An article in today’s New York Times highlights the trend of national banks going after the “unbanked” with offerings that include high interest and fees. The Federal Deposit Insurance Corporation estimates that about nine million households in the country do not have a traditional bank account, while 21 million, or 18 percent, of Americans are underbanked.

There is little to distinguish some of the loans being offered by the banks compared to the notoriously bad for consumers pay day loans. Banks see a potential to make as much as $45 billion from short term loans, high-fee checking accounts, and check cashing services.

When a consumer walks into a bank, they can’t easily understand all the many different products being offered. What’s worse, lower income customers are “profiled” and then steered towards prepaid debit cards that don’t stack up against some of the better prepaid cards on the market, because they include high fees and minimum balances. Some banks are competing for the lucrative payday loan market. According to the article, “The loans can get expensive. When the loan comes due, the bank automatically withdraws from the customer’s checking account the amount of the loan and the origination fee — typically $10 for every $100 borrowed — regardless of whether there is enough money in the account. That can lead to overdraft and other fees that translate into an annual interest rate of more than 300 percent, according to the Center for Responsible Lending.”

So what can the unbanked do? The best bet is to research various alternatives using the Web, to understand fees before stepping into a bank and being squeezed into something that may not be a good financial fit. It would be nice if banks listed a complete menu of their products in an easy to read format.

650,000 consumers left big banks to join credit unions in the past month, ahead of Bank Transfer Day, according to Credit Union National Association (CUNA).

Bank Transfer Day happened Nov. 4, 2011. It was the brainchild of a fed up consumer, Kristen Christian, who set up a Facebook page to encourage people to send big banks like Chase, Citigroup, and Bank of America a message by transferring their accounts to credit unions or smaller banks that presumably would provide more personalized service and not have excessive fees. Even though Bank of America backed down from its plans to charge most of its individual account holders a $5 a month fee for the privilege of accessing their own money via a debit card, and other banks followed suit, consumers are still mistrustful. Will big banks continue to seek ways to recoup their lost profits from the new consumer protection laws that among many changes lowered the swipe fees banks could charge merchants for every debit card transaction.

If one person can set up a Facebook page and get more than 80,000 people to pledge to close their bank accounts with big banks, where does it end? After all, governments have fallen in the Middle East during the Arab Spring, thanks in part to the power of social media to unit people in protest. Now Occupy Wall Street has captures the imagination of Americans fed up with income inequality, and the sense that the levers of power around the world are controlled entirely by the financial elite. When voting doesn’t seem to change anything, more people are captivated by the idea that change can happen when people unite in collective actions such as public demonstrations, boycotts of certain products, or selective transactions.

Can just 80,000 people moving their money into credit unions make a difference? According to Forbes magazine: “If the 80,000 signed up for Bank Transfer Day indeed move their money, they stand to save a combined $4.8 million a year as credit union members save on banking fees, states Bill Cheney, CEO of CUNA. If over 400,000 consumers made the switch, they’d stand to save about $29.8 million just by joining a credit union. When you look at what consumers could gain and not just what banks would lose, it becomes a positive movement with long-standing legs.”

Think about the environmental movement and the countless concessions big businesses have made to “go green.” Grocery stores now all offer reusable grocery bags as an option at check out, for example. Trucking companies are switching to bio-diesel fuels.

People are outraged at other fees such as overdraft fees and transfer fees. And small business owners are frustrated that banks have tightened up their lending policies to the point that it is very difficult for them to get loan to expand their business. While banks have not signalled any concern about individuals closing their accounts, since each account does not represent a large deposit, they have discussed concerns about business closing business accounts. If enough small businesses closed their accounts, it would likely result in banks pivoting to create new programs to try and lure them back, or keep them from leaving in the first place. In the end, the power of the purse is the best lever individuals have, because when they band together in collective action such as Bank Transfer Day, it gets the attention of the media, and in turn, attention of big business, politicians, and big finance.

NPR reported this week on a troubling trend. Bank of America in Idaho and in other states is suing people who lost their homes to foreclosure to attempt to recover the difference between the mortgage and the current value of the home in today’s market. This is called a deficiency judgement. In the case of Ben Jensen and his wife, Bank of America sued them for $140,000. Unfortunately for the Jensens, Idaho is one of about 40 states that allow banks to pursue deficiency judgements. Even though the Jensens had lost their home and damaged their credit rating, the bank thought it was worth the effort to squeeze them for more money. They had at best $5,000 in savings, so there was no way the bank would get the amount they sought, and instead would merely have pushed the couple into bankruptcy. They managed to settle by will have to pay the bank $75 a month for three years.

