Archive for the ‘Despicable Banking Practices’ Category

Anonymous Banker : Bank of America and Chase commit to increase lending to Small Business through unsafe and unsound, deceptive and unfair credit card practices

Wednesday, December 16th, 2009

As you all know, I’ve been an ongoing supporter of the need for banks to step up to the plate and lend to Small Business.   Credit availability to the small business sector is a necessary component to our nation’s economic recovery. 

The History of the Small Business Credit Line

But I am also a banker, and as such, recognize the need for safety and soundness in lending.  I blasted the industry over the last decade when they foolishly disregarded prudent lending practices, leaving the door open for  business “liar loans”.  During that time, a business owner could obtain a small business revolving credit line for up to $100,000 by completing a one page application.  They didn’t have to provide any verification of personal income or business revenue.  They didn’t have to substantiate a profit or the ability to repay the debt.  The loan commitment was based almost entirely on the credit score of the individual owner/guarantor.  In that era, if you had a pulse and a credit score of 700, you could go into any big bank and get a loan for up to $100,000.   Well, okay, there was  one other criteria:  the loan amount was typically limited to 25% of the businesses STATED revenue.  Everyone knew that if you STATED that you had $400,000 in business revenue, you could qualify for a $100,000 business credit line.

Additionally, the banking industry abandoned all forms of public filings on these credit applications.  What does that mean?  Well, first, because the loan was “to the business entity”, the line of credit did not appear on the individual owner/guarantor’s  personal credit report.  The bank also didn’t file a UCC filing on the business assets – the cheapest and easiest way to let other lenders know that one bank already has a loan out to a potential  business borrower.  So the line of credit became invisible to other potential lenders.

The result of these imprudent lending practices was that the business owner could go from bank to bank and accumulate credit lines.  Banks had no way of knowing if that Small Business was applying for their first line of credit or their third, fourth or fifth  line of credit.

These Small Business loans were rarely, if ever,  sold through the securitization process.  That meant that the entire credit risk was held on the books of the bank.  When the economy began to crash and burn, so did the “liar loan” portfolios.  Inside the industry, bankers scrambled   to understand exactly how much exposure they had in this market. 

Throwing the baby out with the bathwater:  Banks withdraw from the Small Business Lending Market

In response to the economic crisis, the very first thing banks did was limit business revolving credit lines to Small Businesses to 15% of gross revenue.  And thankfully, banks finally began to apply some level of credit underwriting to loan requests up to $100,000, requiring borrowers to submit tax returns to support the information they provided on the application. 

At the same time, banks assumed that every loan they had on their books was a “liar loan”.  So they systematically cancelled these credit lines to small businesses across our nation,  stripping the businesses of working capital for salaries, inventory, rent and receivables.  These businesses received no prior notice.  The banks simply froze the credit line and sent the customer a letter, after the fact.  

The banks did make one small concession to their small business borrower.  They allowed them to apply to have their lines reinstated.   These requests for reinstatement were subject to the “new” credit criteria.  So in a year of often declining revenues, the banks applied their new guideline, limiting the borrowing to 15% of gross revenue.  Many viable businesses no longer qualified under the stricter criteria and still found themselves without a line of credit. 

At present, viable businesses have lost their access to working capital and  banks simply don’t want to grant business working capital lines and retain the risk.

Did bankers learn their lesson?  I think not!

You’d  think that the banks would have learned a lesson on the importance of income verification from this.  Unfortunately, they have not.  The banks are promising a new round of lending to Small Business, and they will meet this obligation through  Small Business Credit Cards. 

Want a credit card with a line up to $50,000?   Check out Bank of America or Chase Bank.  Here’s how their process works:

  1. You will be asked to STATE your  “household income”.  Tell them whatever you want.  They won’t even ask for a tax return.
  2. Business Revenue:  Banks don’t ask and they don’t care.  If they do ask, they won’t verify it.  So feel free to lie.
  3. Credit reporting?  Sure, the bank will pull your credit report to get your credit score.  But then, just like the old days, the line will disappear from the radar screen.  At Chase Bank, it appears that management encourages their business bankers to sell their Small Business Credit cards by advising the business owner of the benefits afforded to them when their new credit card is  NOT  reported on their personal credit report.  The invisible business loan all over again. Shame on them!
  4. If you have a good credit score and a personal card from Bank of America, give them a call.  Perhaps they will offer you the same deal they offered me. When I called customer service,  The BofA representative offered to convert my personal credit card to a business credit card because I was such a valued customer!  When I assured her that I didn’t own a business, she insisted that I didn’t need one to get a business credit card.  Perhaps our regulators would like to monitor the prevalence of this practice throughout the industry and prohibit the banks from circumventing the spirit and intent of the Credit Card Act.

