to be subject to them.

4.      If a consumer does not opt-in to overdraft protection, he or she will simply be denied at the register for purchases over their available balance.

Overdraft fees will still be charged for purchases made by check and on recurring debit card payments (i.e. auto-pay monthly bills). However, purchases at retail stores will not be subject to overdraft and withdrawals at ATMs will trigger a warning that a customer is about to overdraft. Only if the customer chooses to continue with their withdrawal will they be charged an overdraft fee at an ATM. According to the NY Times, the distinction between types of payments was made in response to consumer satisfaction surveys. These surveys concluded that consumers are less aggravated by fees on checks and recurring payments than by fees on retail purchases and ATM withdrawals.

Currently, consumers can be charged overdraft fees upwards of $30 for purchases far less than the fee. Under these current conditions, a $3 cup of coffee that pushes an account below zero could cost a customer 10 times that amount in fees. As we described in earlier blogs, overdraft fees are essentially high interest loans made without the consent of the consumer. The Fed’s realization of this injustice and action to remedy it, however dilatory, is highly praised.

This recent move is a step in the right direction, and one The Corporate Observer has advocated for in the past (see: “Big Banks Strike Again: High Interest Loans Disguised as Protection”). Consumers’ rights to full disclosure in the banking world are of paramount importance and the Fed deserves congratulations for its responsible action.

Assisted by Zach Kady

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Generally, you are NOT responsible for the debts of the deceased

Jed Sorokin-Altmann is an Associate at Berklaw who specializes in consumer protection. He provides insightful and helpful tips to vulnerable consumers who are too often preyed upon by professional con artists and even reputable corporations. Jed's message is thoughtful and concrete. We welcome his new voice.

Assisted by: Jed Sorokin-Altmann

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All consumers, not just those who bank at the largest banks, deserve protection from irresponsible practices of banks. Yesterday, the House Financial Services Committee took a giant step away from that critical goal when it passed an amendment excluding over 97% of banks from the statutory reporting requirements to be performed by the soon-to-be-created Consumer Financial Protection Agency (“CFPA”).

The excluded banks are small banks and most credit unions. Small banks are classified as those with assets less than $10 billion or credit unions with assets less than $1.5 billion. To be sure, there are some valid arguments for imposing additional regulation on only the larger banks and financial institutions. Notably, they control about 80% of the assets.

But every financial institution must take some portion of the blame for the runaway greed, exotic financial instruments, and poor practices rampant in the financial sector over the past decade. Congress must not allow high-priced lobbyists to cabin this issue on the doorsteps of a few money centered banks. While the near collapse of the financial world’s banking industry may have been the result of the extreme conduct of a few large banks, excusing smaller banks and labeling their investment practices “less risky”, runs a foul of Congress’ duty to protect all consumers.

The Miller-Moore amendment and those who support it cite small banks’ inabilities to cope with costs related to annual examinations as reason for exemption. Isn’t this the same argument that big banks have been making for decades? The banking industry has always claimed that oversight will hurt business and decrease profits. Look where that argument got us!

Forgoing examination of 97% of our banks is not the answer, but rather the seeds of a new problem. Instead of giving these smaller institutions a free pass, the new regulator should tailor exams to each specific type of bank. For example, Citigroup and Bank of America should be subject to a very rigorous exam. Local community banks or credit unions should not get a pass, but simply be subject to a less onerous testing. Has Congress forgotten that all banks need tougher regulations in order for all consumers to be protected?

Assisted by: Zach Kady

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We’ve all heard about overdraft protection, but most people probably don’t understand exactly what it is and how it works... As several recent news articles have highlighted, this service:

1)    Offers No Protection. Standard interpretations of protection would lead a consumer to believe that he or she is protected from over drafting their account – i.e. a consumer will not be able to spend more than they have.

2)    Is instead an automated loan with a high fixed interest rate.

