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One of the recent credit offers that has been sent to me from my efforts at I Buy Junk Mail contained this flyer below.It made me wonder where the line was between clever loan marketing and an out and out bribe to take out a loan?Is a cash bonus the same as paying someone to take out a loan?Cash out from a loan has been around for a long time but this advertisement seems to present it in a different way.What is your reaction to this flyer?Click on image below for bigger image.

In Washington, lawmakers are scrambling to find a solution to the subprime mortgage crisis. One plan under consideration would freeze interest rates on some borrower’s variable-rate loans. Another proposal involves raising the dollar limitations on mortgages the Federal Housing Administration can legally insure. And there are some who think the U.S. Government should establish a federal agency to refinance troubled loans at lower interest rates. But in the rush to find a remedy, one action is noticeably missing: where are the indictments, legal or editorial, for the people responsible for creating this mess?

I remember when Freddie Mac first began securitizing residential mortgages in the 1980s. Banks, including the one where I worked at the time, discovered a financial windfall. We were able to rid our balance sheets of fixed-rate mortgages, enjoy an immediate boost in revenue, and earn ongoing fees for servicing the loans. But once the income stream started, there was no turning back.

Financial institutions started relying on securitization revenue to meet their quarterly earnings forecasts. Hungry for mortgages to securitize, banks got lax in their lending practices; as a result, commission-based loan originators approved nearly every homebuyer’s application. Mortgage-backed bond issuers, who buy loans from banks, also relaxed their standards; instead of demanding an 80/20 loan-to-equity ratio for mortgages they bought, they gradually lowered the required equity amount from 20 percent of the home’s value to no equity at all. The flow of easy mortgage money led to inflated home prices and, fortunately for banks, higher mortgage amounts. In short, mortgage securitization turned many bankers into predatory lenders.

To be sure, the subprime mortgage meltdown has cost high-ranking officials at companies such as Bear Stearns, Merrill Lynch, and Citigroup their jobs, but there have been few criminal charges filed. However, the attorneys general of California and Illinois are investigating Countrywide Financial, which recently announced that it would lay off 12,000 workers, for dubious lending practices. Hopefully, more probes will follow.

Some will argue that borrowers are responsible for getting themselves in over their heads. But many lenders lured people into loans they couldn’t afford. And for that, they should face criminal prosecution.

A reader asks:

“What if any makes the difference between SIVs and Enron?” 

What do you think? Aren’t both approaches both simply to hide the true condition of the underlying accounts?

Today I was activating a replacement credit card and as I sat on hold I listened to the banks recorded sales pitch for credit insurance or payment protection insurance, it made me wonder. And then I heard it and then it hit me.

An argument that I made recently was that shouldn’t banking contracts contain some leniency for consumer repayment problems instead of trying to hold consumers to the letter of the contract when they are having financial problems, and yes I do understand the concept of give them an inch and they’ll take a mile.

But what strikes me today is that the biggest problem that I run into dealing with the front line of banks is persuading them to take payments and to get repaid rather than just continue to force the delinquent debtor towards bankruptcy.

On the front end of the consumer relationship is a marketing message which encourages the customer to come on board with near abandon and impulsivity but at the back end of the relationship, in collections it certainly feels like a take no prisoner attitude. Truly a good cop, bad cop scenario.

So if creditors want credit agreements to be absolute and without flexibility then why do most banks around the world today sell credit insurance with the marketing message of “We all know life is unpredictable”.  Isn’t this recognition that the lives and circumstances of the customer are not absolute and may be in adjustment of flux?

My question is, in light of this agreed unpredictability of life, what do you think the banks ethical responsibility is to their customer when they fall on hard times? Is it to hold them to the contract or to be individual flexible to the individual customer circumstances and allow the debtor to repay what they can afford without driving them towards bankruptcy?

My background in medicine taught me at an early age that the ethics of medicine are to do no harm to the patient and put the patient’s needs first. If medicine was only about the rate of financial return then more patients would be put through unnecessary tests to generate income or given medicines that provided financial incentive to the doctor. We view those situations as wrong and unethical.

I’d love to hear your feedback on how different professions can have different ethical norms or should banking be like medicine and place the best care and treatment of the customer as a cornerstone in ethical banking?

Here are the principal of medical ethics and do they seem to vary from what we consider to be the principals of banking ethics?

Principles of medical ethics

I. A physician shall be dedicated to providing competent medical care, with compassion and respect for human dignity and rights.

II. A physician shall uphold the standards of professionalism, be honest in all professional interactions, and strive to report physicians deficient in character or competence, or engaging in fraud or deception, to appropriate entities.

III. A physician shall respect the law and also recognize a responsibility to seek changes in those requirements which are contrary to the best interests of the patient.

IV. A physician shall respect the rights of patients, colleagues, and other health professionals, and shall safeguard patient confidences and privacy within the constraints of the law.