The Question is….  WHY are banks doing this?   Greed!  (Of course)

Why would banks continue to lend without regard to any of the time-honored traditions of safety and soundness.  First, unlike  Revolving Small Business Credit lines,  banks DO sell-off  credit card exposure through securitization.   The bankers, together with Wall Street, devised a way to reap the profits  while, at the same time, absolving themselves of any losses.  Securitization rules, in their current form, empower and even encourage banks to violate all prudent lending practices.

Despite warnings released in the OCC’s Survey of Credit Underwriting Practices 2009, stating:

A key lesson learned from the financial market disruption is the need for bankers to apply sound, consistent underwriting standards regardless of whether a loan is originated with the intent to hold or sell. The OCC reminds bankers that underwriting standards should not be compromised by competitive pressures or the assumption that the loan will be sold to third parties.

banks continue to apply lower credit standards to forms of credit they will sell off in the market than they do to credit they will retain on their books.  Just compare the banks requirements for a $50,000 Business Credit Card to a $50,000 small business revolving line of credit.  The first fails to verify ANY financial information and is sold.  The second verifies financial information and the risk is held by the bank. 

Business Credit Cards are a profitable and huge market for big-banks.  Here are a few statistics from Creditcard.com:

  • In 2008, JPMorgan Chase was the largest issuer of small business credit cards with $34.5 billion in total card volume. Bank of America is second with $26.31 billion and Capital One is third with $20.7 billion. (Source: Nilson Report)
  • Credit cards are now the most common source of financing for America’s small-business owners. (Source: National Small Business Association survey, 2008)
  • 44 percent of small-business owners identified credit cards as a source of financing that their company had used in the previous 12 months —- more than any other source of financing, including business earnings. In 1993, only 16 percent of small-businesses owners identified credit cards as a source of funding they had used in the preceding 12 months. (Source: National Small Business Association survey, 2008)

Congress Empowers Bankers to be greedy and deceptive to Small Business

Our Congressional leaders failed to include Small Business Credit Cards in the new protective laws provided under the Credit Card Act of 2009.   Do our government leaders actually believe that it is okay for banks to practice deceptive and unfair lending against Small Businesses, but not consumers? 

Many of the provisions of this Act do not go into effect until 2010 (giving the banks plenty of time to jack up everyone’s credit card rates to almost 30%).   Buyer Beware!  Small Business owners need to know that Small Business Credit cards are not protected from deceptive and unfair credit card banking practices, such as:

  • Interest Rate Hikes – any time for any reason
  • Universal Default
  • How banks apply your payments - Lowest Interest Balances Paid First
  • Limits on over-limit fees

I suspect, that absent a change in regulation, the following disclosure from Chase Bank’s new INK  Small Business Credit Card will remain the same long after the provisions of the Credit Card Act go into effect. Perhaps the disclosure should be called “Chase Bank’s transparent disclosure of deceptive and unfair credit card practices, rather than:

Pricing and Terms –Rate, Fee and other Cost Information

  1. You authorize us to allocate your payments and credits in a way that is most favorable to or convenient for us. For example, you authorize us to apply your payments and credits to balances with lower APRs (such as promotional APRs) before balances with higher APRs.
  2. Claims and disputes are subject to arbitration.
  3. As described in the Business Card Agreement, we reserve the right to change the terms of your account (including the APRs) at any time, for any reason, in addition to APR increases that may occur for failure to comply with the terms of your account.  (emphasis in original)

Conclusion:

Our government leaders and our regulators failed to protect this country from unsafe and unsound lending practices, which brought our economy to the brink of collapse.  As they develop their new-found focus on Small Business lending,  they need to ensure that credit, in every form, adheres to the principles of safety and soundness and of honesty and integrity throughout our financial system.  These principles must be adhered to by BOTH the borrowers and the banks.  And sadly, perhaps neither can be trusted to simply “do the right thing”.

Yes, we certainly do need to make loans to the small business community.  I feel their pain.  But, America, as a world leader,  needs to set an example and do it right and do it NOW.  The securitization market isn’t going to magically improve because our tax dollars temporarily guarantee the risk to investors (TALF).  And without a strong securitization market, credit in this country will remain frozen.  Lending will only improve when we implement strict and meaningful regulations that govern the safety and soundness in our lending system for all forms of credit.  The ultimate investors in these loans must feel secure in the likelihood that these loans will be repaid.  It’s an issue of confidence.  Banks and Wall Street have a long way to go in winning back the trust of the public.  I don’t think they can get there on their own.  I think we need to bring them there  (and they’ll be kicking and screaming all the way). 