According to NPR, “The National Consumer Law Center, a nonprofit consumer advocacy group, confirms deficiency judgments appear to be going up across the country. How that plays out depends on state law. Geoff Walsh is a staff attorney with the organization. He says approximately 40 states, including Idaho, allow lenders to sue former homeowners for the amount of the mortgage that remains after a foreclosure.”

Anti Deficiency Laws

As a form of relief from some aspects of foreclosure, some states have “anti-deficiency” laws, which protect purchasers of residential real property used as primary residence.Anti-deficiency laws typically provide no protection for second mortgages or home equity lines. Also, there is no protection when the property is not used as the primary residence of the purchaser.

In a typical foreclosure, if the purchaser fails to make the mortgage payment the property is foreclosed and title is obtained by the lender through a legal procedure. The property is then typically sold to pay the mortgage, and a deficiency between the sale price and the outstanding balance of the mortgage usually exists. Under anti-deficiency laws, if the mortgage is for the purchase of a dwelling occupied by the purchaser, the purchaser will not be held responsible for any deficiency. The lender can only recover the property and the proceeds of a subsequent sale. The purchaser does not pay any deficit between the sale proceeds and the outstanding loan balance. This allows the purchaser to walk away from a property without owing a deficiency judgment amount.

States that have statutes in place to prevent banks from going after a deficiency include:

Alaska
Arizona
California
Connecticut
Florida
Idaho
Minnesota
North Carolina
North Dakota
Texas
Utah
Washington

In some states, banks are only allowed to file a single lawsuit to collect a mortgage debt. How this plays out varies by state. In New York, for example, a lender must choose between the actions of foreclosing on the property or suing to collect the debt. The following states have some type of one action statute:

California
Idaho
Montana
Nevada
New York
Utah

How to Avoid a Deficiency

It pays to contact your bank as soon as you can’t make a mortgage payment. Try to get a loan modification, or a reduction in the principle. As long as you continue to make payments, you may qualify for the new federal program propose d by the Obama administration to make it easier to refinance a mortgage, provided you have stayed current on payments for more than six months. Talking to the bank can be painful, and the bank will continue to call you for status updates, but it’s better to try to do a short sale (selling your home for less than you paid for it) with the bank’s approval, than simply walking away and letting the foreclosure go through. You may be able to work out a deed in lieu of foreclosure. This type of mortgage default requires the cooperation of both the lender and the borrower. It is fast and inexpensive because both parties agree to transfer the property to lender, avoiding the time and expense of foreclosure. Another way to avoid a deficiency is to declare bankruptcy. Even the threat of declaring bankruptcy can get the bank to cave in and reach some sort of settlement, as in the case of the Jensens. The earlier you settle, the lower the settlement is likely to be.

In the end, losing one’s home is perhaps one of the most stressful things that can happen in life. On top of this stress, the last thing anyone needs is to have the threat of the bank that gave you the mortgage come after you, even years later.

Bank of America raise a flurry of criticism this week when it announced that it was going to start charging its customers a $5 month fee for use of the debit cards that are issued with checking accounts. Bank of America and other banks have initiated these new monthly fees in response to the new lower transaction fees that retailers pay banks when accepting debit cards for consumer transactions. These so called “swipe fees” used to average 44 cents a transaction and now they are half that. Retailers will benefit the most from the lower swipe fees, and all it takes is a few of them to pass on the savings to consumers for everyone else to benefit. Banks, however, aren’t taking the change sitting down, because they got used to making huge profits from high swipe fees.

According to the Washington Post:

Perhaps the bank’s decision simply reminded us all over again that we are living increasingly in a fee-littered world, where companies continually seek out new ways to nibble away at our wallets by charging for the smallest of once-free services, leaving many customers feeling nickel-and-dimed.

“The proliferation of a la carte fees has inundated the economy,” said Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group. Companies “are inventing new fees; they are making it harder to avoid fees; they are increasing the fees. . . . It’s much more complicated to be a consumer”

Banks like Bank of America got used to racking up big profits from the debit card swipe fees, and rather than accept less (some would argue reasonable) profits, they are looking for ways to profit through customer fees.

Many people are fed up with fees for everything. They especially hate sudden large price increases like Netflix announced. And people notice when something was once free, like luggage on airlines, are suddenly seen by businesses as new areas for profits.

