Bank of America Finds Foreclosure Document Errors

A couple of months ago, it at discovered that “many banks used "robo-signers" to approve large numbers of foreclosure documents without reading them closely” (WSJ). Two of such banks are Bank of America and Wells Fargo & Co. Which are currently been scrutinized by the federal government regarding their handling of foreclosures. The problem here is that banks were evading their responsibility of overseeing the transactions of the foreclosures. It became more profitable to make a thousand foreclosures wrong than a few right.

The worst thing is that both banks were shameless about the matter and did not take responsibility for their actions. “Bank of America in several recent public comments about the foreclosure issue did not acknowledge even minor errors” (WSJ). “Wells Fargo & Co. Chief Executive John Stumpf on Oct. 20 said: "I don't know how other companies do it, but in our company the affidavit signer and the reviewer are the same team member."” (WSJ). It is not but recently, and only under the scrutiny of the government, that both corporations have either admitted wrong doings or have gotten caught on the act. The Wall Street Journal reads: “Bank of America Corp. for the first time acknowledged finding some mistakes in foreclosure files as it begins to resubmit documents in 102,000 cases” (WSJ). The article continues “Days later a deposition emerged from a bankruptcy case indicating that Wells Fargo had in fact used a robo-signer who didn't verify documents she approved” (WSJ). This keeping in mind that this are the nation's largest mortgage lenders.

Within the mistakes found on the contracts range the following errors:

• address missing one of five digits
• misspellings of borrowers' names
• transposition of a first and last name
• missing signature

So what does this mean, which is the bottom line? Two things. First, Bank of America and Wells Fargo, which are big players on the consumer banking industry, have lost their credibility as overseers of foreclosures. And second,both corporations will probably have a harder time dealing with great volume of foreclosures because of the government oversight. Both things will affect both corporations’ bottom lines negatively in the short and long run.


Source:

http://online.wsj.com/article/SB10001424052702303864404575572662815011760.html#articleTabs%3Darticle

Wells Fargo Emerges as an Industry Leader

Results from the 3rd quarter show that Wells Fargo has emerged as one of the most profitable members of the consumer banking industry.  Wells Fargo & Co., the 4th largest bank by assets, had a profitable quarter as it lent $150 million more than it did in the 2nd quarter.  This increase in lending led to more than $2 billion of profit for the bank.  One of the key factors that stimulated Wells Fargo's 3rd quarter growth was low mortgage rates originating from government stimulus programs.  The government's attempts to stimulate the economy led to an increase in demand for new mortgages, which boosted Wells Fargo's profits.

This news is important for the consumer banking industry on two levels.  First, Wells Fargo's higher profits indicate a larger trend of increasing demand for new mortgages.  This is important because it shows that consumers have confidence in applying for new mortgages.  Consumer confidence is important as the economy continues to recover from the global recession.  Hopefully higher consumer confidence will continue to stimulate growth in the consumer banking industry and benefit the economy as a whole.

Wells Fargo's increasing profits also display the government's role in changing the landscape of the consumer banking industry.  Government programs to "entice home buyers" are important factors that contribute to the increase in consumer demand.  This shows that the government has an important role in affecting the consumer banking industry and its profits.  By stimulating profit, the government offset some of its regulations limiting overdraft fees.  Either way, Wells Fargo's earnings show that the government plays an important role in shaping the landscape of the consumer banking industry.

-Justin Schaffer
Source: WSJ http://online.wsj.com/article/SB10001424052702304741404575563881198351028.html

Bank of America's New Consumer Bank Strategy

Bank of America announced that it would begin testing new banking offerings in select markets in December as part of its “new consumer bank strategy”. These new offers are so that the bank may figure out new sources of revenue. The New consumer banking strategy will focus on a relationship enhancement strategy which will hopefully have consumers bring more business to the bank as well as make pricing more upfront and transparent.

Previously Bank of America had depended on penalty fees which now this new strategy is trying to make up for. This is an attempt to move Bank of America away from this dependence on penalty fees, and move towards making Bank of America a premier banking experience which will result in additional revenue.

