BofA Testing the Legal Limits

It seems that Bank of America (BAC) has already reneged on the October 6th promise it made to stop raising the interest rates on the credit cards of its existing customer base. Just a week after making this pledge, BofA announced that it would begin introducing annual membership fees, ranging from $29 to $99, to select customers next year.

Combined, these two announcements result in a net win of zero for consumers, and in an unethical bait and switch play on the part of Bank of America. Why? Because, according to regulation, interest rates and annual membership fees fall under the same umbrella. They are both considered finance charges.

While BofA (BAC) postured as if was taking a step towards consumer protection in making the announcement that it would stop raising rates, the introduction of new annual fees to existing credit card accounts will still result in increased finance charges for account holders, even if those finance charges are referred to and assessed by another name. For insight, consider that the addition of an annual fee of $50, on a credit card account with $500 balance and a ten percent interest rate, would double the overall yearly finance charges associated with that card.

Bank of America is using the introduction of these new fees as a tactic to shore up its credit card portfolio in the face of falling profit margins. However, going about it in this way is at best unethical. When you strip away the industry and product specific terminology, BofA’s pledge that it would stop raising interest rates set a reasonable expectation among its customer base that the cost of their credit card accounts with the lender would not rise again.

Additionally, with many consumers closing out their credit cards or transferring their balances due to rate hikes, a promise to stop raising those rates could very well be viewed as a marketing promise – reactive marketing, but marketing non the less. Subsequently introducing, new annual fees violated this promise based on the expectation it presumably set with the bank’s existing customers.

In January of this year, with our help, the New York Times broke a story that called out another credit card issuer, J.P. Morgan Chase (JPM), for violating its marketing promises using a formula very similar to what we now see with Bank of America. After the story ran, Chase was pressured by New York state Attorney General, Andrew Cuomo to change its tactics, and went so far as to extend refunds to customers for the membership fees that it had collected up until the point that the policy was reversed. Unfortunately, almost a year later, there’s been no lesson learned and BofA is engaging in similar behavior.

At the end of the day, all of this points to incompetence on the part of Bank of America’s credit card division. First, BofA made two contradictory announcements, which points to the fact that the lender seems to think that its customers aren’t savvy enough to realize that they’re being had. Secondly, it doesn’t seem that Bank of America has read the CARD Act, which is slated go into effect in February, if not sooner. Chase got in trouble because it increased membership fees for existing customers after it promised that interest rates on those accounts would remain constant. If Bank of America moves along with its plans to introduce membership fees to existing customers into next year, it will find itself in much hotter water than Chase did. This is because after the legislation is enacted raising the interest rates (annual membership fees included) on existing balances will be illegal.

Lastly, with or without Chase (JPM) as an example, BofA’s (BAC) credit card division should have the experience and expertise to know that from a regulatory standpoint the introduction of new membership fees to customers with non zero card balances will be against the new credit card law. It’s about time for entities that are being bailed out with billions of dollars in taxpayer money to stop making rookie mistakes like these.

Disclosure: Author has no positions in the stocks mentioned.

Comments

[john s. gordon:]

the banksters never miss a trick in their mission of gouging the u.s citizen.
> jack

Nov 04 09:13 AM

[Free Market...:]

I think the author is thinking of cash advance fees being counted as finance charges. I have never seen membership fees counted on my statements as "finance charges". Plus, Bank of America could have raised my rates AND added added a membership fee. So far, they have done neither, unlike some of their competitors, so I have to disagree with the premise here. Sorry.

Nov 04 09:27 AM

[wcinvest:]

The US government is completely out of control if it considers an annual fee an interest charge. As long as consumers have advance warning, the banks should be able to chrarge annual fees. Annual fees are a charge with lots of transparency. If customers don't feel that their card gives them enough value for the annual fee, they can close out the account. I have done so myself in the past and it is only a 5 minute phone call.

Bank of America is in a test phase of adding annual fees to a very small portion of their accounts. I don't blame BAC for raising annual fees on customers but if they do it too much and in an unjustiable fashion, they will lose customers. Credit card debt is unsecured debt and not many companies stay in a line of business to lose money.