After announcing the debit card fees, Bank of America saw its stock drop 9%. It is threatening to lay off thousands of its employees. It calculated that some of its customers would leave the bank and find a new bank that does not charge a monthly fee for debit card use. However, prepaid cards are a good alternative for them.

Prepaid Cards Offer an Alternative

While prepaid cards have always had monthly fees, those fees are straightforward and perceived as necessary to cover the business costs of the prepaid card companies. They are not on top of other fees, like minimum balance fees on checking accounts, or overdraft fees.

More and more people are getting rid of their checking accounts, to avoid annual fees, and minimum balances, and the risk of overdrafts, and the costs of printed checks. These people like prepaid cards, because they can still pay with plastic, manage their finances without going into credit card debt, and get cash when they need it from ATMs, or cash back on purchases.

The press reports that the American public’s opinion of congress has never been lower (since pollsters started asking the question in 1977). The rating agency Standard & Poors just lowered the U.S. triple A credit rating. Other agencies are taking a wait and see approach but may also lower their AAA credit rating on the U.S. if congress doesn’t get its act together and address chronic over borrowing.

But how do the budget problems at the federal level effect your pocket book? “Joe” or “Judy” Consumer?

Effect on Your 401K

You do have a 401K don’t you? Conventional wisdom says that congress will eventually move on tweaking social security benefits downward to ensure that the program doesn’t go bankrupt. So having some sort of retirement package to supplement social security will be more important than ever. If age you can start receiving social security benefits creeps up to 68 or 70, what are you going to live on if you try retiring before then?

Historically, the stock market supposedly averages about a 7% return annually. However, the ten year flat-line of returns in the 1970s and the flatline of our current recessionary era suggests that maybe it will return far less over the next 50 years.

When Canada lost its AAA rating in April 1993, to look at an example of what the downgrade in the US AAA credit rating may mean, the country’s stocks gained more than 15% in the subsequent year. The Tokyo stock market climbed more than 25% in the 12 months after Moody’s downgraded Japan in November 1998. So, hopefully, the downgrade will not torpedo the stock market in the short term.

It’s hard to predict where the stock market is heading day to day, or even month to month. If you have stocks mutual funds, the best thing to do is ride out the current financial storm by not selling off and converting to cash or a money market. Studies have shown that when people cash out after the market has dropped, they usually fail to time their buy back in at the right time, and hence “lock in” their losses. It’s better to do nothing and wait for the market to recover.

If you feel compelled to adjust your portfolio, large cap stocks and mutual funds with focus on large multinational companies are your best bet. Blue chip companies like IBM and GM tend to weather economic downturns better than small and midsized companies.

Whatever you do, don’t invest in gold. Since gold as risen in value by about 50%, it is likely topped out in value and is poised for a sharp downturn in value. You wouldn’t want to buy gold at the top of a bubble and see your investment collapse by 40% within weeks of buy it?

Debt

A downgrade in the safety of Treasury bonds means a hit to bond investors’ overall confidence. This makes the price of bonds other than Treasures go up. The federal funds rate could go up, and this rate is tied to the prime rate, which is a benchmark rate that other interest rates are pegged to.

Credit card interest rates are tied to the prime rate, which moves with the federal funds rate. If the prime rate goes up, consumers could see a sharp uptick in credit card rates. Even if the rate doesn’t go up, card issuers spooked by a credit downgrade could raise your interest rates anywhere from 1% to 5% if you’ve had your credit card more than a year (so that you are out of the introductory rate window).

Price of Goods

So far during this recession, inflation has remained low. However, as the global economy has begun to expand, demand for oil is rising. Eventually, rising oil prices cause fuel prices to rise. Higher fuel prices translate to higher transportation costs for trucks trying to get food and other goods to market. More expensive petroleum means higher prices for fertilizers that are largely derived from petroleum, higher fuel costs to run farm tractors, higher feed prices, which lead to higher prices for meat, eggs, milk, bread, and other staples. During the recession of the 1970s we had stagflation, inflation with a stagnant economy. If we see that again, your take hope pay won’t rise as fast as your daily living expenses.

What to do? Think about substitutions. Eat more chicken instead of beef. Bike across town instead of drive your car. The new money saving habits you form now can add up to a lot of savings over the rest of your life.

This year, many banks large and small ended free checking accounts for their customers. And now, as several major banks have announced plans to eliminate free checking, millions of Americans are in line to join the ranks of the unbanked.