In August Bank of America began offering one of its first consumer solutions, eBanking. This allows for customers that use online banking and ATMs to get better pricing. In December the bank will continue this new idea of providing customers choices on how to pay for banking services and reward them for using certain products. Additional testing will begin next year with new products in the payment area that would meet the evolving needs of specific customers.

Anne Pace, a spokesperson for Bank of America, thinks that consumers “will choose to pay through their behaviors — either banking through self-service channels or by their frequency of payment activity through a debit card or credit card. Some will choose to bring us more of their business through higher balances, their mortgage, etc. Others will simply choose to pay a monthly maintenance fee”. People with a cynical view on this new strategy believe that these rewards will simply be no fees but nothing more than that.

I believe that Bank of America’s strategy will work. Bank of America is enticing people with rewards which will lead to more people bringing their business to Bank of America which will increase their revenue. Bank of America has to make sure that these rewards aren’t as simple as cynical people think they will be or else there will be no incentive for people to bring their business to Bank of America.


http://bucks.blogs.nytimes.com/2010/10/21/what-will-bank-of-america-do-to-its-checking-accounts/?scp=7&sq=consumer%20banking&st=cse

Bank of America

Bank of America has gone from being a regional institution to the nation's largest consumer banking franchise. In 2003 it merged with FleetBoston Financial which gave it the most branches, customers and checking accounts of any United States bank. In 2005 its merger with MBNA made Bank of America the biggest credit card issuer. After a failed merger with Merrill Lynch and the acquisition of the very troubled Countrywide Financial during the financial crisis, it lost its place on top to J.P. Morgan Chase and Goldman Sachs. Not to mention Kenneth D. Lewis the former chief executive losing his job.

It seemed that Bank of American couldn’t do anything right until April 2010 when the new chief executive reported a first quarter profit of 3.2 billion. What had been thought to be a failed merger with Merrill Lynch was actually the main cause for this first quarter profit. However by the third quarter the bank reported a $7.3 billion loss due to a $3.1 billion profit set and a write down of $10.4 billion in the value of its credit card unit. On June 7, 2010 countrywide agreed to pay $108 million in settlements for federal charges that the company overcharged customers.

The article states that “Bank of America was slower than all other big financial institutions besides Citigroup to repay its federal bailout money -- $45 billion, $20 billion of which had come as emergency aid after the Merrill losses were revealed”. With Bank of America constantly having to make up for its acquisitions of Merrill Lynch and Countrywide it is no wonder they were the slowest to repay their bailout money. But even though bank of American reported losses in the third quarter, its first quarter profits had come mainly from Merrill Lynch. This is a sign that Merrill Lynch is becoming less of a burden on Bank of American and more of the source of profit they hoped it would be when they acquired it. As for countrywide, with a settlement finally being reached, hopefully Bank of America will be able to turn a profit on countrywide just as it has done with Merrill Lynch.



http://topics.nytimes.com/top/news/business/companies/bank_of_america_corporation/index.html?scp=3&sq=consumer%20banking&st=cse

Fed Looking to Tighten Credit Card Regulations… Sound Familiar?

In order to block practices that banks have used to circumvent new credit card laws, the Federal Reserve recently announced plans to amend the credit card regulations it established back in May of 2009. The Wallstreet Journal sites two examples of banks, Citibank and First Premier Bank, that have creatively skirted the regulations.

Citibank recently launched a new promotional program that raised some customers’ interest rates as high as 29.9%. The bank then turned around and “offered a rebate on up to 70% of finance charges if they were paid on time.” In some cases, the rebate brought the borrower’s interest costs to the same cost it would have been prior to the rate increase. Further, the bank’s policy on the promotional program allowed it to revoke rebates at any time. In doing so, the bank was technically breeching rules that disallowed banks from raising rates on existing balances and the 45-day notice for changing terms. The amendments the Fed looks to impose will prohibit this type of promotional program. The fed stated that, "Promotional programs that waive interest charges for a specified period of time are subject to the same protections as promotional programs that apply a reduced rate for a specified period."

First Premier Bank also tried to circumvent new credit card regulations by offering a card with a $300 limit, $75 annual fee, and a $95 processing fee to be paid before the card is activated. Technically, the bank is in violation of the fed’s law that limits fees to no more than 25% of the card’s credit line in the first year. The bank claimed that “the 25% limit only applied to fees charged after an account was opened.” The fed’s amendment will clearly indicate that the 25% restriction also encompasses fees that the consumer is required to pay before the credit card is used.

