Tuesday, December 16, 2008

The Rest of the Story

Someone wrote me and asked what I thought about the banks and how they contributed to the current problems we face. Well, that one is pretty simple. Like the insurance companies who legislated away their risks, the banks lobbied the legislatures for laws that made it much easier for them to part people with their money. I point to two main areas.

First, years ago the laws did not permit the banks to charge many of the fees that they now charge. By fees, I mean $35 overdraft fees and items like that. One example - the Uniform Commercial Code used to provide that stop payment orders on checks were a service that the banks were to provide at no fee. That provision was eliminated from the UCC and banks began to charge fees for stop payment orders.

Then a provision was added to the UCC that permits banks to charge items to your account in any order they desire. So, naturally they process them in the manner that creates as many overdraft items as possible. If there is one big item that overdraws your account and ten small items that would all clear with no overdraft, they process the big item first then charge you ten separate overdraft fees for each of the ten smaller items. This provision of the UCC was actually litigated in Ohio and the court ruled in favor of the bank (even though Ohio law contains an implied duty for the parties to act in good faith and I don't see any way that such a scheme could be executed in good faith).

Then there is the way that they process debit cards. They will actually permit you to charge something to the card even though you don't have the money in the account - then they charge you a fee. Once again, not good faith.

But the biggest thing I think the banks did wrong was the pushing of credit as a manner of living beyond peoples means. Want a vacation - get a "home equity loan." It used to be that second mortgages were considered the last resort of people who were already in financial trouble. But the banks changed the name to home equity loans and marketed them aggressively and everyone had to have one. Finance that lifestyle instead of working for it.

A couple of years ago there was a commercial for one of the credit cards that showed a girl stepping off a curb and breaking her heel. Suddenly, someone hands her a credit card and she gets new shoes, new dress, new hair and goes dancing down the street while the song "Downtown" is playing. I remember watching this and thinking that my dream case would be a class action lawsuit against that credit card company for violations of the false or misleading advertising provisions of the various state's consumer practices act. The commercial basically was designed to falsely imply that "if your life is bad, just go shopping with our card and everything will be perfect." Until the bill comes in the mail, that is (but they left that part out).

But those kind of cases don't often walk into small law offices in Lebanon, Tennessee, so the dream remains unfulfilled. Maybe I should get past my disappointment by getting a home equity loan and buying an airplane.


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