FNBO Blunder: Due Diligence 2nd Request Email

FNBO achieved the seemingly impossible: It created a run on an FDIC-insured bank.

"Security" Measure Creates Mass Insecurity

FNBO Direct followed its previous threat to keep customers’ money with this new threat:

As part of your initial application, we did not receive information regarding your current employer, occupation or position. In many cases, this is because you have a status of retired, unemployed or self-employed. We are updating our records as part of our on-going due diligence to be compliant with our standards to support the USA Patriot Act.

Due to the importance of the USA Patriot Act, we have placed a hold on your account(s) until we can document this information for our records. No deposits or withdrawals can be made through your account(s) until we receive this information. We will release the hold upon receipt of this information.

Please provide us with your previous employer, occupation and position by sending an email with this information to fulfillment@fnbodirect.com. If this information is not received within 30 days, the account(s) may be closed. Your immediate attention to this matter is appreciated.

If you wish to discuss this further, please send an email to fulfillment@fnbodirect.com or call 877-370-3707. Please reference your FNBO Direct account number displayed at the top of this page when you contact us.

Thank you for choosing FNBO Direct for your Online Savings Account.

FNBO Direct Customer Service

Problems:

• The email does not state that any law requires these actions. FNBO only states that you must comply with "our" (FNBO's) standards (if a law does require them, that topic is for another article).
• Having money is not prima facie suspicious, unless you want to be subject to interrogation every time you pull a bill from your wallet: Do you have a receipt for that dollar? Millions of people have something called “savings” from past jobs. Maybe some bankers have nothing better to do than interrogate retired Grandma and the self-employed teenage babysitter.
• The email starts by stating that FNBO does not have your “current employer” but then asks for your “previous employer.” FNBO apparently does not even know what it wants.
• FNBO’s action is not due diligence. It is closer to no diligence at all. If FNBO is so worried about Grandma’s “suspicious” money, it should verify or deny before accepting her money, not after, so she can take her pension elsewhere. FNBO’s sequence of actions shows that it has few qualms about receiving Grandma’s “suspicious” money; it just dislikes giving Grandma her money back.
• Some posts on the web claimed that providing more information had solved nothing so the only ray of hope for the customer is that FNBO "may" close your account if you do nothing and do not provide the information, so at least you might get your money back--a month later--maybe (hope you did not need it to pay bills anytime soon).
• The email reads like a classic phishing scam when a con artist impersonates an institution to steal your identity, this time invoking FNBO and the PA instead of the Bank of Nigeria. Many businesses state that they would never send such an email asking for such personal information by email.

How To Make Things Worse: What FNBO Direct Did with Its Policy

• FNBO actually managed to damage itself further by taking its bad policy and then mistakenly applying it to customers who already had provided employment information, when on August 10 it sent the above email (with its confusing, out-of-the-blue "2nd Request" title) to an untold number by accident.
• FNBO then took almost 3 hours to issue an apology email, amidst a flurry of complaints from irate customers.
• FNBO still did not learn its lesson because its "apology" only told customers to disregard the last email but in the next breath warned that it still could freeze your account and send you a similar email at any time: "If Due Diligence information is required, you will receive a follow-up email."

Meanwhile, FNBO Direct customers peppered internet forums and blogs with announcements that they were withdrawing their money and closing their accounts as soon as possible.

FNBO achieved the seemingly impossible: It created a run on an FDIC-insured bank.

How To Measure Prosper Profits Accurately

See "Prosper Private Lending Service: Do You Want To Be a Collection Agency?" for background.

Prosper.com lenders are apt to overestimate their profits:

• Your returns might appear high at first (when borrowers make the first payment because they are still eager and excited about their new money and the novelty of Prosper) but do not be surprised if defaults increase over time as borrowers get bored of paying and the luster of their vacation/wedding/business-that-did-not-take-off is long forgotten.
• You never know your final profit until the last payment is made (or not made) 3 years later.
• You can spend 2 years simply hoping that you get your principal back.
• After that, spend another year seeing if you will get the promised 15% above principal or if the borrower will skip the last year of payments so you net 0% above principal—which would be a real 6-9% net loss after you account for 2-3 years of inflation.

Formula To Track Prosper Return on Investment (ROI)

Therefore, perhaps Prosper profits should be tracked by making the loan, recording a -100% return (100% loss), updating to a -97% return after the first payment, and so forth.

Why Do You Have ING Direct (or Not)?

The Sun's Financial Diary mentioned that ING Direct has lackluster rates but a 52% market share and asks why.