I think that these are two of many practices that the fed will call into question when it reevaluates its credit laws. Hopefully, the amendments made will give consumers a break and disallow banks from instituting high fees to make up for lost profits.

WSJ article: http://online.wsj.com/article/SB10001424052702304510704575562140663625322-search.html?KEYWORDS=credit+card&COLLECTION=wsjie/6month

First Credit and Now Debit: Bank Sues Fed Over Forthcoming Debit Card Transaction Fees

Last week, I discussed how credit giants Visa and MasterCard caved into the demands of the U.S. Department of Justice, forcing them to nix policies that disallowed merchants from offering discounts to customers who paid using credit-cards with lower processing fees. A similar story can now be said for new laws imposed on under the Dodd-Frank financial-overhaul bill; but this time, the banks are being targeted for their hefty debit-card processing fees.

Under the new set of regulations, banks with assets of over $10 billion will be required to dramatically lower their debit-card processing fees. The regulation is, once again, aimed at helping merchants who have long complained that the fees are unreasonable and too high. U.S. banks acquire an estimate $20 million a year from these debit-card fees and typically charge merchants anywhere from .75% to 1.25% on each transaction.

TCF Financial Corp., one of the nation's biggest issuers of debit-cards, has filed a lawsuit against the Fed., claiming that the new law unfairly targets big financial institutions and disallows the company it's constitutional right to "recover its costs and a reasonable return on its invested capital." Clearly, this regulation will hurt the consumer banking industry across the board -- even smaller financial institutions who will need to compete against the lower processing fees of the larger financial institutions. It will be interesting to see if TCF can win the lawsuit. If not, banks may force consumers to make up for lost processing fee profits (i.e. requiring consumers to pay a certain monthly fee).

Wal-Mart and Green Dot will change the consumer banking industry

Wal-Mart is attempting to sell prepaid debit card thru Green Dot. “Green Dot is the largest provider of prepaid debit cards, which are sold as an alternative to checking accounts” (WSJ). The service provided by green Dot parallels that of prepaid phone cards. The “consumers can cash checks and have funds loaded on the card, set up direct deposit, pay bills and more” (WSJ). This untapped market of prepaid debit cards is booming and here are the key things to keep in mind.

Pros

• Low-income consumers which are underserved by traditional banks and increasingly unable to get credit cards are the main market of this new product.
• “Industry forecaster Mercator Advisory Group expects funds "loaded" onto such cards to grow more than 60% annually through 2013” (WSJ).
• Barriers to enter the market are low because “prepaid debit cards requires little capital investment” (WSJ).

Cons

• It is expensive to reload the prepaid debit cards
• Visa and MasterCard may enter the market very easily
• “50% of the company's "active" cards were thrown away”(WSJ)
• “Green Dot can add customers faster than it loses them”(WSJ)
• “Green Dot's stock price may be inflated by the scarcity of available shares”(WSJ)

The bottom line is that the consumer banking industry may lose costumer to this new way of doing business. I individuals do not need to spend 10 – 20 minutes opening an account to have a debit card they probably won’t. This means fewer costumers which translates into less revenue for the banks. Banks must be quick if they want to keep their competitive edge and chances are they will enter this new market soon.

source:

http://online.wsj.com/article/SB10001424052748703794104575546361605817130.html

Bank Losses Lead to Drop in Credit Card Debt

Since 2009, there has been a drop in credit card debt in the United States which can widely be credited to newly wary consumers. It is believed though that a significant portion of the decline can be contributed to the financial institutions writing off billions of dollars in credit card debt as losses. By using debit card and staying away from exceeding new credit limits the consumers are voluntarily reducing their balances. Kenneth J. Clayton, senior vice president for the American Bankers Association for card policy, said the impact of tighter credit “It has a braking effect on the economy, and the key thing is to get to the right balance,” he said. “We are in a process right now of finding that balance”.

