Bank of America is the latest major bank to get slammed with fines and orders to repay customers affected by unfair and deceptive practices and products.
In June 2013, Americans’ confidence in U.S. banks ticked upward for the first time since 2006, according to polling conducted by Gallup, to 26 percent approval. This represents a 5 percentage point increase from the same time in 2012, as well as the seventh consecutive year the majority of Americans have shown little or no confidence in the national lending system.
While the national economy and U.S. economic confidence have slowly risen in recent months, the notion that banks are generally untrustworthy is propagated by a seemingly continuous flood of news about settlements, fines and penalties the major banks are being forced to pay for recently-disclosed past misdoings.
On Wednesday, the Consumer Financial Protection Bureau announced that the agency will be fining Bank of America and FIA Card Services “for unfairly billing consumers for services relating to identity theft protection ‘add-on’ products and for using deceptive marketing and sales practices for credit protection ‘add-on’ products.” This announcement came on the heels of a $9.5 billion settlement on charges that Bank of America misled Fannie Mae and Freddie Mac prior to the mortgage crisis of 2008.
It also followed a $228 million settlement deal involving QBE Insurance Corp as a co-defendant before the U.S. District Court for the Southern District of Florida. The case alleged that Bank of America and QBE participated in a kickback scheme in order to inflate the cost of homeowner insurance they were requiring their clients to buy. While mortgage lenders are allowed to charge homeowners for property protection insurance after the homeowner’s insurance lapses, Bank of America and QBE allegedly passed on the cost of the kickbacks Bank of America received from the insurance providers to the customers.
Bank of America has been ordered by the Consumer Financial Protection Bureau to pay $45 million in fines and refund $738 million to affected customers — including at least $250 million to approximately 1.4 million customers who bought Bank of America’s Credit Protection Plus or Credit Protection Deluxe and an extension of credit monitoring for refunded consumers of the bank’s Privacy Guard, PrivacySource or Privacy Assist.
In a statement issued by Bank of America in response to the settlement, the bank neither denied nor confirmed responsibility, but indicated that it stopped marketing the affected products in August 2012. The bank also indicated that it has processed most of the refund payments.
In the lending industry, the use of add-on products — bank services that a lender can sell to a borrower or attach to a loan as a condition of signing, such as fraud protection, gap payments and secondary insurance — provides the lenders a low-cost, high-profit increase on the return on investment on mortgage and loan products. While some add-ons are legitimate, many are simply a money-grab representing products that are either overhyped or misleading. In the case of Bank of America, the Consumer Financial Protection Bureau found that telemarketers selling the products regularly went off-script, promising features that were not available with the product or omitting key details.
For example, with Bank of America’s credit protection products, consumers were charged immediately for the service, but could request a full refund in the first 30 days if they were not satisfied. The Consumer Financial Protection Bureau found that the bank’s telemarketers incorrectly told customers that the first 30 days of protection were free and that they would not be billed for the introductory period.
Additionally, the bureau found that telemarketers regularly told customers that there would be extra steps toward enrollment or the purchase of the add-on, leading many to assume that they had not yet purchased the product. In reality, the purchase was completed during the telemarketer’s call.
The bank also misconstrued the actual benefits of the services or products that the customers were enrolled in, alleged the bureau.
Banks behaving badly
Bank of America is far from the only bank to be caught selling fraudulent add-on products, and it is unlikely to be the last. JPMorgan Chase, Discover and Capital One have all paid penalties for bad add-ons. In December 2013, American Express paid $16.2 million in fines and a minimum of $59.5 million in refunds to consumers in regards to its Identity Protect and Identity Protect Premium, Account Protector and Lost Wallet Protection services.
In September 2013, Chase Bank USA and JPMorgan Chase agreed to return approximately $309 million to the 2.1 million customers of their identity theft products.
Knowingly defrauding consumers has grown to be standard practice in the lending industry. As the nation’s banking regulators and the Justice Department continue to opt out of seeking criminal remedies to the growing number of mortgage and securities officials alleged to have negligently mismanaged or gambled with their customers’ investment, many of the senior executives are growing to see the fines and repayments their banks must endure as simply the cost of doing business. As there is little to no personal cost to the bankers themselves in these settlements, the bankers are free to categorize them as business losses and write them off.
As reflected in records retrieved from a Freedom of Information Act request by the American Lawyer, the Security and Exchange Commission — the nation’s watchdog for securities trade compliance — regularly uses politics to judge who and why it will prosecute. An example of this is the 2010 case against Goldman Sachs & Co. concerning the Abacus 2007-AC1 investment vehicle. In this case, the SEC went after a low-level vice president without prosecuting senior management in what business observers have called an attempt to name a scapegoat.
Politics and meeting the customers’ demands
Currently, the Consumer Financial Protection Bureau is facing a House Financial Services Committee hearing regarding allegations that the bureau is possibly engaged in discriminatory practices, including the rating of minority employees below white employees. Democrats on the committee argue that the hearing revolves around a single employee’s complaint. Typically, such issues are heard by the Equal Employment Opportunity Commission or the Federal Reserve’s inspector general.
However, this hearing is but the latest in a Republican line of attack against the Consumer Financial Protection Bureau that starts with the bureau’s conception. In the past, the House Republicans have fought the appointments of now-Sen. Elizabeth Warren and current bureau director Richard Cordray, protested its independent funding and Congress’s inability to have a say in it, and rallied against President Obama’s recess appointment of Cordray over a standing Senate Republican filibuster. As much of the mainstream Republican Party’s financial backing comes from the lending industry, it’s reasonable to say that the Republicans’ opposition to the bureau is donation-based.
Regardless of whether the slack the banks receive in regards to prosecution are political in nature or simply based on an attempt to keep the flow of borrowing capital moving, this lack of culpability has created an environment in which banking is now seen as one of the most untrustworthy industries in America. Despite this, the complaint most Americans lodge against the big banks is that the banks care more about their business customers than their personal customers.
According to Gallup’s Retail Banking study, overwhelmingly, customers want to know that their bank is listening to them, taking what they have to say seriously, and acting in the best interests of their personal customers.
“What is the key to gaining a customer’s confidence? It’s the bank ensuring that the customer knows the bank is looking out for their financial well-being,” wrote Beth Youra for Gallup’s “Focus on Financial Services” blog. “The emotional elements are the Holy Grail that build to well-being.
”[Finance] is personal. Partnering with customers on managing their finances, making them feel confident about their financial future, and taking the lead when necessary helps them believe you are on their side and looking out for their best interests”