For your reading pleasure:

National Small Business Administration Survey 2008

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Anonymous Banker: Small Business takes it on the chin from our Congressional Leaders and Regulators

Tuesday, October 27th, 2009

I recently posted a blog saying that our Congressional leaders and regulators needed to redefine the term small business.   Over the next weeks, I’ll be following up with more blogs on that theme.  Here’s my first:

Our President, Treasury Secretary Geithner and our Congressional leaders have all, during the course of this economic crisis, blathered on about their commitment to small business.  For once, I’d like to see them put their laws and regulations where their mouths are.

Congress passed consumer credit card regulations designed to stop deceptive practices in credit card lending.  Yet Congress intentionally left  out all business credit cards that can be peddled to the 26 MILLION small business owners across the United States. One can only assume that this means that it’s still okay for the banks to be deceptive when issuing credit cards to these valued members of society that are the backbone to our economic recovery.   And banks certainly will…. I promise you that.

Let’s remember, that banks do not issue business credit cards without the support of personal guarantees of the small business owners, who I might add could also be referred to as ‘consumers’.   

Well, let me correct that.  Many banks do issue “Commercial Credit Cards”, which should not be confused with “Small Business Credit Cards”.  Commercial Credit Cards are reserved for corporations with revenue typically in excess of $2 Million dollars, and then, only if the entity isn’t privately owned and operated.  Commercial Credit cards are reserved for businesses like not-for-profit corporations, where personal guarantees would not be available since there is not direct private ownership.  But if a personal guarantee is available from the business owner, the banks take it. 

The banks themselves differentiate a “Commercial Credit Card” from a “Small Business Credit Card”, so WHY aren’t our Congressional leaders doing the same? 

Probably because they don’t really have any interest in protecting the small business owner and just like to hear themselves talk.

I dare Congress to prove me wrong and amend the new protective credit card laws to include Small Business credit cards.  Till then, I will continue to advise all my small business customers NOT to apply for any small business credit cards, but to apply instead for a consumer credit card and use that card only for business expenses.  It does not change the deductibility of the expenses.  And, at least then, the business owner will get the benefit of the new protective regulations when they go into effect next year.

On the question of direct personal liability vs. personal guarantee:  You can’t be half pregnant, my friend.

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Anonymous Banker Takes On Congress and the Banks

Wednesday, September 16th, 2009

It’s been almost one year since I wrote to the New York Times’s Joe Nocera and predicted that the Worst Is Yet To Come, and specifically pointed to the economic risks posed by the credit card industry. I’m saddened to say how accurate that prediction was. The banks did, in fact, come back to the Federal Reserve with their hats in their hands, and the Fed duly assumed their exposure from sub-prime credit card debt, disburdening the banks on behalf of the taxpayer. This program, among others, is considered by many to be the government intervention that saved the economy.

In truth, without the bailout of Fannie Mae and Freddie Mac, and without the TARP funds handed out to recapitalize many of the leading banks in this nation, and without the increase in FDIC insurance and the Money Market Mutual Fund Stabilization Program, our entire financial system and the very core of our economy would have been shattered. I do not dispute the necessity of these programs.

However, to declare victory–to even allude to the hope that, as Treasury Secretary Geithner stated, “We are back from the edge of the abyss”–is a tremendous miscalculation of what our future holds, and more importantly how the future is viewed by the people and small business owners of this nation. For above all confidence is the necessary ingredient, and it simply does not exist out here in the real world. Without a feeling of hope in our future, consumer spending will continue to lag, putting a tremendous strain on our nation’s small business community–on which there has been little, or dare I say, no focus by our government leaders.

While there is much rhetoric around programs to promote small-business lending, know this: the granting of SBA loans is in the hands of the very banks that have tightened credit until the small business owner cannot even breathe. The SBA has lending guidelines that the banks are ostensibly supposed to follow. But in the institution where I am employed, whenever I submit an SBA loan, it is declined. And when I inquire as to why it has been declined, I am given reasons that the loan does not qualify under the “bank’s” lending criteria. When I ask why they are holding the credit to the bank’s criteria and not to the SBA criteria (which is somewhat less restrictive), I am consistently told that the bank has a right to hold the credit to a higher standard than that imposed by the SBA. The banks that are given the authority to grant these loans have simply refused to apply the less stringent SBA criteria to the underwriting process!

