THE SCREWING OF THE AVERAGE MAN How Your Banker Does It
Dickson, Paul
THE SCREWING OFTHE AVERAGE MAN : How Your Banker Does It by Paul Dickson From Watergate and Equity Funding to tne “Dare to be Great” program of Glenn Turner, the 1970s promise to be an era...
...Hunting for More Competition Nonetheless, the future at the teller’s window of your local bank is not entirely bleak...
...Where the Government Puts Your Money After April 15, and Other Horror Stories Interestingly enough, the federal government’s favoritism towards banking doesn’t stop with the pockets of the average -man...
...Each of these institutions operates under separate laws and customs...
...Admittedly, the money any one of us loses yearly because our checking account doesn’t pay interest might not fill our freezer with porterhouse steaks, but from the banks’ point of view it adds up to a hefty amount when multiplied by the number of depositors...
...With restrictions like these, bank advertising can easily veer toward the far limits of plausibility...
...Federal truth-in-lending legislation affords some protection to the prospective borrower, but there are few protections regarding other banking services...
...For example, some savers can take money out of their accounts when they want without losing interest (because it is compounded daily), while others lose interest if they make tneir withdrawal at any time other than the first day of each quarter...
...There are, of course, limits imposed on the range of bargains...
...There is some good news here-this is one abuse that may soon be corrected...
...Whereas rent strikes are occasionally an effective weapon against recalcitrant landlords, defaulting on a bank loan to protest financial practices like the 360-day year is not advisable...
...One study estimates that banks earn about $100 million a year from use of this money...
...State banking laws also vary widelywhat is the standard interest rate in one state may be usury in another...
...Without entering into the realms of higher math, you will normally end up with more interest at the end of the year if you have a LIFO account...
...Forty years later, banks are no longer failing en masse, but they continue to cash in on photo by Le~lieK endidrd C.ishen the regulators’ fears...
...The sum lost by an individual borrower on a six-year loan comes out to be one month’s interest-small potatoes, perhaps, except that in the aggregate the arrangement yields a healthy bonus for the banks...
...The banks might put it another way: What does $5.92 mean to you against the millions it means to us...
...One estimate is that this calendar magic costs the consumer about $150 million a year...
...Of course, not all state governments are so cavalier with their money...
...Commercial banks regularly promise “the highest rate of interest permitted under law,” even though the law generally allows savings banks and savings and loan associations to offer somewhat higher rates...
...Depending on the periodic needs dictated by the bank’s overall cost flow, salesmen earn d i f f e r e n t commissions for selling certain services at different times of the year...
...Apparently the inability to explain the many services offered does not deter the selling of them...
...The Pinson study of savings account interest rates had a s i m i l a r conclusion-most banks sampled had an extremely difficult time explaining how their account procedures work...
...In February, Washington Post investigative reporter Ronald Kessler disclosed that Sibley Memorial Hospital in the District of Columbia had more than $1 million stashed in no-interest deposits...
...Citibaizk reports that First National City has a volume-orien ted incentive program to get its branch office personnel to “cross-sell” as many services as possible to each customer...
...This is not to say that we should be unconcerned with multi-million dollar heists, but we must not be so hypnotized by the super-capers that we fail to notice the hundreds of mundane, little traps in our daily lives...
...Following the expose‘, Maryland announced plans to halt the giveaway...
...The average man must learn to ask a lot more questions of the kindly institutions which safeguard his money...
...The Pinson study, Truth in Savings, has helped spark a movement...
...The report also urged that the federal government gradually lift the ceilings on the interest rates which can be paid to depositors...
...The NOW accounts are one of the most controversial banking developments in recent years-already one effort to ban them outright has been turned back in the House of Representatives-and are likely to provoke con tinue d legislative battles...
...At least one bank, Dacle Federal Savings and Loan Association in Florida, has adopted a policy of paying three percent interest on money held in escrow...
...In any event, free checking is as far as even the most consumer-oriented commercial bank can go since federal law states that no interest can be paid on checking accounts...
...Many of these Depression era fears are now almost comically outdated...
...Many banks ended up with a lot of houses they couldn’t sell and a resulting cash shortage which caused them to fail...
...Yet despite this enormous booty, most banks still charge for each check you write and often for each deposit...
...already bills have been introduced in both Houses of Congress to require that banks use standardized phraseology and provide certain standard information to their customers...
...The other is the First In (or FIFO) system which takes out the first, or oldest, $100 in the account...
...As fundamental as this is, the small consumer seldom shops this spread with, say, the care that is almost automatic in comparing the prices of used-car dealers or supermarkets...