The Federal Reserve put out a report stating that mortgages, credit card accounts and nonrevolving accounts like auto loans were approximately $13.9 trillion last week. This is a $200 billion decrease from last year’s report. Bank of America said in April that consumer loans were down $37 billion from a year earlier, with $34 billion of that reduction the result of charge-offs. Economists agree that one of the main reasons for these reductions is a shift from credit cards to debit cards. This shift began before the recession and increased with it. It is believed that purchases of debit cards will exceed purchases of credit cards in 2014. That is partly because more cardholders will fall by the wayside as issuers raise prices for outstanding balances in response to the Card Act. The card act was intended to protect consumers from unfair credit card billing practices.

This article is interesting in that it shows how the consumer finance industry is on a decline. The article says that “Between the recession-related psychology of not wanting to spend, out of fear of what the future might bring, you have the reality of people who simply don’t have a credit card anymore”. Is it possible that the credit card aspect of consumer banking could go completely extinct?



-http://www.nytimes.com/2010/09/25/business/25credit.html?_r=1&scp=5&sq=credit%20cards&st=cse

More Trouble in the Housing Market: Bank of America Shuts Down Foreclosures

Bank of America recently announced that it will shut down its foreclosure operations temporarily.  Government-run mortgage firm Freddie Mac has put a lot of pressure on Bank of America recently, and has expressed concerns about the foreclosure procedures at Bank of America.  The firm is worried that the bank is not carefully examining all of the foreclosures it is handling.  The pressure has led to Bank of America's decision to temporarily halt its foreclosure deals while it evaluates its paperwork procedures.

This announcement comes as bad news to the consumer banking industry as a whole.  Banks have had a lot of foreclosures to deal with amidst the economic recovery.  This event will slow the foreclosure process and potentially damage the housing market's recovery.  On the other hand, while Bank of America has halted its operations, Wells Fargo said it will continue to plow ahead.  This is a positive development for the industry, because it means that some foreclosures will continue to go through as the housing market mess gets sorted out.

This event could prove to be very advantageous for consumers.  People who are 90 days past due or in foreclosure could get some extra time while Bank of America tries to evaluate its internal processes.  Hopefully consumers can use this time to their advantage and save enough money to pay off their overdue balances.  This also gives people who have already defaulted on their mortgages a break while the bank sorts out their financial fate.

-Justin Schaffer
Source: WSJ: http://online.wsj.com/article/SB10001424052748704657304575539963605720860.html

Banks Pile Into Safer Bets

Due to the recession, banks are being forced to “raise their capital cushion against risky assets”(WSJ). These tighter requirements are lowering the exposure and risk the U.S. banks have on the market. However, this is also diminishes the returns that risky investments give. The implementation of such policy has clearly two sides to it.

On the pros:

• Banks will probably tone down their risk-taking and shift to more staid strategies
• This may lead to less risk for the financial system overall.

On the cons:

• This will decrease short term profits
• Stock trading has decreased as investors have become more insecure about the market and skeptical about government regulation.
• “banks are losing traders and business to nonbanks such as private-equity firms or hedge funds.” (WSJ)

The bottom line being that sacrifices must be made in the short run in order to have a more stable market on the future. Huw van Steenis, a bank analyst at Morgan Stanley in London, said it best when he stated that “the obligation to hold more capital means that return on equity will go down"(WSJ). This is a fact, and the market is already responding and adapting this new trends. We can expect a decrease on the returns commercial banks give to their costumers on their investment portfolios but increase on the confidence on the market in months to come.

Refrences:
http://online.wsj.com/article/SB10001424052748703466104575530273745563564.html

Citigroup sells credit card loans to GE Capital

Just a few weeks after selling the student lending business at a $500 million loss, Citigroup agreed to sell about $1.6 billion of private-label credit card loans to GE Capital. This sale is coming from Citigroup attempting to move away from small businesses so that it may focus on its core consumer banking operations. Citigroup also claimed that the sale was not material to its earnings but would reduce the bank’s overall assets by $1.6 billion. By the end of 2010, Citigroup plans on selling half of the troubled assets it deemed nonessential. Citigroup was one of the top recipients of federal bailout aid, and as such has decided to restructure operations as so that it may recover from this credit crisis. The credit card portfolio services more than 40 million customers and consists of about $50 billion in managed assets. These assets include cards for retailers such as Home Depot Inc. and Macy's. Citigroup Inc. will service the portfolio until the first quarter
This “shedding” of credit card loans is a sign that Citigroup is trying to improve their current state after being bailed out. Are they doing it the right way though? Their last attempt left them with a 500million dollar loss. I think if Citigroup is looking to get out of their predicament they need to step back and re-access where they stand and what they need to do to improve.