Wells Fargo & Co., Bank of America, Citigroup and J.P. Morgan Chase, have introduced monthly fees of $5 to $25 on checking accounts that previously had none. The banks have made this change to find new streams of profit, since new regulations have been put in place to protect consumers from outrageous bank fees such as high overdraft fees.

The FDIC estimates that 7.7 percent of U.S. households are unbanked, though the numbers vary from state to state and even city to city.

According to a news report in the Minneapolis Star Tribune:

J.P. Morgan chief executive James Dimon has predicted that up to 5 percent of banking customers may be pushed out of the banking system as a result of higher fees. If this occurred, it would increase the ranks of unbanked Americans from 17 million to nearly 23 million people, based on government data.

“There is a large segment of the population that simply won’t pay $10 or $20 a month to keep a bank account,” said Tony Plath, a finance professor at the University of North Carolina at Charlotte. “The fees will drive them away.”
Such an outcome would deal a big blow to efforts by federal regulators and community activists to reach out to the unbanked. Over the past two decades, the Federal Reserve, U.S. Treasury and Federal Deposit Insurance Corp. have launched initiatives aimed at getting Americans, particularly minorities and low-income households, to feel more comfortable with banks, and to discourage them from turning to high-cost alternatives such as check cashing outlets.

If your free checking account has been changed to a fee-based account, you may be familiar with some of the requirements that would entitle you to avoid paying the new monthly fees. One is to keep a minimum monthly balance, which can be as high as $3,000. Sometimes you can avoid a monthly fee by setting up direct deposit from your payroll. However, to qualify, especially if this is your first bank account, banks also look at your household income, job history, credit history, check usage, and overall comfort with banking. They can deny you an account, especially if you are on the Chexsystems list.

According to the Star Tribune:

A recent survey by the Federal Reserve Bank of Kansas City also found that multiple overdraft charges fueled mistrust of banks, and played a significant factor in why people chose not to have bank accounts. Many banks engage in a controversial practice known as “high-to-low” check clearing, in which they process large checks and debit card payments before smaller ones, rather than in their actual order. The practice often results in people getting hit with hundreds of dollars in unexpected overdraft charges.

“It’s not the dollar amount of fees that’s the determining factor” of whether people choose to have bank accounts, said Steven Shepelwich, senior community affairs adviser at the Federal Reserve Bank of Kansas City. “It’s whether the fees are transparent, and if people feel like they have control over their money.”
For people already frustrated with their banks, the introduction of new monthly service charges on accounts once marketed as “free” may prove too much to bear.

Kenisha Wilson, an assembly plant worker in Brooklyn Center, said she recently began exploring alternatives to a bank account after she discovered that her bank, TCF Financial Corp. did away with its “totally free checking” account and started charging her a $9.95 monthly fee. Wilson said was already angry at the bank after she discovered last year that about $900 in overdraft fees had piled up for small items without her realizing it.
Wilson, 36, said she recently calculated that it would be cheaper and more secure to cash her paycheck twice a month at Wal-Mart, and use money orders to pay her bills, than to maintain a banking account. “I’d be better off just buying a personal safe and putting my money in there than keeping it in the bank,” Wilson said. “I’m not going to pay a bank to take my money.”

The ranks of the unbanked unquestionably are growing.

The Wall Street Journal reports that 17 million people rely on alternative financial services such as cash checking services, payday lenders and prepaid debit cards that charge for each transaction. And Pew Research indicates that the growing immigrant population as well as Latinos and African-Americans don’t mind being unbanked and have found alternatives such as prepaid debit cards.

Elini Constantine, author of the book Unbanked by Choice: A Look at How Low-Income Los Angeles Households Manage the Money They Earn commented in an interview on NPR:

“We see a large number of people in the unbanked bracket. And those of us who don’t have a bank account have risks and lack of opportunities that people who have a bank account don’t even think about. So the trend is dangerous. If you have a stash of cash under your mattress or in your pocket, you’re obviously vulnerable to loss and attack. Plus if you don’t have a bank account and you use a check casher or bill payment service, you’re exposed to fraud, abusive practices and price gouging because these entities aren’t regulated the way a bank is. The Pew study found that the unbanked spend as much as $700 a year just to cash checks. That is, just to get their paycheck money.

Constantine added that it important for the unbanked to learn money management, to establish a record of paying bills on time, and for saving for such things as retirement or a child’s college education. Having savings is important too, to handle emergencies that may arise.

One good alternative to a checking account is a prepaid card such as the MiCash MasterCard. A prepaid card prevents you from having overdraft charges, since its your money and you can’t get overdrawn. You can keep track of spending, and pay bills online.

