Bank of America: Biting the hand that feeds you
By Ed Morrow
Intl. Assoc. of Registered Financial Consultants
The largest bank in the U.S. now ranks near the bottom (6,128 out of 6,800) of U.S. banks lending to small businesses.
Once upon a time there was an Italian immigrant named Amadeo Giannini, whose name might make you think he was an opera star. His father was shot trying to collect a $10 debt, but Amadeo believed in the principles of ethical lending. In 1904, he founded a bank in San Francisco catering to his fellow immigrants, called the Bank of Italy.
When the earthquake shook the city in 1906, destroying many commercial buildings, he scavenged all of the deposits in his bank and started lending money for the rebuilding. Operating from a few planks spread over two barrels, he made loans to any business owner who was willing to rebuild.
Years later, he took great pride that despite the slow re-building of the city and subsequent upheavals in the economy, all of those loans were repaid. He believed in the business owners, and they returned that respect by faultless debt repayment.
In 1928, he merged his Bank of Italy with other institutions, consolidated with additional holdings and renamed it the Bank of America. He expanded into insurance, founding Transamerica, but the federal government forced the separation of the entities under the Clayton Antitrust Act. The government struck again by forcing Amadeo to divest his holdings outside of California, which became a major part of Wells Fargo.
The institution, built on the extension of credit to business owners and farmers, continued to acquire other banks to increase capacity, and the list of affiliated institutions is staggering. In 1958, the firm instituted the BankAmericard, which changed its name to Visa. In 1998, the bank merged into NationsBank, and the name Bank of America survived.
Probably no lender in the U.S. has been more closely identified with extending credit to energetic business owners. The bank and its customers prosper, supporting one another in a symbiosis of credit extended for expansion and reliable repayment achieved through growth.
Since then, the institution acquired Countrywide for $4.1 billion and has become the leading mortgage originator and servicer, controlling 20 percent to 25 percent of the home loan market. Following that, it acquired the failing Merrill Lynch and became a target of the regulators for the huge bonuses paid to Merrill reps and executives.
In 2008 and 2009, Bank of America accepted $45 billion from the federal bailout program known as TARP, plus another $5 billion channeled through AIG. It has repaid TARP and is now embroiled in a $10 billion lawsuit with AIG and $57 billion lawsuit for mortgage-backed securities sold to Fannie Mae and Freddie Mac. Bank of America has had a long running relationship with federal regulators. Sometimes they work together, but often they are opponents. At times the bank acts more like a retail bank, at times like a brokerage firm and at other times almost like a government. But the roots of the institution go deep into the financial fabric of the country. In 2009, it concluded the year with revenue of $134 billion and total assets of $2.2 trillion, and it finished 2010 with $2.8 trillion.
In 2011, BofA posted $4 billion in net revenue in the last quarter and restructuring of cost savings and a 10 percent reduction in its 284,635 workers. The bank is aiming for a quarterly profit of $10 billion, which would stimulate economic growth nationwide. But what market impact will this belt-tightening achieve?
There is a strong correlation between Bank of America and the growth of the country in the past century. It is not just a bank and not just a collection of tall buildings; it serves the local financial needs of a major part of the country, the most important of which are small to medium-sized business owners.
Where growth is needed
The current recession is measurable primarily by the number of unemployment claims. The expansion of employment in the recent 30 years has been public sector government employees and private sector employees of modest-sized — firms not from giant manufacturers.
A small company can swiftly grow from 20 to 30 employees — perhaps with just a new tool, new products or a dynamic website. That’s a 50 percent increase in employment. While it is possible to see that kind of growth in a large company, the likelihood is that growth in the U.S. will come from smaller firms, not major enterprises.
Furthermore, the businesses with less than 50 employees are not outsourcing to China or India; they hire local people and purchase their supplies and raw materials regionally. While they might export products, they don’t export profits.
Biting the hand
Now Bank of America is calling in many loans on credit lines granted to local businesses that the bank claims no longer fit its revised standards. Many small business owners are facing demands from Bank of America that they pay off their credit lines immediately.
When BofA alters the credit terms, many once suitable loans are now outside the parameters and despite flawless payment history, they are being cancelled. When a loan is not repaid, it goes into default and that is an ominous sound to the entire banking community.
A Burbank messenger service was directed to repay its $96,000 balance within a month. California’s largest bank offered multiple repayment options that the business owner deemed unaffordable, such as paying off the debt at 12 percent over two years. The $4,500 monthly payment would be almost 10 times his current interest-only payment. According to the Los Angeles Times, the owner said he told the bank, “I was like, ’Dude, you’re calling a guy who’s barely surviving!’ My final word was that I could double my payment, but not triple or quadruple it. I told them if they apply too much pressure, they’re going to push me into bankruptcy.”