According to Moebs Services, most Wall Street banks charge $35 dollars per check or debit paid without sufficient funds. In essence, that $1.50 Snickers bar you bought at the convenience store will end up costing $36.50. This may seem like an exaggeration or oversimplification of the process, but it is not. The Center for Responsible Lending reports that most point-of-sale overdrafts (like buying that Snickers bar) are for an amount less than half of the $35 dollar fee charged by big banks. That’s right; Main Street is paying an average of at least 50% interest on these small loans. Normally, when an individual takes out a loan from a bank, he or she consults with a loan advisor and is made aware of interest rates ahead of time. In the case of overdrafts, the system is marketed as a protective measure and most consumers are completely unaware of impending charges that cardholders will incur if they spend more than they have. In this regard, overdraft protection acts like a loan forced upon the consumer with no express consent.

The trouble does not end here. The banks have been fighting Congress and public sentiment for years on the issue of allowing customers to opt out of overdraft protection. Until recently, this has not been an option and still only a few large banks have made the switch to allowing customers to opt-out.

The worst is still yet to come: Bank of America has recently been shown to reorganize payments at the end of each business day so that larger payments are paid first. According to the bank, this is done with the intention of paying more important bills first. However, the actual effect is that larger payments deplete a cardholder’s funds so that numerous small charges can rack up the maximum amount in fees. Any reasonable person can realize that thanks to overdraft protection all bills will be paid regardless of their order of entry and that this scheme of reorganization serves only to create more fees and more gains for the big banks.

In addition, this is by no means a minor practice in the banking industry. The Center for Responsible Lending reported that banks made over $24 billion in overdraft fees in 2008 alone. Moebs Services reported that about half of all banks make more money from these fees than from actual profits. The same firm estimates that banks will make another $27 billion from overdraft fees in 2009. Banks appear to not only be content to profit off of Main Street’s money when times were good; it is now their prerogative to profit off of the lack of money in people’s checking accounts during this recession.

News of outrageous gains from loans disguised as “over draft protection” is both disturbing and upsetting, but it is not surprising. As we have discussed previously, big banks have been practicing risky, deceptive and even illegal deceptive practices for years. The irony, even after Main Street has given hundreds of billions of dollars in bail out money to the banks with the goal of “saving the economy,” they continue to swindle those hit hardest by the recession. It is time Congress stands up to the big banks and that the average person demand oversight on all lending practices, even those disguised as aid to consumers.

Proposed solutions forthcoming…

Assisted by Zach Kady

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Securitization of life settlements is yet another dangerous development for Main Street. Is this really what we need right now?

It just doesn't stop. Despite repeated lessons and tales from the brink (the collapse and near collapse of Lehman Brothers and Bear Stearns to name just a few), Wall Street is at it again. What now, you ask? Wall Street is securitizing life insurance policies. What the heck is that?

A recent New York Times article details "life settlements"--which have Wall Street executives' mouths watering. The premise is this--elderly people sell their life insurance policies for fractions of what they are worth to banks. Wall Street then repackages these policies into bonds, grabs fees and sells them, netting dealers even more fees--and creating another speculative industry. This time betting on when grandma will die. And what's next derivatives on these bonds.

Securitization of life settlements is yet another dangerous development for Main Street. Industry sources explain that insurance companies are able to maintain premium rates based on the profit they make from policy lapses. If life settlements are securitized and traded, Wall Street will pay the premiums and the insurance companies will be out the easy profits from the millions of policies a year that lapse. Ultimately they will be forced to raise premiums to continue earning profits. Who, then, will suffer the true consequences? Main Street, once again.

Is this really what we need right now? In a time when the economy is inching towards a recovery from a crisis caused by precisely what is presented here: the opportunity for a new overaggressive and under-regulated speculative market? And who is going to be able to regulate these new instruments of greed so that Main Street does not become the victim?

We have a better idea for Wall Street.

Go back to basics. Finance renewable energy products, figure out an innovative way to finance new infrastructure--so sorely needed. Maybe even come up with a new micro-loan product that works for hard working Americans who want to start small businesses.

Let's let the securitization of life insurance policies die a peaceful death.

Assisted by David Martin and Jessica Begen.

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