...Mortgages provide another maze of pitfalls for the borrower...
...Another encouraging sign is that bank customers are beginning to ask questions...
...In all, the lost interest amounted to $100,000 a year-or $1.1 1 a day for each patient in the hospital...
...Since the banks are unlikely to provide you with useful information, here are the most important things to inquire about in shopping for a savings account: .Find the maximum rate of interest available in your area-five per cent in most cases...
...The same banks which had few qualms, until recently, about lending millions to corporations like Penn Central are often reluctant to make consumer loans...
...At the consumer level, bank profits stem from the difference between the interest rate granted savings depositors and the interest rate collected on loans...
...Find out exactly what happens when you make a withdrawal, as there can be two different systems at work...
...Yet the average man’s problems with his local bank only begin once they deem him worthy of borrowing...
...Generally, the more often your interest is compounded the better, especially if you make frequent withdrawals...
...One New York savings and loan association advertised the highest rate of interest in America when, in reality, for most of its depositors it didn’t even pay the highest rates in town...
...No wonder five financial institutions on the same block in the same community can have five different mortgage policies, five different formulas for computing interest, and one common claim-that each offers the best deal in town...
...Consequently, many otherwise intelligent and well-informed people would be astonished to discover that banks are at least as diverse as restaurants or colleges...
...Since savings banks and savings and loan associations are forbidden by law to offer checking accounts, commercial banks have a virtual monopoly in this area...
...The differences between the methods can produce dramatic results...
...No area more clearly illustrates the pervasiveness of these two-bit gyps than our dealings with financial institutions-from opening checking accounts to taking out first mortgages...
...A Bank Baedeker The Depression mystique isn’t the only obstacle to effective banking regulation and consumer awareness...
...Even more remarkable in this age of consumer consciousness is how rarely these questions are even raised...
...Paul Dickson is a frequent contributor to The Washington Monthly...
...Recently, though, some banks in Pennsylvania, Virginia, and New York began to offer free checking accounts with no minimum balance...
...Those friendly folks at the local bank may need to hear from Marley’s ghost before they start asking the questions of themselves...
...For the practical lessons of the Pinson study, see the box on “Comparison Shopping...
...While there is merit to this reasoning, it raises difficult questions of whether the depositors or the banks deserve greater consideration when a bank starts having trouble...
...Releasing such information, the agency argues, might precipitate a run and thereby scuttle a bank which otherwise could have been saved...
...bank in 197 1 : Recent developments have made it necessary that we revise our policies for consumer lending...
...But most people outside the banking world still haven’t noticed...
...Some banks provide customers with detailed information on heir interest policies, while otiiers are entirely mum...
...Comparison Shopping at the Bank One bank service clearly worth shopping for is a savings account...
...The American Bankers Associationnot known for self-flagellationadmits there are 54 widely used methods of computing interest...
...For example, there are periods when it is worth more to a bank employee to get you to borrow than to save...
...One recomniendation called for permitting savings and loan associations to offer checking accounts-a move that could hasten the spread of the free checking account...
...According to a 197 1 Federal Reserve survey, 82 per cent of the banks contacted used some form of the short year in calculating interest on loans...
...But in an industry as conservative as banlung, such agressively competitive practices border on heresy...
...Sitting atop this entire structure is a series of federal regulatory agencies which creates complications unique even for the federal government...
...Last year, The Washington Star discovered that Alabama was keeping close to $2 million in a bank in George Wallace’s home town with half the money receiving no interest...
...The Washington Post discliosed that the state of Maryland had placed millions of dollars of public money in non-in terest bearing accounts in various banks -including one headed by a retired state treasurer...
...Similarly, the memories of bank runs persist in the minds of government regulators...
...The average man, mystified by tne overall system of gold crises, dollar devaluations, and floating prime rates, readily admits he is baffled by these monetary dramas, but he doesn’t seem to know, or care, that ne is equally in the dark on the level of his personal financial transactions...
...As a result of the publicity which these shenanigans have received there probably has never been a time in which tne average man was more apt to look with skepticism on the fast-talking sharpy who offers him a “rock-bottom” price on the Brooklyn Bridge...
...Take the interest-free deposits that commercial banks hold for the government in tax and loan accounts-which amount to checking accounts in which the government places its tax money and other receipts...
...Since the government is mute, the average man is left to rely on the banks themselves for information...
...But it’s a long way from free checks to a square deal at the bank...
...On the other Iiand, there are no explicit federal limits on the interest rates the bank can charge when you take out a loan...
...Today bankers will resort to almost any settlement rather than foreclose on a mortgage...
