A Clear and Present Danger: A Californian Finds Gaps in Consumer Communication from Financial Institutions

Going to EDIE certainly isn’t enough for the FDIC. “In the event of a sale or takeover,” says David Barr, Assistant Director of the FDIC’s Office of Public Affairs, FDIC, “it takes us, the FDIC, hours of interviews with the customer to make sure they are insured or uninsured.” It requires knowing whether an account is owned by a single person or more than one, and whether the depositor has one or multiple accounts at the same institution and how these are set up. In other words, there are complex issues such as fluctuating balances and detailed records regarding tax ID’s, account structures and ownership that tell the whole tale.

Plus, there are other reasons a visit to the FDIC’s EDIE site just won’t do. First of all, the EDIE calculator requires that you, the consumer, understand the FDIC’s definitions of basic terms, particularly “single – no beneficiary” versus “joint – no beneficiaries”, which as many IndyMac depositors who lost thousands of dollars found out to their chagrin, is not always a clear enough indication of where you really stand. Then, you will most likely need to locate and pull together a bunch of documentation that your bank already has, but you do not (just check your statement and see if you can find beneficiaries listed), and integrate a wide range of disparate facts that are interspersed throughout the FDIC website, and not linked to the page where you are doing your calculations. (Example: When WAMU customers who are now JP Morgan Chase customers calculate their coverage, this needed advice is not linked to their calculation results but presented elsewhere on the site: “Your transferred deposits will be separately insured from any accounts you may already have at JPMorgan Chase Bank for six months after the sale of Washington Mutual Bank.”)

And finally, no matter how many calculations you do on “EDIE,” the results page simply never contains this clear and conspicuous warning: “The raised $250,000 limit will revert to $100,000 effective January 1, 2010”. “The lesson to be learned here,” warns Stephen Happel, Associate Dean and Professor in the College of Business at Arizona State University, “is even now not to have any [non-ira] account more than $100,000 and even then, you must be careful because if they have the same taxpayer ID, you could still be at risk.”

So how this can be? What is the real reason your bank or mutual fund isn’t providing you with all the information you need? “Institutions don’t want to spend the money and time required to give you all of this information because it is time consuming and costly,” says Happel who, along with others, is extremely troubled by today’s banking practices. “Plus, there are issues of liability which can be avoided if the consumer is told to get the information himself and is directed to an official website which is more standardized, convoluted and not particularly consumer-friendly.” Not to mention, that if you knew you were over, you might well put some of your money elsewhere.

Actually, this still is only a part of the story since there are many other factors that affect what happens to consumers. These include how disclosures are required to be made based on the Truth in Lending Act (1968) (4), and Truth in Savings Act (1991) (5), and also how some banks are “saved” based on the “Too Big To Fail” (6) doctrine established in 1984. Did you know that as a depositor, if you do business with a larger bank which is deemed “too big to fail” for the good of the country, or even the world, you are more likely to be made dollar good – no matter how large your accounts are, while at a smaller bank, if your balances are over insured limits, you and your institution might not receive the same consideration? (This is why the doctrine is called “moral hazard” and might explain why IndyMac Bank, with 282,000 depositors, was not made dollar good while WaMu’s depositors were.)

And then there is the matter of an “alert”, that a bank could well provide you, in writing, electronically, or by phone. Well, here, the FDIC says that it’s too complicated, too “difficult and expensive to require banks to provide a consumer alert via written notice or email that covers every situation because there are “so many different rules, circumstances and scenarios” (7). But rest assured, not everyone agrees. In fact, a consumer alert is just what Suze Orman, consumer finance advocate extraordinaire, strongly proposed last August, that is, before she became the FDIC’s poster girl, relieving banks of any obligation to inform and pushing depositors to visit EDIE (8), and it is certainly something almost every bank can do.

To be sure, banks that account for over 95% of the credit cards in the country, if not all, use “complex programming and sophisticated algorithms on a regular basis and in real time and constantly collect information about your transactions,” says Ben Woolsey, Director of Marketing at creditcard.com, a site which aggregates and compares credit card information. “Banks monitor consumers constantly and take full advantage of the Internet, computer technology, and mobile communications. They know exactly what you are spending, when and where. If you overspend or trigger a suspicion of credit card misuse or fraud, the bank – and probably you – are alerted immediately, so the bank can contain its losses. Plus, banks are regularly pulling your credit reports, repricing your credit card with a 15 day written notice if your credit score has fallen, and sharing this data with sister companies and subsidiaries to market new products to you. It is not information in a vacuum.”

