Posted on 13 Apr 2009
As a result of complaints about increases in interest rates and fees, the committee overseeing federal banking-bailout programs is investigating the lending practices of institutions that received public funds.
Since the Troubled Asset Relief Program (TARP) was launched last October, banks bolstered by capital infusions have boosted charges on a wide range of routine transactions, hiked rates on credit cards and continued making loans criticized as predatory by consumer advocates. The TARP funds are intended to open lending spigots and make it easier for people to borrow money.
Last week, for example, Bank of America Corp. told some customers that interest rates on their credit cards will nearly double to about 14%. The Charlotte, N.C., bank, which got $45 billion in capital from the U.S. government, also is imposing fees of least $10 on a wide range of credit-card transactions.
Citigroup Inc., another recipient of government cash, is trying to entice customers to borrow at high rates. "You could get $5,000 today," Citigroup's consumer-finance unit wrote in fliers mailed to customers. The ads don't disclose that the loans often carry annual interest rates of 30%.
The interest rates "compare competitively to similar offers in the market" and vary depending on the creditworthiness of borrowers, a Citigroup spokesman said. Citigroup has received $50 billion in capital from taxpayers, and the U.S. government will soon own as much as 36% of the company's common stock.
"To continue to offer competitive products and services and responsibly lend in this current environment, we must adjust our pricing," said a Bank of America spokeswoman about the company's new fees and interest rates.
The U.S. government's ownership stakes in hundreds of banks, as well as political ire stoked by lucrative pay and perks, are raising the specter of new regulation on basic banking practices. First-quarter results due starting this week will be scrutinized for signs of how much taxpayer-funded capital is being funneled into loans.
Elizabeth Warren, chairwoman of the Congressional Oversight Panel, the body named by Congress to oversee the federal bailout, said the panel is working on a report examining instances of potentially inappropriate lending by banks that got taxpayer capital. "The people who are subsidizing the activities of the banks through their tax dollars are the same people who are furnishing the high profits through consumer lending," Ms. Warren said in an interview. "In a sense, we're asking taxpayers to pay twice."
Last month, a Senate committee narrowly approved a bill that would rein in many credit-card marketing and pricing policies, including ballooning interest rates. Proponents of the legislation say many of the largest card issuers have received government aid and so should be subject to greater scrutiny.
Banks say that raising fees and rates, even on low-risk customers, is a legitimate way to recoup some of the costs of the bad loans still on their books. They also say taxpayers have a financial interest in seeing the industry quickly return to profitability. Any revolt over price hikes could intensify the crisis by depriving institutions of a key income source, say banks. New restrictions on these lending practices "may truly have an impact on profitability," said Gerard Cassidy, a bank analyst with RBC Capital Markets.
The controversy underscores the quandaries of Washington's dual role as owner and overseer of U.S. banks. While shoring up the banking system is a goal of federal regulators and the White House, what is good for the bottom line of banks isn't necessarily good for their customers.
So far, regulators are focusing mostly on nursing banks back to health. "To my knowledge, the TARP funds weren't supposed to change consumer-protection requirements that apply to all institutions," Comptroller of the Currency John Dugan said in an interview. Mr. Dugan's office oversees most of the nation's biggest banks.
One bank that advocacy groups like the Consumer Federation of America and the Consumers Union are watching is Pacific Capital Bancorp. The Santa Barbara, Calif., bank-holding company got $180.6 million from TARP and is an issuer of so-called tax-refund anticipation loans. These are loans made to people who want immediate access to their state and federal tax refunds, and typically have annual interest rates that exceed 100%.
Debbie Whiteley, a Pacific Capital spokeswoman, said the bank isn't using TARP capital to make tax-refund loans. Still, the government infusion is helping to improve the bank's overall financial health, according to the company, meaning it will be in better position to make a variety of loans.
Regional banks U.S. Bancorp and Wells Fargo & Co. offer "checking account advance" loans that allow customers with direct-deposit accounts to access funds before they are credited to a customer's account balance. The short-term loans carry annual interest rates of about 120%.
U.S. Bancorp and Wells Fargo said the loans satisfy customer needs for emergency credit. The cost to borrowers is relatively low, according to the banks, because the loans usually are repaid within weeks.
Last year, U.S. banks and savings institutions collected $39.5 billion in deposit-account charges, and fees for everything from ATM usage to balance transfers accounted for about 25% of the industry's total revenue, according to the Federal Deposit Insurance Corp.
A big chunk of that revenue comes from overdraft fees. The industry's median overdraft charge is up 10% to $27.50 in the six months since the government began pumping capital into banks, according to Moebs Services Inc., a Lake Bluff, Ill., research firm. The median charge previously held steady for five years. Meanwhile, the average annual credit-card rate has climbed to 12.35% from 11.38% six months ago, according to CreditCards.com.
Don Mawson, a 49-year-old who works in Boston for State Street Corp., said he called Capital One Financial Corp. to complain about its decision to increase the late-payment interest rate on his credit card to 29.4% from 7.9%, even though he has never missed a payment. Mr. Mawson says the bank, which got $3.6 billion from the federal government, declined his request.
A company spokeswoman declined to discuss Mr. Mawson's account but said Capital One is increasing some interest rates "to reflect the current risk environment." Unhappy customers can cancel their accounts, she added.
The government has demanded that TARP recipients provide detailed accounts of what they're doing with taxpayer-funded capital. According to an analysis of federal data by The Wall Street Journal, overall loan volume at 470 banks that got TARP capital was down 1% from the quarter ended Sept. 30, compared with a 2.2% decline at banks with no capital infusion as of March 20.