Master Your Card

I read a story online about some of the stupid things people do with money and one of the comments was from someone in the banking industry. He said that he had a client who always came in for a cash-out refinance on his house whenever it appreciated.

According to the banker, the customer took out a home equity line of credit and had a credit card with it. Every two years as the customer’s house appreciated, the guy would come in and refinance the home equity to get a little bit more added on. The bank never asked what he was doing, they just did the loan because he was a long time customer and that was that.

About six years into this cycle, the bank discovered that they were going to have to foreclose on the loan – they owned both the mortgage and the home equity. When collections got a hold of this guy he admitted that he’d been refinancing to keep up appearances in his house. Apparently, he’d gotten a demotion or moved around to where he was making less money and he was trying to keep it from his wife. So, he’d refinance every two years just to buy “stuff” appropriate for what she believed their income level to be.

This guy was up to his eyeballs in credit card debt and he used the home equity credit card just as much as the other credit cards. He told the bank’s collection agency that he’d tried to foreclose, but he’d been denied. The banker posting all of this didn’t go into great detail about why he’d been denied, only that that was the case.

In my opinion, there are two big problems with this. Number one, why would anyone refinance their HOUSE just to keep up appearances? This goes back to that post I wrote about the rich being in debt . Yes, we all get accustomed to certain lifestyles, but going into debt over them is not the answer. Simply readjust to what is appropriate at that time and then work your way back to where you were previously. I just have a hard time understanding the need to buy the latest and greatest expensive toys.

Take the iPhone, for instance. I saw no reason to own one now. It will eventually go down in price and I don’t need to stand in long lines – irritated by screaming kids and pushy people – just to get one. Same goes for most of the Apple products, really, but also new TVs, the PS3, all of those really expensive gadgets that WILL go down in price. Racking up serious credit card debt to own them doesn’t seem practical to me. I just don’t understand it.

But, in the case of this customer from the banker’s perspective, it was a matter of pleasing his wife. Frankly, if he was concerned with pleasing his wife with material possessions, then they’re marital problems ran much deeper. He should have been able to go to his wife in complete faith and explain the situation. If she was overly disturbed by that, then perhaps he was in the wrong relationship. I don’t know, I can’t fairly comment on the nature of their relationship. It just seems to me that he went to a lot of trouble to hide this from his wife, and the situation only escalated the more debt he added. I would think it would have been more prudent to tell her what was going on from the beginning and let the chips fall where they may.

The second issue I have with this is that the bank took no interest in what was going on. When we take home equity applications, we have to ask what the intended purpose of the loan is for governmental reporting purposes. You can use the proceeds for whatever you want, but if the banker had been doing his job, he might have been able to find a better solution for the customer. And that’s where I get frustrated with bankers.

Part of our job in the banking industry is to take care of our clients and their financial needs. The other part is to educate customers. Sometimes customers don’t want the advice, and that’s fine, but we aren’t doing our jobs if we don’t at least offer to help the customer. Now, what I took away from this particular bankers comment was that he never tried having an in-depth conversation with the guy. He did the loan because he knew the guy was good for it, at least, he thought he knew.

In my opinion, I think it had more to do with the fact that this banker was getting a good bonus check on these refi’s. Every bank is different in how they pay out their bankers; however, there is an incentive for business – i.e. opening a new checking account, bringing in new money for savings or CDs, and loans. So, the more a banker brings in, the more they can earn. Certainly we all like to get paid for our work, but that was money undeserved. The banker neglected to do one of his basic job functions – inform the customer.

The fact that the guy was refinancing every two years should have been a red flag, and whether it was or wasn’t, the banker didn’t act. That’s just a breach of due diligence and I’m sure he took some heat for it when the bank had to foreclose. A carefully worded conversation would have revealed that the guy was struggling and that he needed debt counseling, not another loan.

So, in this situation, both the customer and the bank were at fault. The customer should have known better than to try to maintain a lifestyle that he couldn’t afford, but the bank shouldn’t have aided him in the process. It’s frustrating to read stuff like that because then people get the perception that banks are the bad guys. While sometimes there are people in banking who probably shouldn’t be, the majority of us stay with the job to truly help people.

Had it been me, that customer wouldn’t have gotten past his second refi of the loan. Two years is hardly any time to make a dent in the existing loan and then he wants more money? I don’t think so. There’s more going on that meets the eye and we’re going to have a conversation about it, my sales numbers be damned!

Do you think this guys actions were rational? Is their some reason that I’m not understanding for doing what he did? Likewise, do you think the bank should have taken more interest in what was going on?