The truth of the matter is someone needs to pay for the people who end up defaulting on their credit cards. If the government makes the rules too onerous, BofA, Capital One, American Express, Discover, Chase etc. will dramatically and understandably cut back on charge card credit. If the government then forces them to offer low interest rate cards to bad credit risks, then some of these companies will just exit the market if they can't sell off their credit card operations.

If BAC's annual fees are too outlandish for the services/awards rendered, their customers can go to a different competition. Yes, the banks did some bad things but the primary culprits of future taxpayer losses are 1) AIG 2) Fanny Mae 3) Freddie Mac 4) GM. The government should keep this in mind when they write legislation.

High fees such as $99 make sense for cards that truly pay excellent rewards. I would look elsewhere for a different card but would consider paying even $99 under some circumstances.

I am all for reasonable consumer protections like not allowing Banks to reorder transactions to increase overdraft fees. But since credit card debt is unsecured, the government should be very careful with that legislation; otherwise charge card credit will contract at even a faster pace.

Nov 04 11:08 AM

[questioner5000:]

Any chance that you can get these commercials, (that usually invoke President Obama by name, or utilize the White House as a backdrop, and which try to convince people who have credit card balances, to deliberately renege on repayment of their debts- - not because they can't repay their debts, but because "they deserve a "fresh start" ), to broadcast, say only ten times a day, instead of a hundred?

My favorites are the ones that clam that; "Credit card companies have received billions in bailouts from you, the taxpayers", and so now it's time for you to receive YOUR bailout". But, what is the difference in these "bailouts"? The banks, like BAC, received billions in loans from the Treasury, (funded by the taxpayer at, say 2.5% p.a.), under which they're currently paying billions, in the form of preferred dividends, (at rates of 5% to 8% p.a.), and are required to fully repay the loans, (when the government SAYS they are allowed to), plus billions of additional dollars in order to redeem warrants. At the same time, they're held up to ridicule and tormented by one neo-populist demagogue after another, with new edicts on credit cards, home mortgages, checking accounts, executive wages, Board composition, capital levels, etc. Notice that BAC, in particular, would like to repay its TARP funds, but arbitrary new "prerequisites keep getting thrown in their path. Meanwhile, the "bailouts" required on behalf of "taxpayers" - - many of whom pay little or no taxes - - basically consist of debt FORGIVENESS, whether precipitated by the loss of a job or medical needs, (which I can understand and support), or based on the simple desire to walk away from debts piled up during past spending sprees, which borrowers now feel are "a burden". Among my favorite consumer "bailouts", are the recent forced interest rate reductions and principal writedowns for people who are simply "underwater" in this real estate market, at this present time. They CAN pay, they just don't feel that they have to! (In other words, if home values go up, the homeowner is to get the benefit, but if they go down, even if only temporarily, the banks and taxpayers have to make it all better. What kind of bilateral "contract" is THAT?)

Bank of America's financial condition was solid in 2007. They made no subprime loans - - in fact, they exited their last subprime market in 2001 - - and Community Reinvestment Act loans, (mandated to borrowers of less than stellar credit), were only 6% - 7% of their total RE portfolio. Then they bought Countrywide and Merrill Lynch, (without the overwhelming sweeteners that, say, Chase got in acquiring Bear Stearns and WAMU), while a large segment of their CRA loans went bad, (to the extent that that 7% of their mortgage portfolio is now close to 30% of their foreclosed properties/problem RE loans.

Frankly, BAC shareholders would have been better off if BAC had told the government to "stuff it", when it came to overreaching CRA requirements. They also should have pulled a "Barclay's/Lehman", and allowed both Countrywide and Merrill Lynch to collapse, dumping the whole mess on the government and taxpayers. However, that would have most probably caused a collapse of the whole financial system. Basically, BAC saved your a**es!

So, maybe if people suddenly woke up, and paid their debts as best they can, without seeking out the latest "free ride", BAC wouldn't have to charge an annual fee on its credit cards.