...The study revealed that Citibank’s platform employeesthose who sit at desks rather than stand at windows-are not nearly as omniscient as they seem...
...Regulatory responsibility is shared by the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Company, and the Justice Department...
...The bank down the street or around the corner from where we work is a place we patronize not because it offers the best deal, but because it is the most convenient or has the shortest lines on payday...
...All this strongly suggests that Uncle Sam is a penny-wise and pound-foolish businessman...
...For example, some savings and loan associations in Massachusetts and New Hampshire will pay what is, in effect, interest on checking accounts...
...A number of state-regulated mutual savings banks in Massachusetts and New Hampshire are trying to break the commercial banks’ monopoly on checking accounts by offering a kind of savings account which for all intents and purposes functions as a checking account...
...It can range from accounts compounded daily to ones compounded on a semiannual minimum balance...
...But most bankers still defend the practice by pointing out that the annual interest earned on escrow accounts would be small-a homeowner with a $400 tax bill would get only $5.92 a year if he were paid five per cent, compounded quarterly...
...Jackie M. Pinson, a graduate student at Kansas State University, demonstrated that two accounts paying exactly the same rate of interest can differ as much as 171 per cent in earnings over a six-month period...
...When the average man thinks about the financial soundness of his bank, images of “panics,” “runs,” and “failures” may come to mind, despite the fact that the Federal Deposit Insurance Corporation (FDIC) now insures most personal deposits for up to $20,000...
...For a person who needs only $300, the only answer is a finance company -which often obtains its capital through bank loans-where interest rates sometimes run as high as 36 per cent a year...
...The h s t is the LIFO system (for Last In, First Out), which means that if you take out $100, it is considered for interest purposes to be the last $100 you put in...
...Others pay interest on the entire account, but only if there is a minimum balance of $50 or $100...
...This whole superstructure is shrouded in secrecy: even the General Accounting Office cannot audit the Federal Reserve, and their ability to oversee the Comptroller of the Currency and the FDIC is limited...
...the total might be more like 100 if you count some of the rarer variations...
...Of course, the law does not require the banks to loan this money interest free...
...In late 1971 a presidential commission on “Financial Structure and Regulation,” chaired by retired businessman Reed 0. Hunt, came up with some 90 major recommendations for reshaping the American financial world...
...These memories of another era’s fiscal catastrophes thus tend to blind us to the modern abuses we are far more likely to experience at our local bank...
...But even if the average man prudently requests his friendly banker to explain the provisions of his new a c c o u n t , he may remain unenlightened, according to Citibank, an e x h a u s t i v e examination of New York’s First National City Bank (Ci tibank) recently completed by Ralph Nader’s Center for the Study of Responsive Law...
...It was basically consumer pressure, for example, that turned such sacred cows as no-interest Christmas Clubs into plans which yield capital and interest at Yuletide...
...The 1933 law forbidding interest on checking accounts was clearly devised to help failing banks cut costs...
...Take this letter sent out to all customers of a Washington, D.C...
...Citibank researchers reported excessively harsh collection policies for overdue loans at First National Cityabusive calls to the debtor and his family, complaints to the debtor’s employer, wage garnishment, and the use of what has been termed “sewer service...
...Called NOW accoun ts-for Negotiable Order of Withdrawal-they allow you to pay the plumber or the phone company by writing a withdrawal order on your savings account in lieu of a check:This way you are able to use a savings account like a free checking account while still getting some interest, though rates tend to be lower than those on regular savings accounts...
...this represents some 40 per cent of the banks’ collective assets and amounts to a vast interest-free supply of capital...
...The federal government sets the maximum interest rates that banks can pay on savings...
...In a non-leap year, a 12-month loan comes due in 360 days, while the interest payments are calculated for the whole year...
...We tend to regard bank advertising with the same skepticism we bring to airline commercials-since we know all banks are alike, what do their sales claims matter...
...Oaks from Acorns Department Lingering memories of the Depression have caused bankers, customers, and even lawmakers to defend policies which favor the banks at the expense of individual customers...
...Take the 360-day year custom-interest is charged for each day of the real world’s 365-day calendar, while the customer only gets the use of the money for 360 days...
...Fair Weather Friends The loan department is probably the one part of the bank most of us enter with an active sense of anxiety...
...On the other, he immediately places these tax revenues in non-interest bearing accounts while simultaneously borrowing money to finance the national debt...
...One widespread practice which deserves closer scrutiny-and is beginning to get it-is the requirement that homeowners put money in escrow for payment on the property taxes and insurance on their homes...
...Some banks do provide free checking, but only if you maintain a sizable minimum balance...
