Banking
Last summer, I wrote about two social lending sites, one for money and one for stuff. Borrowme seems to have gone under, without ever building up any steam. But Prosper seems to still be functioning well, and hasn’t been totally swamped by the mortgage meltdown.
When I wrote about it, I hadn’t put any of my money into Prosper, but I did so in the fall. I’ve now made 36 loans over the course of the past year, all of them for $50. Two of them have already been repaid (ahead of schedule) and two of them are 3+ months late, and barring a miracle, likely to go into default. Netting out the defaults, I’ve made a little more interest than I’d have gotten from the bank, but the difference is probably under $40. So, not a particularly good return on the time spent reading through loan requests. Although there’s a certain fascination with reading people’s stories… I still think the real potential is for loans among people with 2nd and 3rd degree real life connections, but I see little evidence that’s what’s happening.
I’m slowly moving almost all of my real banking into the online world. My main checking account is now at Ebank, which I love because I can take out money from any ATM without a fee. I’m trying to figure out whether I think it’s unethical to keep our savings at Countrywide, which is offering awesome savings rates, presumably because they’re desperate for deposits to keep from sinking under all their bad loans. (Yes, it’s FDIC insured.) But they’ve got a reputation for being particularly unhelpful to borrowers in trouble.
D has been saying that he wants to save his money for a Nintendo DS. I’m not thrilled at the idea of a handheld game system, but if he has the willpower to save that kind of money on a $1 a week allowance, we’re going to allow it. I’m trying to convince him to open an account at a nearby bank that offers generous rates on kids’ accounts, but he likes having the piles of coins to play with and count. We need to figure out if they offer safe deposit boxes — if so, we’re going to say goodbye and good riddance to SunTrust.
I was at a conference last week on accounts, assets and access. It was a real eye-opener for me. Call me naive, but I hadn’t realized how much money banks were making off of poor people on overdraft and late fees. Now that it’s been pointed out, it seems obvious — the dollar amounts that low-income people borrow are typically so low that even high interest rates don’t amount to much in dollar terms. The killers are the fees.
Here’s an example of a card advertised as available to people with bad credit. Not bad interest — only 9.9% APR. But check out the fees — $29 set up fee, $95 one-time fee, $48 annual fee, $7 monthly fee. And if you’re in this situation, you probably don’t have this cash on hand, so all of these fees are charged to the card when you get it. So if you get the minimum possible credit limit of $250, your card will come to you with a balance of $179 and available credit of $71. Oh, and they charge $11 for each autodraft (which actually costs them less to process than a check) and $25 each time they raise your credit limit.
Compared to that, a payday loan with a 100% interest rate doesn’t sound like such a bad deal.
October 23rd, 2007 at 8:05 am
Those rates and fees just make my heart hurt.
But here’s what I don’t understand. There looks to be a good opportunity for profit, or non-profit accumulation for other community purposes, in lending to low-income people. I know that this has been attempted in various places — community banks engaged in non-predatory lending to local, low-income people and start-up businesses. Given the space I detect here (between those exorbitant fees and fines, and a “typical” banking set-up), why aren’t more people/organizations able to provide those services?
I guess I’m wondering what barriers to entry there are, that have prevented less predatory lenders from swooping in, to steal these lenders’ business away from them. Because unless there are barriers to entry, we’re forced to believe that those fees and fines are the rational cost of doing business with this customer base, and I simply refuse to accept that.
October 23rd, 2007 at 8:10 am
Oh, I can’t quite comment on CountryWide, because our checking account is at the icky SunTrust (they bought up our local bank — local banks seem to have a 3year shelf life these days, or so has been our experience as married people), our savings accounts are with Fidelity (yeah, I guess that cash/money-market account is uninsured — not entirely smart, but not that risky either, at least I hope not) and our mortgage was bought by CountryWide one month after the original loan was issued. And I don’t know what rates they’re offering for savings. But I feel pretty icky about CountryWide having my mortgage business. We’ve been shredding “refinance your loan!” pleas from CountryWide for months now, and they drip with deceptive language and bogus claims.
October 23rd, 2007 at 11:07 am
Countrywide has been the third or fourth company to buy out our mortgage. We get endless phone calls and letters trying to get us to refinance to the subprime mortgage. These people are relentless and stupid. After all the bad press they have received and the abundant tragic stories of foreclosure due to subprime loans, do they really think I would switch? We have a low-rate fixed mortgage and are holding onto to it. I worry about this company since they are understaffed, have blatantly sneaky tactics and are untrustworthy. I just hope they don’t lobby to be able to switch loans over without borrower approval. I think it should be illegal to buy out loans.