Additionally, Congress would do well to implement regulations protecting business owners from deceptive credit card practices, deceptive merchant service credit card practices, usurous credit card rate increases, the passing of FDIC insurance premiums onto business banking accounts, the cancellation of credit lines when business borrowers have not missed any payments, and the increase in bank fees across the board for services such as wire transfers, checkbooks and ACH services.

Back to the banks. Of course they need to tighten underwriting standards. But most bankers state that the key reasons for making less loans is twofold: (1) lower demand for loans because borrowing needs declined, and (2) deteriorating credit quality of applicants.

Well, golly-gee-wiz! If the banks measure credit quality, as they do, by analyzing revenue and income trends, then clearly few applicants will qualify for loans during this economic depression! But I see business owners taking extreme steps to reduce expenses, commensurate with reduced revenues, and demonstrating their ability to manage their companies through this crisis. They still need funding, though, and there is simply no place for them to go since the banks have abandoned their fundamental obligation as lenders.

The lack of available capital to support our nation’s businesses has a direct impact on unemployment: if the business owner does not have confidence in his ability to obtain reasonable levels of financing, there will be no new job creations, and worse, an increase in unemployment.

Do I really need to spell out the domino effect that invariably ensues when that happens? Just one reason why I predict that unless there is a reasonable focus on small business lending, we will continue to totter on the edge of the abyss. The SBA has been known to lend directly in emergency situations, such as 9/11 and Hurricane Katrina. Is this economic crisis, combined with the banking industry’s general reticence to lend, perceived as less of a crisis than these events? Personally, I am not confident that our government will enact the necessary legislation to stimulate lending. I hope my prediction in this regard is less accurate than the one I made last November on the credit card bailout.

Reprinted from Bizbox

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Anonymous Banker says please PIN your debit card purchases

Saturday, September 12th, 2009

I can’t even watch a golf match without getting pissed off at the banks.  Chase’s Sapphire card and their television commercials, run during the FedEx Golf  Tournament, are a perfect example of how the banking industry systematically screws over the small business owner.  This ad is Chase’s attempt at brainwashing the consumer into using their debit card in a way this is most costly to the business owner and most profitable to the bank.

First, Chase issues a “reward” debit card to every new consumer or business opening a checking account.  In fact, when you open a business or personal checking account with Chase, you can’t even “opt-out” of getting a  debit card because Chase’s computer system won’t let the banker open the account without issuing a rewards debit card.  This should be no surprise since Chase is one of the largest providers of merchant services to the business community.  And debit cards with reward points provide higher returns to the bank and higher costs to the business merchant that accepts the card.

Second,  Chase trains their consumer customers to use their debit card as a credit card.  Their mantra is “Don’t PIN the card”.  In fact, Chase Bank waives basic personal and business checking  monthly maintenance service fees if the account owner uses their debit card five times each month, but only if they don’t PIN the card.  Don’t PIN the card, don’t PIN the card, don’t pin the card….. says Chase Bank!

Chase has all types of rewards programs.  Some are free to the cardholder.  Upgrades can cost the consumer $25 to $65 a year.  And here are the terms, from the Chase website, defining how you earn your rewards:

 ”Qualifying purchases” include all Debit Card purchases made without using a Personal Identification Number (PIN).  “Non-PIN” purchases include purchases you sign for, Internet purchases, phone or mail-order purchases, small dollar purchases that don’t require a signature, bill payment (where billers process the transactions as a credit card), and contractless purchases (purchases made by holding your blink (sm) – enabled card to a secure reader.)  Purchases authorized with your PIN and ATM transactions do not earn points.  For a full description of Qualifying purchases, please see the program terms and conditions.

With all the different rewards programs and Merchant service rates, it’s hard to be precise.  But even estimating on the side of the bank, the consumer would have to spend at least $1875 to earn a $15 gift card.  Those same purchases generate merchant service costs to the small business owner of about $30 to $48.  The profit goes to the bank.

When you, the consumer, think about the rewards you get off your debit card (if you remember to actually cash in your rewards), consider this:  All those extra fees that are paid to the bank by the store owner are really paid by YOU in the form of higher prices.  You lose and the small business owner loses.  The only one that gains is the bank.

Consider the cost of prime time TV advertising and how costly this is to the bank.  And Chase Bank uses this air-time to brainwash the consumer into developing a habit specifically designed to screw over the small business owner.  Chase is trying to instill buying habits that are very costly to YOU.  If your purchase is more than $15, then please, PIN THE CARD!!!  Perhaps then, Chase won’t run these ads while I’m trying to relax and watch a good golf match and I can forget, for that brief span of time, just how despicable the banking industry really is.

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