Here are some possible reasons for ING Direct's strong market share:

• Advertising visibility.
• Brand-name recognition as a "real" bank without having to check FDIC lists.
• Ease of setup (How many people bailout in the middle of other banks' applications?).
• Minimal strings attached (do not have to open a checking account with $10/mo fee, etc.).
• Customer service and ongoing, consistent ease of use, either online or by phone.
• The quick gratification of the sign-up bonus.
• People with low balances rationally value the lack of minimum balances and no fees when compared to the small dollar amount of even an extra 1% on a small balance (it will take a long time before the marginal difference of a higher rate on a small balance will exceed the sign-up bonus).
• People keep token amounts to keep an open account for the referral bonus, which provides social/viral marketing (see advertising visibility).

What is your explanation?

Freezing Credit To Stop Identity Theft: Good or Bad for Savers?

A chastity belt for your financial reputation

Many readers of this blog probably have little interest in taking new debt and might be interested in the "credit freeze" which guards against identity theft by preventing anyone from opening new lines of credit without special permission.

My understanding is that you (or even an identity thief) could use your current credit card as normal but you would have to unlock your credit before getting new cards or opening a mortgage in your name. That sounds fine for people who dislike debt and rarely take new debt or rarely open new credit lines.

Does the credit freeze harm savers?

My question is: Since banks can run soft or hard credit pulls even when you give the bank money, will the credit freeze interfere with opening deposit accounts (savings, money market, CD) to save or invest money?

Do any of you financiers know the answer?

FNBO Might Decide To Keep Your Money

I mentioned FNBO's assertions that it can keep your money indefinitely and Bank Deals posted that he will attempt to test withdrawals (thank you), although he did not mention the amount.

• Small amounts will test nothing. People want to know if they will miss their house closing when they need to withdraw 5 figures or close the account.
• FNBO claims that it can refuse to transfer to accounts that it previously approved and used.
• FNBO claims that it can refuse to mail a check to your physical address or even hand your money to you in person (the FNBO email warning did not limit itself to bank accounts).

Did FNBO Steal Your Money?

Has anyone been unable to get their money back from FNBO?

Here is what FNBO lets you know in an email after you have deposited money:

Because security of your account is important to us, we want you to be
aware of one of the steps we take to maintain security: We may temporarily
restrict all deposits to and transfers from your FNBO Direct account if we
determine a security risk exists and we may refuse to complete any transfer
based on the existence of a security risk. Please see the "Note about Linked
Accounts" and the "Important Note about Security for Deposits and Transfers" in
the updated Disclosures for your account here. Corresponding changes are
contained in Sections 7 and 12 of the Online Services Agreement and Section 6 of
the Deposit Agreement, all found in the Terms and Conditions here.

Prosper Private Lending Service: Do You Want To Be a Collection Agency?

Lazy Man and Money mentioned his tribulations with Prosper.com, a service where individuals buy and lend to each other.

I had looked at Prosper some time ago, and decided not to lend money there at that time for the following reasons:

• The advertised high interest rates are for the lowest-rated, riskiest borrowers and the forum told tales of defaults so it seemed unlikely to net a significantly high return (lend to 2 people at 25%, 1 of them defaults with the first due date, so you average a loss at -37.5%).
• You have to win the loan by bidding down against rival lenders so it seemed unlikely to net high rates with the highest-rated, reliable borrowers—yet there is always a chance that even an A-rated borrower might default.
• To diversify to hedge risk would require many hours of work to bid small amounts to many borrowers (you can lend $50 to a person who is seeking $5,000 in loans from many lenders).
• Bidding means that you might waste time in research with no result and 0% interest.

I know that some lenders will beat the odds but I suspected that lending at Prosper would require much work, time, management, stress, and risk but with an uninspiring probability that it would not significantly outperform an FDIC-insured 5% Money Market/CD account or moderate-risk stock index fund.

Please share your experience if you have used Prosper or a similar service.

Complete the Prosper motto: "Where people come together to . . ."

Update 6/1/07:

• Time: 2 timesavers are (1) you can set criteria and Prosper will auto-fund loans from your account, and (2) you are not allowed to be your own collection agency (this means that either the money gets repaid or it doesn't).
• Rates: Lazy Man's Prosper portfolio (thank you) shows A-grade loans at twice the rate that this Prosper page shows for average A-grade rates, about 20% v. 10% (which means other A-grade loans can be significantly less than 10%).

Update 6/2/07: My Personal Finance Odyssey and The Finance Buff expressed a caution similar to mine.

Update 6/21/07: You cannot cash out whenever you want as you could do with a money market. You cannot cash out early with a penalty as you could do with a CD. You must collect a few dollars per month and wait 3 years (a common loan term) to claim your full profit, if any.

Update 6/23/07: My Personal Finance Blog is pulling out of Prosper. Another point that new Prosper lenders might overlook is that "no defaults yet" after a year does not mean much because you might need 2 years just to get your principal back when I imagine that debtors are getting bored of paying and the luster of their vacation/wedding/business-that-did-not-take-off is long forgotten.

Update 6/25/07: My Money Blog posted data which so far support my 6/23 concern that defaults will increase over time.

Update 6/26/07: How To Measure Prosper Profits Accurately