Taking the Boom Out of Refinancing

You may have noticed that the Bank of America has decided to slap a new, multi-thousand-dollar fee on all those who walk through its doors hoping to refinance their homes. This may or may not surprise you, according to your view of banks, but this particular fee tells us something about business in modern America.

All across the land, everyone wants to re-fi. Interest rates have not been so low since Eisenhower crossed the Rhine. Customers line up at banks like Russians at dairy stores, dreaming of 8% over 30 years.

For the banks, slumped deep in the recession, the re-fi boom represents very good news. Each new mortgage gets slathered with accessory charges until it looks like a hospital bill. A modest mortgage of, say, $150,000 can yield upwards of $3,000 in up-front money for the lender.

Still, Bank of America has found reason for dissatisfaction. Some customers, it discovered, have filed applications with more than one bank. They pay processing fees at several banks and then wait to see where the best interest rate pops up. They are shopping around.

Displeased, B of A decided to fix their wagon. Re-fi customers who walked through its doors henceforth would get hit with a new charge: an “application fee” of 1.5% of the loan. For our hypothetical $150,000 mortgage, that comes to $2,250.

If you eventually accept the B of A loan, the application fee gets credited against the other charges. If not, you lose it. Since no one would accept that kind of loss, B of A customers would be anchored to the bank, and its interest rates, from the day of application.

No more shopping around.

Have you ever walked into a car dealership and found it difficult to leave because the salesman virtually blocked the doorway? That salesman and B of A feared the same thing: the marketplace.

Let’s assume for a minute that the car salesman adopted the Bank of America’s technique. Say you’re a customer and you walk into the Chrysler showroom and kick the tires of an STX Vroomer.

“How much for the Vroomer?” you ask the salesman.

“Not so fast, buddy,” says the salesman. “First let’s go see the manager and get your application fee paid.”

“You want a fee before I get the price of a Vroomer?”

“You bet, it’s Chrysler policy. If I give you the price first, you might go down to Smitty’s Chevrolet and compare with their Gaucho. We can’t have that.”

“How much is the fee?”

“Twenty percent of list on the Vroomer. Since I can’t tell you the list, you just sign the check. We’ll fill in the amount.

“Twenty percent! If I pay you 20%, I couldn’t afford a Gaucho no matter what.”

“Welcome to the Chrysler family.”

Now the Bank of America would argue, without doubt, that the two situations do not equate. In explaining their new fee, a bank spokesperson has described it as a response to the avalanche of business. The thousand-dollar fees will allow the bank to concentrate on customers that the spokesperson described as “serious.”

I’m sure they are serious after forking over a couple grand. But the interesting part here is the implication about the other customers, the ones who wanted to retain the right to shop around by paying the more modest processing fees.

To B of A, this made them less than serious. Frivolous, perhaps. Undependable.

And so the bank forced them out.

Assuming that the real issue was, in fact, the crush of business, the bank could have responded in numerous other ways. It could have increased capacity, transferred staff, streamlined the process. In short, it could have regarded the re-fi boom as an opportunity to build customer loyalty and expand its business.

But the bank chose instead to take advantage of a market that temporarily favors the lenders. It chose to maneuver customers into guaranteeing they were a sure thing before the customers saw the final terms of the deal. And if the customer didn’t like it, he could get out. The next guy in line would see things differently.

Certainly, worse crimes have been committed in the marketplace. You could argue that this maneuver amounts to nothing more than a corporate pettiness.

But a pettiness with meaning to the thousands walking through B of A’s doors, clutching their trust deeds. And let’s hope, when the opportunity presents itself, it’s a pettiness those customers will remember.