Design or Incompetence?

Or both?

In late summer or early fall, Citibank was running a promotion: if you opened a new account or moved a certain amount of money to your bank account, you would get a $200 bonus within three months. Someone I know took advantage of this promotion, but as of Monday he still hadn’t gotten the $200 bonus, so he visited a branch.

“I was given the ridiculous explanation that I didn’t surrender the promotion letter and  that the promotion code NP55 was not linked (?) in the application. I told them that: (1) the letter is not a coupon to be surrendered, (2) I should not have to tell the customer service rep how to process the promotion, (3) there was no requirement that the letter even  be presented (just go to a financial center, it states), and (4) the code only needed to be mentioned if applying by phone. They called me back in the afternoon and asked me to come back this morning. They first offered me some ‘thank you’ points, but I stood my ground.  After calling several places they finally reached a Texas office that would further research my problem. “

Eventually, he got a letter saying that Citibank would give him the $200 credit.

I’ve often wondered about situations like this: Is this just garden-variety incompetence, where the marketing folks think of a promotion and the computer guys program the systems wrong? Or is it a sinister design, in which the company decides to pull a bait-and-switch, and will only make you whole if you complain? (This goes far beyond banking. Think about any situation where you were overbilled, and after spending hours complaining you only ended up where you should have been in the first place. I’ve always thought there should be a treble-damages rule or something like it for overbilling, because otherwise companies have an incentive to overbill everyone all the time, especially if they are near-monopolists like the cable company.)

I’ve generally leaned toward incompetence, because I think if a company actually did have such a sinister plan, it would leak (because lots of people would have to know about it). But maybe it’s something in between.

Paul Kiel of ProPublica has uncovered multiple cases where homeowners are not getting their trial loan modifications made permanent. That’s not news. What is news is that the reasons the banks are giving for not making the modifications permanent are complete bogus! One person had his modification rejected by JPMorgan Chase because he made a statement that he expects his income to eventually recover; another was required by Wells Fargo to update his documentation during the trial period and then put into a second trial period because his income went up by $80 per month. (If you’re wondering why this matters, the big reason is that this way a bank can string you along making you think you’ll get a modification before finally rejecting you; if they rejected you up front, you could have walked away and saved yourself the payments in the interim.) In both of these cases, this violated Treasury Department guidelines for the loan modification program.

Here’s the thing. Jamie Dimon and John Stumpf are not reviewing documents and rejecting people’s modifications. These decisions are being made by first- and second-line servicing center employees, who are following instructions they got from . . . somewhere. What’s more remarkable, official spokespeople for both banks are cheerily giving bogus reasons for failing to make modifications permanent, unaware (until busted by ProPublica) that they are violating the Treasury Department’s rules!

So someone is taking the trouble to create inaccurate instructions for the servicing centers and give inaccurate talking points to the PR department. It could be pure incompetence, I guess. But it could be something in between–incompetence through conscious inattention. The bank’s senior executives make the decision to participate in the loan modification program, but then they don’t try very hard to make sure they are following the rules. They know that if they have a messed-up process, they can save on internal costs, and they can also drag out the trial modification periods, which means (a) more payments they wouldn’t have gotten if they rejected people on schedule and (b) longer before they have to write down the loans in question on their balance sheet. So they aren’t consciously giving orders to break Treasury’s rules, they’re just not trying hard to follow the rules, staff their servicing centers properly, train their people sufficiently, and test their computer systems thoroughly. And that way there’s never a smoking gun; instead, they can just say their servicing centers are swamped and they’re having trouble implementing new processes fast enough. (Wait! That’s what they’ve been saying about this very program for months!)

There doesn’t even need to be intent here (although there could be). Companies focus on the things they think are important. During the financial crisis, all the banks were focusing on their cash levels every day, and I’m sure they did a very good job at it. They don’t focus on things they think aren’t important. It seems like JPMorgan Chase (JPM) and Wells Fargo (WFC) are not focusing on their loan modification programs, and Citibank (C) is not focusing on delivering on its promotions, just on using those promotions to suck cheap deposits onto their balance sheet. If that ends up helping their bottom line, then so much the better for them.

About James Kwak 133 Articles

James Kwak is a former McKinsey consultant, a co-founder of Guidewire Software, and currently a student at the Yale Law School. He is a co-founder of The Baseline Scenario.

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