What most reporters seem to miss, however, is the fact that Bank of America and other credit card lenders now actually make money by forcing customers into default. This was one of the insights I gained from listening to Michael Greenberger, who spoke recently at an event sponsored by the Delaware Press Association.
Greenberger frequently testifies before Congressional committees on US economic issues caused by complex and unregulated financial derivatives. He's former Director of the Division of Trading and Markets at the Commodity Futures Trading Commission (CFTC) and formerly sat on the Steering Committee of the President's Working Group on Financial Markets, and as a member of the International Organization of Securities Commissions' Hedge Fund Task Force. He is currently Law School Professor and Director, Center for Health and Homeland Security for the University of Maryland.
In November, Greenberger spoke about the shadow market devoid of rules, reporting and oversight created by bank deregulation which allows banks to, in essence, pen financial deals that gamble on a certain percent of insolvency. Imagine betting on a horse race. The track makes money on the number of people who bet on horses that lose. Similarly banks are selling options on losing portfolios. What happens is, in essence, corporate and shareholder pockets get lined the more cardholders go into default. My analysis may be over simplistic, but you get the gist.
Jackie Ramos, details this graphically in her YouTube posting.
Former Bank of America employee offers inside look at bank's practices
While millions of credit card customers have been through the painful process of negotiating past-due or over-the-limit accounts, few have dealt with their credit company face-to-face. Usually, the conversation is with a customer-service representative in another city who cheerfully outlines the fees and penalties that the cardholder must pay, regardless of whether he or she can afford it.
Jackie Ramos, a former "customer advocate" from the collections department at Bank of America (BAC), posted a video on YouTube on which she offered an inside glimpse into what happens on the other end of the phone. While Ramos notes that her former employer encouraged her to "do the right thing for the customer," she says she soon came to realize that her job was actually to squeeze as much money as possible from the company's cardholders.
In her video, Ramos describes the strategies that Bank of America used to maximize its profitability. From charging a $15 "convenience fee" for payments over the phone to tacking on $39 late fees and $39 overlimit fees, Ramos says her bosses encouraged her to nickel-and-dime customers, drawing out every penny possible.
For some debtors, Bank of America offered "Fix Pay," a program that would effectively transform a credit card account into a loan; in the process, it would eliminate fees and close the account. According to Ramos, customers had to answer what she describes as a series of "irrelevant" questions and meet certain income requirements before they could qualify for the Fix Pay program. Ramos' infraction, which ultimately cost her her job, was that she encouraged some cardholders to lie about their finances in order to get into the program. Her logic was simple: If their accounts were manageable, fewer customers would default on their obligations.
While Bank of America declined The Huffington Post's request for a comment on the video, it did confirm Ramos's account of the firing with the blog.
The fact that Bank of America disagreed with Ramos's actions should hardly come as a surprise for anyone who has held a credit card over the past ten years or so. Late fees, convenience fees, interest rate increases, credit limit decreases, and other gimmicks have become common, effectively transforming credit cards into the economic equivalent of a game of Russian roulette.
Can government regulation save consumers and credit card issuers?
The C-CARD Act, which President Obama signed into law in April 2009, was designed to halt the strategies that credit card companies use to squeeze their consumers. Unfortunately, almost as soon as C-CARD made its way out of Congress, credit card companies began using their nine-month grace period to come up with fresh charges and innovative new ways to cheat consumers. Some, like Bank of America and Citibank are experimenting with annual fees, while others are playing with the idea of charging fees for inactive accounts. Meanwhile, lawmakers are expanding the fight to debit card companies, most of which "double dip" on ATM fees. In fact, as we draw closer to February 22, 2010 -- the date that the Credit CARD Act will go into effect -- it seems likely that debit card fees might be the next tool that banks will use to ensure a fresh stream of charges.
Yet the C-Card Act may be the salvation of the credit card industry. While the methods that Ramos describes have short-term benefits, they ultimately seem designed to push customers into insolvency. In one case, she describes a customer who owed $6,000 on a card. The cardholder, a recent widow facing single parenthood, complained to Ramos that the 29.99% interest rate that Bank of America was charging her, in addition to various fees, made it impossible for her to continue making payments. Unable to qualify for Fix Pay, she had little choice but to default on the debts. Given her situation, it seems unlikely that Bank of America can hope to recoup any of the money she owed.
Ultimately, that may be the lesson of Jackie Ramos: while her willingness to place her morals ahead of her career is inspiring, the truth of the matter may be that she was putting Bank of America's long-term health ahead of its own shortsighted policies.