...Ironically, in a banking world where gaudy brochures are the rule, pamphlets on savings accounts are as rare as $2 bills...
...And, although there is still rampant inertia in the banking community, free checking is becoming more common, as people ask, “If the Mellon Bank lets its customers check for free, why doesn’t my bank...
...The sheer variety in the kinds of banks existing today is also an impediment...
...Then there are all the other institutions which perform bank-like functions even though they aren’t banks: credit unions, insurance companies, and for that matter, pawn shops...
...First, there are the commercial banks, the savings and loan associations, and the mutual savings banks...
...The average man may not endure a major loss each time he goes to the teller’s window, but a number of little tricks his bank has devised may nickel-and-dime him to death...
...For starters, there is the basic question of what rate of interest we get for our savings and how often that interest is compounded...
...As the Pinson study of bank interest rates showed, the differences between banks can be quite substan tial...
...Today, the tightlipped FDIC is reluctant to disclose to anyone that a bank is having difficulty...
...Last year there was an abortive effort in Congress to outlaw escrow accounts, and attempts are continuing on the state level...
...And, there are more than 50 different ways to compute interest-with tlie variations meaning a considerable difference in our earnings or tlie amount we pay for a loan...
...In effect, this means that the homeowner must pay his taxes to the bank a year in advance, giving the financial institution interest-free use of the money until the taxes are actually due...
...Unlike most commission reports, which are promptly filed under “Forget,” this one has attracted serious attention, and many of its conclusions are being transformed in to legislative proposals...
...Private charities are also giving banks more than their due...
...Recent newspaper stories have indicated that this kind of largesse is not restricted to Uncle Sam...
...The legislation would mandate the disclosure of such essential pieces of information as the time unit for compounding interest, the actual annual percentage rate of interest, and the actual annual percentage yield...
...During the Depression, banks were forced to foreclose when homeowners couldn’t meet mortgage payments...
...There are those banks which pay interest only on the smallest balance held in the account during the entire quarter...
...For those lucky enough not to be au courant with the vocabulary of collection agencies, “sewer service” is the practice whereby a process server purposely neglects to deliver the summons, preventing the debtor from appearing in court and resulting in a default judgment against him...
...As a result, we normally require that new loans be made only to depositors with our bank, and we have also placed a usual minimum of $1,000 on all loans...
...Across the country, commercial banks hold $200 billion in checking-account funds...
...The effect of these suggestions would be to foster greater competition between commercial banks and their rivals-the savings and loan associations, savings banks, and credit unions...
...The niggardliness of banks in this respect is enshrined in aphorisms like, “A banker,is someone who lends you an umbrella when the weather is fair and wants it back as soon as it begins to rain...
...The practice is also being challenged in several law suits...
...On the one hand he harasses the average man with interest charges for paying his taxes a few days late...
...But false or misleading claims in bank advertising are exempt from the scrutiny given advertisements by the Federal Trade Commission...
...Look for the frequency of interest compounding...
...It is remarkable how little most of LIS who are pawns in tlie money game compreliend its rules and rituals...
...Under a model program which Senator Adlai Stevenson I11 established when he was state treasurer of Illinois, the banks have to bid for the state’s accounts...
...All in all, Alabama had $180 million in interest-free accounts...
...And even now, the banking world is bracing for a new specter which might best be called “Beyond Free Checking...
...THE SCREWING OFTHE AVERAGE MAN : How Your Banker Does It by Paul Dickson From Watergate and Equity Funding to tne “Dare to be Great” program of Glenn Turner, the 1970s promise to be an era of bigger and better scandals...
...Rooked and Checkmated One way the average man often suffers for his ignorance is through an i m m e d i a t e loss in his checking account...
...The Nader organization somehow was able to jar loose a series of studies, conducted for the bank by an independent management consultant, which showed that only 40 per cent of the platform employees could explain the costs of different types of checking accounts, and only 35 per cent could unravel the requirements for the bank’s highly touted “Ready Credit” form of instant loan...
...In the absence of such laws, the jumble of bank practices leads the average man in confusing, often costly, directions...
...escrow accounts for mortgages date from the era when houses were auctioned off to pay overdue property taxes...
...But let’s face it, unless you happen to be George McGovern, the holder of paper which was once Equity Funding stock, or one who dared to be great, these scandals probably have affected your faith in America far more than your pocketbook...
...The worst hangover from the Depression days may be the laws regulating banks...
...On any given day, banks across the country are likely to be holding an interestfree $5 billion which they are free to use for short-term ventures like treasury bills or tax-free municipal bonds...
...What regulation does exist comes from federal and state banking agencies...
Vol. 5 • July 1973 • No. 5