October 23rd, 2007 at 2:49 pm
Countrywide bought out our mortgage recently, and because I’d read so many bad things about their practices, I pored over all the paperwork from them with a fine-tooth comb. Surprise, surprise, they had miscalculated our property taxes by $5000 a year, and so were raising our payments to cover the “escrow shortfall.” We make two annual payments — summer taxes are around $6000, winter taxes are around $1000. They had both set as $6000. Note they didn’t have both set at $1000….
Since then, I’ve read about them raising mortgages for flood insurance that was exhorbitant and unnecessary. I don’t trust them as far as I can throw the house. We too have a low fixed-rate mortgage and I’m keeping an eye on any paperwork that comes through. I’ll just bet they’d be the types to find any possible “your silence is assent” loophole for any fees or changes.
October 23rd, 2007 at 3:49 pm
What’s the relationship here between bad math education — or even a fear of math — and poverty? Not being able to comfortably run the numbers on a lot of this stuff really puts you at a serious disadvantage. We’re talking here about banking, but when I think of the debt load many young people take on, in no small part because they’re never really doing their math …
The other possibility to me is that this is suffering under the shroud of silence we Americans draw over all things financial. I have girlfriends I have known for years — decades even. I know the first time they slept with their husbands, how their relationships with their mothers are perfect/strained/otherwise, on and on it goes. The one thing I do not know about any of these people, and if I think about it the one thing I don’t even know about my own sister or my parents, is how much money they make. It is never discussed.
My parents did teach me the importance of a good credit rating, but they have never been involved in any of my own personal business dealings (such as buying our first home). We asked people to come look at the house and tell us if the foundation was solid. But we never asked anyone else in the family to help us with the paperwork.
October 23rd, 2007 at 9:21 pm
Jen, The problem with “the folks using these banks just don’t understand the math” is that banks are relentless in pursuit of new customers. The big ones keep buying up the small ones, and they’re chasing each other’s tails. Meanwhile, it’s a documented fact that low-income, especially urban African-American, borrowers and savers cannot get decent bank services to save their lives. (Literally, when you consider the health-insurance crisis in this country.) But WHY? There should be SOME bank willing to serve people with poor credit, without using predatory fees and other forms of usury. There’s a perfect niche for making money.
We also have a low-rate fixed mortgage and all our paperwork keeps trying to get us to switch to “super low! cash in your equity!” loans that turn out to be 2-year ARMs. To which I can only say, WTF?! Do I LOOK like an idiot?!
This seems genuinely disgusting to me. That the mortgage was sold to these people fills me with dismay.
(Oh, and WellsFargo paid interest on our escrow account, but CountryWide? No go. Of course, we’re welcome to take over insurance and property tax deposits ourselves if we care that much about the interest, they say….If only I trusted myself a tiny bit more to leave that money alone.)
October 24th, 2007 at 12:56 pm
Comments on Countrywide — First of all, my home loan is with Countrywide. I knew the loan officer from a previous company and stayed with him. He suggested I look at an ARM, but I preferred fixed products. Here’s the deal though. I spent hours pouring over different scenerios and concluded a fixed product was best for our family. I read through the fine print. A house is the biggest investment most people make in their lives and I believe as individuals we have the responsibility to treat it is as such and quit blaming others because we didn’t take the time to “count the costs”. Countrywide is a bank and their job is to make money. It isn’t their job to twist your arm (ohh! an unintended pun) and put you in a room with the fine print for 48-hours.
Kudos on teaching your children wait-training and having to spend the time saving up for things they wants.
As far as providing services to low-income earners, for all of you thinking banks are getting it wrong, provide your own solution, with greatly reduced fees and see how profitable you are able to be. I don’t know if banks have it wrong and at this point in my life, I’m not willing to take the risk to find out.
October 25th, 2007 at 6:07 pm
I think the reason that nobody has stepped in to provide lower cost loans is that the admin costs are very real. Those banks are probably charging $ fees that are about what it costs to service those customers. It seems extortionate, but the per customer cost of having a branch open, sending a monthly statement, having people available to answer questions etc etc adds up.
So if someone can find a slick, low cost way of servicing those customers, they will make a lot of money. But slick, no cost servicing (e.g. over the internet) is often easier to provide to high value customers, because they have better access to the infrastructure required.
November 23rd, 2007 at 1:53 pm
This site is absolutely for YOU, Elizabeth…
http://www.predatorylendingassociation.com/