Moreover, banks also use this constantly updated data for reporting purposes, as the law requires. When there is a regulatory examination, or an institution is taken over or determined to require sale, the institution is required by statute to provide precise information regarding depositor accounts and whether these fall within insurance coverage limits. This data is generally made available to the FDIC prior to the bank’s closing, which is generally on a Friday, with no advance notice given to depositors, and then verified immediately over the weekend. So, if institutions have the data, what about providing you with information on all of your deposit accounts at one institution? Is it really that difficult?

Absolutely not. “This is totally ridiculous, and there is no problem about doing this at all" says Stacy Mecklenberg, a software engineer based in the Bay Area, who, along with thousands of banking information technology professionals has written many extensive financial applications over the last 25 years. "Compared to other applications that financial institutions are constantly producing, if this flag and data doesn’t already exist, which I'm sure it does, this requirement is relatively simple and easy to design, implement and deploy. It could easily be done in less than a month."

Therefore savvy customers, fed up depositors, and pro-consumer watchdogs are becoming a lot more vigilant, not to mention wary and vocal, because it is clear that what is coming out of Congress and regulatory agencies may well be protecting your bank and bank lobbyists far better than it is protecting you. In its release to banks dated October 3, 2008, (9) the FDIC “suggested” that banks “may” and “should” post notices in their branches to advise consumers of the lift and reversion of limits, but once again, how a bank implements this suggestion is left up to them. “I have seen that in this environment, banks want to keep your money without protecting you as well as this particular economic environment requires,” says Muriel L. Beach, president of the New York Statewide Senior Action Council, New York City Chapter, “They simply don’t give you full information particularly in view of the fact that the guarantee is only until 12-31-2009, and often you are renewing a CD beyond that period. I feel that the way banks are doing this is deceptive, particularly for seniors because they let seniors renew a CD for a period beyond the December 31, 2009 guarantee and don’t point out at all at the time you are taking out or renewing a CD that the coverage is not in effect on January 1, 2010. You have no idea about the number of people I have made aware of this who don’t know and almost don’t believe me when I mention it to them specifically, not to mention that it is entirely inappropriate to tell a senior, who may not have a computer, to get the information on line.”

Finally, if you are wondering what loopholes exist in online information, when you go to an organization’s website, once again, the onus is again on you – and not the institution. At most bank websites, the information regarding the temporary lift and reversion in FDIC insurance is “somewhere” on their website, maybe in a footnote or among the institution’s press releases, but definitely not in a “clear and conspicuous” location alongside your new CD application. Even at the country’s biggest institutions, such as Bank of America, which declined to be interviewed for this article, there is an absolute myriad of sophisticated online banking choices, but again, the choice to inform you if your insured deposits go “over” doesn’t exist, and your most critically needed information is “buried” where you won’t easily find it – unless you know both where to look and what to ask for. In fact, if you don’t bring up the issues of FDIC insurance lifts, reversions, dates, and penalties if you draw down your account to the reverted insured amounts when January 1, 2010 comes around, they won’t either. Moreover, not every site is updated. Even at the IndyMac Federal Bank site, now run by the FDIC itself, the latest rules and regulations and even the CD Application agreement still reflect old restrictions and limits of $100,000 – even in November. (10)

TIP:

If the latest information from the FDIC and US Treasury isn’t prominently placed on your institution’s main page, first search the site’s footnotes and press releases. If there still isn’t anything, the site might still say “FDIC insured” or “FDIC insured to the maximum allowed by law”, and some at least include a hyperlink to both the FDIC and US Treasury websites. This is about average.

If you still can’t find anything or want to find the information more easily, try “googling” this search string at www.google.com:

(Search String: nameofbank.com +FDIC +December 31, 2009).
(Citibank FDIC “December 31, 2009”)

If the site contains information regarding the reversion of the temporary lift to its former $100,000 limit, this is where you’ll find it.

Try this again for the US Treasury information regarding your institution’s participation in the ‘break the buck” program which is set to end on December 18, 2008, unless the Treasury renews it for another nine months.
(Search String: www.mymutualfund.com “U.S. Treasury” “September 19, 2008”) [the date the program was started].
Example: (fidelity.com “U.S. Treasury” “September 19, 2008”)

Who Does It Right?