V. A physician shall continue to study, apply, and advance scientific knowledge, maintain a commitment to medical education, make relevant information available to patients, colleagues, and the public, obtain consultation, and use the talents of other health professionals when indicated.

VI. A physician shall, in the provision of appropriate patient care, except in emergencies, be free to choose whom to serve, with whom to associate, and the environment in which to provide medical care.

VII. A physician shall recognize a responsibility to participate in activities contributing to the improvement of the community and the betterment of public health.

VIII. A physician shall, while caring for a patient, regard responsibility to the patient as paramount.

IX. A physician shall support access to medical care for all people.

If the business of banking today is ethical in profit performance only and banking has become solely focused on the return and does not care to develop more personal relationship as a trusted financial adviser and someone who can be a bit flexible in difficult times, why should the consumer not become numb to their responsibility of repaying bank debt and look at it simply on the numbers and find greater value in discharging their debt rather than repay a friend?

Ethics are “ the rules of conduct recognised in respect to a particular class of human actions or a particular group, culture etc”.

Prior to joining Myvesta UK I spent over 30 years working for major high street creditors.
In my early days banking was very parochial with the focus on providing a community service. The local bank manager acted as judge and jury when dealing with anything to do with lending money. He (in those days it was virtually unheard off to have a lady manager) would personally interview anyone wanting to borrow money and assess the application.

Not only did he look at the borrowers finances, he would look at the person who wanted to borrow the money and he would also take into account the family background. If you had borrowed money and then ran into difficulty in repaying he was the one who wanted to know why but he would take the time to see if things could be put right. Consequently going to see your bank manager was a daunting experience. 

The banks have always made profits but back in those halcyon days the demands of the shareholders was only a minor voice. The banks paid more attention to stability and ensuring it had the right image. There was a code of ethics in place but it was not published, it was just an understanding that the bank served the local community; it took into account local influences and on a national level shareholders did not make demands. To me, as a northern lad, ethics was just a county down south somewhere. 

From the early 1970’s things began to change. First it was the introduction of credit cards, so banks lost their monopoly on lending, the banks and building societies began to fight for each others business and then the banks moved from being happy with having influence in the in the local community to influencing things on a national then an international level. Not surprisingly as the banks became global organisations and shares traded on stock markets worldwide, 24 hours a day, things such as mission statements and codes of ethics began to appear so that anyone, anywhere, could see in a single paragraph what the organisation stood for.

Given that the UK is now dominated by large global credit organisations such as Hong Kong and Shangai Banking Corporation (HSBC), Abbey – who are part of the Santandar group and Bank of America (owners of MBNA) and other creditors such as Barclays and Lloyds TSB are now global companies, then their global status means that they have to adopt an ethic of wanting increased profitability year on year, otherwise they would come under pressure from their larger shareholders. These shareholders are not concerned about the financial problems the man in the street has, he is just a statistic show in the balance sheet bad debt write off. Creditors do like to be known for adopting ethics which help those who fall into financial difficulty. Since 2000 they raised concerns with the Office of Fair Trading (OFT) that some of the debt management companies were taking advantage of those who needed help. As a result they were closely involved with the OFT in drawing up a code of conduct that the Debt Management Companies (DMCs) and creditors should follow. The DMCs embraced them wholeheartedly as it gave them credence for what they do but it is a shame that a large number of creditors still to this day continue to ignore their responsibilities under the code. The same can also be said of they way creditors publicise their eagerness to subscribe to the Banking Code of Conduct, in particular section 14 which covers those in financial difficulties. How can the likes of HSBC and Northern Rock openly say they adhere to the code, yet they deny the right of the debtor to a debt solution such as an IVA. Worse still this is done via a blanket approach so they even look at the individuals circumstances.

It will always be difficult to get the lenders and the borrowers to agree to a set of ethics that they both subscribe to. Whist I have had a go at the creditor in fairness they do have a difficult time with fraud and people deliberately taking credit when they cannot afford it. Also we need to be realistic, those halcyon days will not come back. However what they can do is practice what they preach and follow the codes. Also relax some of the pressure on their staff.  The people that work in the branches, regional offices etc do have their own moral ethics and I am sure they would welcome the opportunity to be allowed to do what they feel happy doing. Serving their customers and finding the best solution for them. Sadly they have strict guidelines and sales targets to achieve otherwise the face disciplinary action and loss of income.

So, after 30 years I now know that “ethics” is not near London. The vast majority of creditors workforce has ethics and they should be allowed the time and the support to use them. What we do not need it such prominence being put on profit before everything else. After all, if a creditor does hold the hand of someone having financial problems and nurses them back to health, they are still a customer and may very well be fit enough to borrow again in the future. So it’s a double whammy…creditor saves a bad debt write off and customer is still a customer.

I have often contemplated the reason why large commercial financial organisations seem to treat customers suffering from debt problems with apparent contempt.

Taking all of the emotion out of the argument it just seems to me that banks are missing a great commercial opportunity to be seen as ‘the good guys’ for a change if they were to implement responsible and compassionate debtor friendly collection policies.