While people aren’t ready to abandon their credit cards and prepaid debit cards any time soon, the era of mobile payments continues to inch closer. This is day when the average person is more likely to make a purchase by waving their cell phone at a payments reader upon checkout than using plastic.

The major cell phone companies such as AT&T, Verizon, and Sprint are cutting deals with MasterCard and Visa to put a computer chip inside the next generation of cell phones that will contain all of the data that is now contained in the magnetic stripe on the backside of most credit cards and debit cards. So, instead of swiping a plastic card, you would just wave your mobile phone in front of a “wave and pay” reader, and the transaction would be completed with the appropriate confirmations. This technology is also known and NFC, or Near Field Communications, and uses wifi to transmit the data through the air. Of course, this data needs to be encrypted for security. The technology works today in Europe, and you may have even used it to pay for gas at specially equipped pumps or at McDonalds.

There is no guarantee that this idea will immediately click with the people. Companies exploring this technology might find it hard to convince people to shift any time soon. And mass adoption could be years away. A recent study showed that just 12 percent of the adults in the US and six percent in Europe are paying through their phones. Such mobile payments would disrupt current payment methods and would require retailers to invest in new technology. Mobile payments have two kinds of solutions for initializing and authorizing transactions and it can be done through SMS too. Second kind of payment involves contactless cell phone payment systems.

Google and Apple, and other manufacturers of smart phones, are even considering starting their own payment network, to eliminate Visa and MasterCard from the equations. Thus, they would manage the transaction network and keep the “swipe fee” that runs anywhere from one to three percent of the transaction. This is the Paypal model. Clearly, Visa and MasterCard would not be happy about his, and these dominate players will work hard to maintain their advantage.

Ultimately, new technologies are good for consumers when they foster competition, drive down costs, and create new flexible ways of paying for the things we buy.

You could tell it was coming, big banks like JP Morgan Chase are considering a variety of new and higher fees for people who withdraw money from ATMs. Chase is considering boosting the fee to $4 or even $5 per withdrawal for anyone withdrawing money from a Chase ATM who is not a Chase customer. Typically banks do not charge its own customers for ATM withdrawals within their own ATM networks. However, most do charge anywhere from $2 to $3.50 for non customer withdrawals.

Most people do their best to use ATM machines from their own bank, if they are a checking account customer. But what about the millions of people who do not have a checking account with any bank and instead use a prepaid card? Since they are already paying at ATM fee per withdrawal typically with their prepaid card account, any fee an ATM charges is on top of that. While you may accept a couple of dollars as a convenience expense, when it gets too high–and $5 is certainly too high–it feels like highway robbery.

The Wall Street Journal reports that banks are scrambling to replace billions of dollars in revenue expected to be lost from new federal regulations on overdraft charges and debit cards.

“J.P. Morgan Chase & Co., TD Bank Financial Group, and PNC Financial Services Group are already changing their ATM policies to collect more fees,” writes the WSJ.

New York Times financial writer Ron Lieber put the spotlight on Chase and other big banks which have announced plans to increase fees on checking account customers. The banks are doing this in the wake of new financial reform law that protect consumers from high fees on overdrafts and will limit the interchange fees banks that issue credit cards can charge merchants. Lieber points out that Chase shareholders do not intend to lose the enormous revenues that they earned from such high fees. So now the banks are looking to convert previously free checking accounts to accounts with monthly fees.

Many checking account holders are discovering that if their average balance dips below a certain threshold, say $1,500, they will be charged $10 or $20 a month for their checking account. Chase ominously implies that legions of formerly banked customers will become “unbanked” and thus be exposed to costs such as check cashing fees.

But there is a powerful alternative. Prepaid cardholders can get all the benefits of having a Visa or MasterCard debit card, including FDIC insurance on their funds, without having to have a bank account. They do have to pay attention to which card they get, because fees vary, but Lieber says that for cards with reasonable fees, the cost of using the card can actually be lower per month than the costs of many fee-laden checking accounts. They can’t get overdrawn. They can withdraw cash at ATMs or as cashback at the grocery store. And they can buy things online and at stores and restaurants wherever debit MasterCard or Visa is accepted.

This is not a free service, though it can come pretty close.

http://www.nytimes.com/2011/01/15/your-money/brokerage-and-bank-accounts/15money.html?_r=1&src=fbmain

No Free Checking for You

News reports indicate that the days of free checking accounts being so easy to get are waning.