Fidelity Investments at www.fidelity.com, is a great example of how to do it mostly right, but this is really the exception where right at the “landing” or “home” page, you see all the most pertinent US Treasury information regarding the “break the buck” guarantee, complete with all of the right details. (11) All of the FDIC information is again right where you need it, on the CD information page. (12)

Comparison Shopping Sites:

Do these do any better? The answer is “no”.

If your source of information is a site like www.bankrate.com, be aware that since bankrate.com is not created by a regulated institution, there is no disclosure requirement period. “Bankrate.com is a separate and private organization that compiles the information from various sources as facilitation,” confirms the FDIC’s Jim Devaney. In other words, it is not regulated by the FDIC at all.

So where does this leave the average consumer? Is there any pre-emptive course of action?

First of all, the basic imperative for consumers is not to take any one source of information as “correct”. When you’re watching your assets and need to make decisions, read up, and get at least three opinions from knowledgeable people, including your accountant and/or financial advisor before you make any decision, and don’t let your money just sit there. Check out the documentation and move your funds so your accounts are always in compliance with changing FDIC and credit union limits on the bank side, and the US Treasury’s “break the buck” guarantee on the participating money fund side.

Next, go into your bank and call your mutual fund with a complete list of questions and request that notices be clearly and conspicuously provided on their sites and in writing, and not hidden in a fund’s footnotes or posted under your elbow at a teller station, gray type on gray paper. And last, but not least, make some noise. Tell the FDIC, US Treasury and Congress’s financial leaders including Senators Christopher Dodd and Chuck Schumer, as well as Speaker of the House Nancy Pelosi and Representatives Barney Frank and Henry Waxman that they, and the agencies reporting to Congress, are fully accountable for administering programs fairly and transparently. While they have been busy bailing out institutions, too many depositors have not been treated equally or received any acknowledgement at all that they are being heard. Some have suffered tremendous losses while others have been kept “whole”, leaving the institution with a substantial bailout and the depositor with perhaps many more losses to come.

Fran Quittel is a technology recruiter and business journalist based in Emeryville, CA. She also sponsors the site www.fdicbusinessalert.com and has actively pursued the implementation of policies that require institutions to provide clear and transparent alerts to depositors regarding their FDIC insurance coverage status.

Footnotes:

1. The new FDIC rules: coverage for personal accounts under one tax ID per institution to $250,000 until 12-31-2009, when the limit reverts to $100,000, and to insure non-interest bearing business accounts. For details, visit www.fdic.gov and also http://www.nytimes.com/2008/10/02/business/02deposit.html?_r=1&scp=9&sq=FDIC&st=nyt

2. http://www.ustreas.gov/press/releases/hp1163.htm

3. For broad-brush basics on the TARP program, visit http://en.wikipedia.org/wiki/Troubled_Assets_Relief_Program

4. http://en.wikipedia.org/wiki/Truth_in_Lending_Act

5. http://en.wikipedia.org/wiki/Truth_in_Savings_act

6. http://en.wikipedia.org/wiki/Too_Big_to_Fail_policy

7. David Barr, Assistant Director, FDIC Office of Public Affairs

8. http://fortmyers.floridaweekly.com/news/2008/0827/suze_orman/, August 27, 2008

“I’d love to see a system,” she said then, “where the minute you deposit money that exceeds your insurance coverage, you're given a clear notice that informs you that not all your money is insured. The point isn't to tell someone not to do something, but merely to clearly inform them of their risk. Something along the lines of:

"Your recent deposit of $150,000 is not fully insured by the FDIC. In the very unlikely event that this bank runs into financial trouble, only $100,000 of your money would be eligible for full payment through the FDIC program. The remaining $50,000 may be subject to less than full coverage." It's the sort of disclosure that actually helps risk-averse investors stay out of trouble, and the most disturbing part of the IndyMac story is that the people who are going to lose money are in fact the most risk-averse. Why else would they have so much money sitting in the bank?

Along the same lines, while the FDIC’s EDIE forces depositors to visit the calculator to find results on their own, on October 12, 2008, visiting CNBC, FDIC chair Sheila Bair herself came out strongly in favor of credit card companies sending immediate alerts to parents of college age children who had exceeded their credit card limits.

9. http://www.fdic.gov/news/news/financial/2008/fil08102.html

10. As of 11-14-2008

11. www.fidelity.com, Fidelity participates in Treasury Money Market Fund Guarantee Program

It was not however included on each covered money fund product description webpage, which would have them a solid 100%.

12. Certificates of Deposit (CDs) http://personal.fidelity.com/products/incomesolutions/content/cds.shtml.cvsr