http://online.wsj.com/article/AP08898d6555ce4945b0079a6df1ecf0bc.html?KEYWORDS=consumer+banking

Bank of America's Move Puts Pressure on the Wholesale Mortgage Lending Industry

On Tuesday, the mortgage lending business took another hit.  Bank of America announced that it will no longer do business with mortgage brokers.  This means that the bank will only participate in mortgage deals directly with consumers.  In other words, the bank will only loan money directly to consumers rather than through mortgage brokers.  The bank cited a desire to develop the bank's relationship with consumers and focus on the consumer aspect of its business.

This event will likely have an enormous effect on the landscape of the wholesale mortgage lending business.  This decision was announced after several reports found that loans originated by brokers are much more risky than loans from consumer banks.  Bank of America's withdrawal leaves Wells Fargo as the only remaining major consumer bank to do business with mortgage brokers.  From the perspective of the brokers, this deal serves threatens the sustainability of the entire broker system.  Brokers will be forced to do business with Wells Fargo, which severely limits their options.  This could slash revenue and broker business.  Also, Wells Fargo could also decide to drop its business with mortgage brokers, which could kill the industry.

This event is so important to consumers because their mortgage choices will be more limited by Bank of America's withdrawal.  With Wells Fargo being the only major bank to buy loans from mortgage brokers, consumers are essentially forced to turn to one of the major consumer banks for mortgage assistance.  This limits consumer choices, and could prevent consumers from receiving the best deals.  Also, the consolidation of the mortgage lending market means that interest rates could rise for future mortgages.  (The decrease in supply of mortgages means the equilibrium interest rate will rise.)  While Bank of America claims that the move allows the bank to focus on consumers, in reality, consumers will be limited by lack of choice and lack of product differentiation.

-Justin Schaffer

Source: http://blogs.wsj.com/developments/2010/10/05/do-home-buyers-need-mortgage-brokers/

MasterCard and Visa Slammed With More Credit-Card Regulations

A new agreement reached Monday between the U.S. Department of Justice and credit giants Visa and MasterCard resolved a two-year long antitrust probe concerning card issuers who barred merchants (i.e. retailers, restaurants, etc.) from offering discounts to customers who used credit cards with lower merchant fees. Up until the settlement, merchants could sometimes expect to pay up to 5% on the value of each purchase in credit card processing fees. Cards with rewards such as airline miles typically cost merchants more, and merchants who accept a company’s cards must accept all of them no matter how high the processing fee. The L.A. Times reports that these fees cost merchants an estimated $35 billion annually, a hefty price tag when small businesses, retailers, restaurants, etc. are struggling to stay afloat. The U.S. Justice Department saw these rules as anticompetitive.

American Express chose not to join the settlement with the U.S. Justice Department. According to the Wall Street Journal, American Express typically charges a higher processing fee than rivals MasterCard and Visa. American Express believes that it's policies shouldn't be deemed anti-competitive, given the company's smaller market share. There is a chance that the government could now file a civil suit against the company. (FYI: Visa accounts for 43% of all credit card spending, MasterCard 27%, and American Express 24%... I don't think the company has much of an argument.)

This new regulation on card companies can be tallied right next to the many other federal credit card laws that have hit the industry. Many hope that since the settlement allows merchants to offer lower prices to consumers who use cards with lower processing fees, consumers and businesses alike will save. But it is difficult to assess the impact on the industry. Both the LA Times and Wall Street Journal contend that it will be difficult to sway some card users from using their high-reward cards. Visa and MasterCard have not yet voiced too much concern. It will be interesting to see how much merchants take advantage of the new regulations and if consumers are swayed to use their plain-jane, low processing fee cards over that of their high reward card options. 

Sources:

http://www.latimes.com/business/la-fi-1005-credit-cards-20101005,0,1126646.story

http://online.wsj.com/article/SB10001424052748704380504575530512939089380.html