Unfortunately, as President Obama has said, the banks got in trouble because they made "bad bets". He's right! BAC bet on the American consumer. Maybe if the taxpayer realized how much they're being pandered to by their legislators and rediscovered their sense of responsibility, this financial collapse wouldn't have been as deep as it became. But, instead, you cling to the pandering .....

"The banks tricked you into buying that big house. We didn't understand the documents we signed"

"They ticked you into paying the minimum, "interest only" mortgage payment, rather than encouraging you you start building equity."

They tricked you into thinking that the 0% rate on our credit cards would last forever!"

They should have known that we couldn't repay all of that credit card debt, before they sent us that mailer.

"It's not your fault! It's the evil, highly paid bankers! (And certainly not us, your Congressmen! Pay no attention to us behind the curtain!"

Nov 04 11:40 AM

[realvoice101:]

Thieves, liars and charletons ....the top execs in the banking industry. Best way to deal with them is to target the individual, not the institution. They'll get the message soon enough. Call them out where they live, work, shop. Make sure their families and neighbors know who and what they are. Live within a community or die an outsider, their choice. In the end, we all exit the same....best to act accordingly.

Nov 04 01:24 PM

[Odysseas Pa...:]

Definition of Finance Charges according to Regulation Z:
www.fdic.gov/regulatio...

FDIC Glossary -- look under the definition of finance charges, annual fees are explicitly mentioned
www.fdic.gov/regulatio...


On Nov 04 09:27 AM Free Markets Rule wrote:

> I think the author is thinking of cash advance fees being counted
> as finance charges. I have never seen membership fees counted on
> my statements as "finance charges". Plus, Bank of America could have
> raised my rates AND added added a membership fee. So far, they have
> done neither, unlike some of their competitors, so I have to disagree
> with the premise here. Sorry.

Nov 04 01:49 PM

[rkwriter:]

Not only did BofA raise my rates, but when I called and complained and told them I thought they were unfairly gouging me, even though I have paid every installment on time(actually I have for 2 years running paid more than my minimum each month) they bumped my rates up again and cut my credit line down to the exact amount I owed.

Nov 04 03:15 PM

[Big Jack58:]

I've noticed on these blogs that the average, informed reader is no longer falling for the old bashing-the-banks routine. I see two things going on with this decision to charge an account fee on these cards: 1) BAC is finding ways they can profit when they offer additional services (even if they originally gave it away). So for cash back, frequent flyer miles, etc type cards they might get clients to pay an account fee ... wow, they are going to charge customers for a service they offer? That's almost capitalistic! 2) BAC might be trying to exit certain client demographics ... wow, a company determines a certain client segment is not profitable and they make changes that will result either in profits from that segment or that unprofitable segment drys up? That's almost capitalistic!

Nov 04 03:23 PM

[hughdidit:]

I'm going to write up a story on my blog about this soon but to give you the heads up to ALL Bank of America Customers, particularly, those with fixed rate mortgages. Bank of America is changing your loans terms to an adjustable rate. One that will track the inevitable rise in interest rates to come very soon. This is not fiction, it is happening to me and its happening on a loan with a perfect record of payment - so no one is safe. My advice to you -- find another bank ASAP!

Nov 04 05:14 PM

[Odysseas Pa...:]

I guess you missed the whole point that my assessment is that they will be prohibited from raising annual fees on existing customers after the new law goes into effect and they have not realized it!


On Nov 04 03:23 PM Big Jack58 wrote:
> BAC is finding ways they can profit when they offer additional
> services (even if they originally gave it away). So for cash back,
> frequent flyer miles, etc type cards they might get clients to pay
> an account fee ... wow, they are going to charge customers for a
> service they offer? That's almost capitalistic!

Nov 04 05:45 PM

[COF:]

"At the end of the day, all of this points to incompetence on the part of Bank of America’s credit card division." That's the former MBNA which BoA bought in 2005. This company (MBNA) is full of shit and the credit card loss rate is now 14% under their management, 2% higher than the second highest. A bunch of stupid a&&holes. BoA was stupid to let the MBNA losers to run their card business. No wonder these suckers are desperate.

Nov 05 02:47 AM