Gee, how does that sound coming from an institution that made billions packaging mortgage backed securities and selling them to agencies of the U.S. government?
One BofA representative referred to the called loans as affecting a “very small percentage” of small business customers. That is never comforting, given the huge customer base at the nation’s largest bank. The bank declined to give exact figures but said affected businesses are not in the hundreds of thousands.
BofA made more than $13 billion in small business loans during the first three quarters of 2011, with more than $2 billion of that money flowing into the hands of small business owners in California and $11 billion across the country.
According to a spokesperson, Bank of America has four million small business customers. The largest bank in the U.S. now ranks near the bottom (6,128 out of 6,800) of U.S. banks lending to small businesses. Its outstanding small-business loans decreased by $411 million between the second and third quarter of 2011. Despite having enormous resources and a history of support with smaller firms, BofA lends only 2.5 percent of its deposits to smaller firms, which is one-third of the national average.
As the biggest player in the market, the practices of BofA are contagious to other lenders, further tightening the ability of companies to expand their operations and their payroll. Large institutions intimidate sole proprietors and closely held businesses.
During the historic credit bubble, Bank of America was among the most aggressive small business lenders, offering at one point loans of up to $100,000 on the basis of a brief application, the business owner’s favorable credit score and a signature. That product came to an abrupt end when such loans went bad at a higher-than-expected rate. Surprise!
Bank of America’s decision to demand immediate repayment of even a tiny portion of its small business loans is a reminder that the health of Main Street businesses depend on the strength of the nation’s banks.
Trickle-down lending impact
Unfortunately, some small business customers are finding themselves in a vicious cycle in which their bank reduces a credit line, hurting the company’s creditworthiness. That prompts the business owner to cut costs and lay off staff as access to credit becomes more difficult, often hurting the business and causing further deterioration in its creditworthiness.
Recently, CBS News featured entrepreneur Lisa Whiting, who built a graphic arts business. The entrepreneur found that banks were no longer willing to lend to her because her credit score dropped despite an on-time payment record with several credit cards. “Whiting had been charging $15,000 a month on a Bank of America credit card with a $15,000 credit limit. During the financial crisis, without warning, that $15,000 limit dropped to $12,000 — a red flag that caused her credit score to drop. That triggered BofA to lower her credit limit further to $8,000, which then caused her credit score to drop to 544."
“I worked all my life to build a credit rating of 809,” Whiting told CBS. “The fact is that they messed with my credit score when I did nothing wrong. I’m absolutely enraged by that.”
Bank of America explained, “We continually monitor accounts for risk and may adjust customers’ lines up or down as appropriate based on their risk profile.”
Some might say, “That’s just gobble-de-gook!”
Whiting says, “They didn’t look at me as a job creator. They looked at me as a potential risk; the computer kicked out a warning that wasn’t even really there.”
Whiting’s story had a happy ending. CBS reports that she got ultimately got financing from a local community bank.
“We can work around credit scores, we can work around other previous issues as long as there’s an action plan,” said Tom Spitz, CEO of Settlers Bank, which lent to Whiting.
Eventually, the news reports prompted Bank of America to restore Whiting’s credit cards and establish a separate $10,000 business line of credit. Sure, they would have done that without the publicity … wouldn't they?
We can only hope that Bank of America will remember the small San Francisco businesses that rewarded Giannini with full repayment and increase, rather than reduce their extension of credit to small businesses. They might even consider the third word in their corporate title and start aggressively helping the core of the American economy — the small business owner.
How can you help?
Financial consultants need to recognize that the next rebuilding of America will come from modest-sized firms who are also the lifeblood of the major banking institutions that serve them, not the corporate giants with overseas factories and suppliers. Smaller firms are busy running their enterprise and desperately need financial guidance. Most smaller businesses have:
- No written business plan
- No written marketing plan
- No informal or formal retirement
- No succession/transition plan
- No business loan cancellation
- Introduction of service
- Gather information
- Analyze problems and find solutions
- Develop a written plan
- Implementation and monitoring
- Obtain referrals
The process is supported by correspondence elements and a professional drip marketing system to request and cultivate referrals. Financial consultants need to be professionally educated and equipped to address this lucrative market.
Commercial bank loans under $5 million are notorious for failure when the founder, owner or CEO dies or becomes disabled. This is because there is no documented succession arrangement and no bank loan cancellation plan. The solution is a plan and a package of life and disability insurance that stimulates the lender to extend the amortization. The resultant cash flow savings will fund the coverage and accumulate additional collateral to strengthen the loan.