Banks spend millions each year on attracting new customers. By working with those relatively small numbers of clients that fall into financial difficulties a ’smart’ bank could pull a major PR coup by having a demonstrably caring policy of going out of their way to help and retain such customers in their time of need.

I once thought that the UK Co-Operative Bank may choose to live up to their ‘ethical bank’ slogan and implement such a strategy. This has never materialized however and their claim to be more ‘ethical’ than their competitors certainly does not seem to extend to their policy of working with indebted clients as they are no different than the larger banks in reality.

I would be very interested to read the views of other readers as to why they believe that banks seem to uniformly treat people with debt problems as second rate citizens.

Erik asks us the following question for our opinion on this situation.

Is it ethical for Banks to let your checking account go negative in order to charge and profit from NSF fees?  

From a purely business standpoint I see why this is such a profit center.  A good percentage of people get into a financial bind from time to time. Unforeseen auto repairs, medical expenses, etc… but, the extent in which the banks charge these fees can make it almost impossible to recover from a financial issue.  

For instance I had an emergency medical issue which tapped my checking account.  The payment was posted to my account immediately putting me a few dollars negative.  in the next few days charges made previous to the incident began to post.  Things like a cup of coffee at starbucks, dry cleaning, etc. Small charges.  

Yet I incurred a $31 NSF fee for everyone costing me an additional $310 dollars on top of the negative balance.  $310 dollars for charges totaling less that $50 dollars?  This kick them while there down philosophy  in my opinion is unethical.  What are your feelings on this issue? Are there alternatives to traditional banking?

A recent statement from a claimed Northern Rock debt management department employee raises new evidence and concerns about the banking policies of Northern Rock and their flagrant and abusive disregard for consumers with repayment problems.

In the past I have written about the blanket IVA refusals by Northern Rock and how a solicitor is pursuing those cases. How the refusal by Northern Rock to treat their debtors either sympathetically, fairly or individually is a violation of the Banking Code and how under Office of Fair Trading guidelines that creditors are not permitted to contact the consumer once they have been notified that they are being represented by a third-party, in this case, an Insolvency Practitioner.

Chris, the alleged employee stated the following in response to a recent article:

“As an employee in the Debt Management department of Northern Rock, I can assure you that the last thing we wish to do is force customers into bankruptcy.

We reject IVA’s out of hand, [VIOLATION] but this is to protect our interest. And why shouldn’t we? We lend someone money - they agree to pay x amount per month. Simple as. Now if a customer contacts us to advise they are having some difficulty repaying their loan/mortgage then we will do what we can to help them.

However, the majority of times the first we hear of any difficulty is from an Insolvency Practitioner.

We still try to contact the customer [VIOLATION] to come to an agreement to repay their loan - even offering lower than average interest rates.”

(Yes, I added the [VIOLATION] marks to show you the important sections.)

And Therein Lies The Problem

If a Northern Rock debt management employee feels this strongly about a position which is clearly wrong then certainly this reflects either a purposeful disregard for compliance with the British Bankers Association and the Office of Fair Trading or this is a reflection of complete disregard for the rules and a failure in staff training.

The issue here is that under specific, clear and written directives by the Banking Code, to which Northern Rock subscribes to honor and according to the OFT Debt Collection Guidelines that Northern Rock must honor they simply are not honoring either.

These issues have left me wondering about the greater issues of banking ethics and business ethics and I’m eager to have an open, frank and honest dialog about these issues at the site I created, The Ethical Banker.

There is no doubt that Northern Rock appears to be in clear violation of the policies, codes and guidelines mentioned above but isn’t the mark of a good bank not if they make mistakes, but how they remedy them?  In this case it appears that more than a memo is needed to help change the culture inside the banks collection department to reflect good business ethics and not good self-serving profit making ethics.

Shouldn’t banks be offering a product with fairness rather than a GOTCHA product where once you sign on the line you are held to absolutes? How can a bank hold consumers to an absolute in an non-absolute world? Does signing on the line for a financial product move the banks interests ahead of all others in the case of a situational life change?

If a bank determines that a consumer is a good risk as long as he has his current level of employment but loses that employment through no fault of his own has the agreement been modified and shouldn’t consideration be granted to incorporate the debtors new circumstances? And before you start flaming me on this, aren’t these just the risks that are inherent in extending forward promises or repayment in an imperfect and uncertain world?

Northern Rock Ethical Considerations

I’m wondering if we as a society consider it to be ethical for a bank to extend sub-prime or relaxed loans to consumers but not to extend the same degree of laxness or flexibility on the back end if a consumer gets into financial troubles or is that entrapment?

If a bank knows they are not in compliance with a code or regulation but continues to operate in non-compliance surely that must be against the banks ethics or is it if compliance would impact profitability?

Are banking ethics based on profit or the fair treatment of banking customers in good times and in bad?