ss_blog_claim=bd50edc517cf0b7549fe6b5f63b6b5f8 The SLS Business Finance Blog: June 2008

Wednesday, June 18, 2008

The Real Problem for Community Banks

Many of us are aware that the RE problem we are facing is really a banking/mortgage problem. The problem is especially acute for community banks. When a bank writes a bad loan, they have to set $$ aside, known as loan loss provisions, to cover the losses. This is $$ that is now out of circulation and cannot be lent out. So banks and especially community banks have even less $$ to lend to their business clients than they had a year ago.

Why does this hurt community bankers more? It hurts them more because they have a higher touch, more personal service, and typically care more about their business clients than a large mega commercial bank. All banks have to say No but if that no is a threat to their deposit relationship with the client (the most important relationship a bank has) then that's really problematic for the community banker. Community bankers are greatly affected because they don't have a leasing division like Bank of America does. Large banks will target community banker client deposits by promising an approval for a loan (usually a lease) to bring them in. Community bankers need their own leasing resources to help them retain their existing clients. If nothing else, a leasing partner helps them retain their deposit relationships, which in the end create the upper limit of how much $$ the bank can lend due to Federal Reserve requirements.

Tuesday, June 17, 2008

Issues at Big Blue

IBM is the talk of the technology side of the commercial finance world. IBM has its own internal finance division known as IBM Global Finance. It is typically the # 1 choice for its thousands of partners, large and small, who have clients who need to finance their hardware, software, storage or networking gear purchases. Issues are coming out regarding their financing/lease contracts, confusing language in end of lease buyout options, lots of hidden fees and evergreening. Financial evergreening is when a client misses the window to determine whether or not they want to purchase the equipment or give it back at the end of the term and rather than convert to a month to month (which is the standard until the decision is made) they get charged for a whole additional year's worth of payments and have to hit the window the same time in the following year.

All these issues are at best sloppy and deceptive, and at worst, fraudulent and illegal. Dell got caught with their hand in the cookie jar and IBM may be as well despite their excellent reputation in the marketplace for products and services.

Tuesday, June 3, 2008

Dell Financial Services GUILTY

Reprinted from Channel Web

N.Y. Judge Rules Dell Engaged In Fraud, Deceptive Business Practices

By Scott Campbell, ChannelWeb

A New York State Supreme Court judge ruled Tuesday that Dell (NSDQ:Dell) engaged in fraud, false advertising, deceptive business practices and abusive debt collection in the state.
Judge Joseph Teresi said Dell lured consumers to purchase its products with advertisements that offered attractive "no interest" and/or "no payment" financing promotions. However, many consumers were denied those deals. The judge called it a "bait-and-switch" scheme in which consumers instead often received interest rates that exceeded 20 percent.

In his decision, the judge wrote, "Dell has engaged in repeated misleading, deceptive and unlawful business conduct, including false and deceptive advertising of financing promotions and the terms of warranties, fraudulent, misleading and deceptive practices in credit financing, and failure to provide warranty service and rebates."

Teresi also found that Dell deprived consumers of technical support to which they were entitled under their warranty or service contract by:
- Repeatedly failing to provide timely on-site repair to consumers who purchased service contracts that promised on-site and expedited service.
- Pressuring consumers, including those who purchased service contracts that promised "on-site" repair, to remove the external cover of their computer and remove, reinstall and manipulate hardware components.
- Discouraging consumers from seeking technical support. The judge found customers who called Dell's toll-free number were subjected to long wait times, repeated transfers and frequent disconnections.
- Failing to provide rebates that were promised to consumers.

New York Attorney General Andrew Cuomo's office filed a lawsuit against Dell in May 2007.

Dell issued the following statement regarding the judge's findings:
"We don't agree with the decision and will be defending our position vigorously. Our goal has been, and continues to be, to provide the best customer experience possible. We're confident that when the proceedings are completed, the court will determine that only a relatively small number of customers have been affected."

The Attorney General's office said consumers were often misled by Dell's practices. "Dell and [Dell Financial Services] frequently failed to clearly inform these consumers that they had not qualified for the promotional terms, leaving many to unwittingly finance their purchase at high interest rates," the Attorney General's office said in a statement.
"For too long at Dell the promise of customer service was a bait-and-switch that left thousands of people paying for essentially no service at all," Cuomo said in the statement. "We have won an important victory that will force Dell to live up to its responsibilities and pay back its customers for profits that were pocketed but not deserved. This decision sends an important message that all corporations will be held accountable for the promises they make to consumers."
In addition, Dell Financial Services (DFS), a joint venture between Dell and CIT Bank, incorrectly billed consumers on canceled orders, returned merchandise, or accounts it did not authorize Dell to open, according to Cuomo's office.

Dell also "continually harassed these consumers with illegal billing and collection activity. Although many consumers repeatedly contacted Dell and/or DFS to advise them of the errors, DFS did not suspend its collection activity and Dell failed to expeditiously credit consumers' accounts, even after assuring consumers it would do so. As a result, many consumers have been subjected to harassing collection calls for months on end and have had their credit ratings harmed," according to the statement.

The ruling by the court prohibits Dell and its DFS arm from engaging in the practices cited in the suit. Teresi also ruled the court will hold future hearings to determine restitution Dell would have to pay customers for profits "unlawfully earned," according to a release from the state Attorney General's office.

Editor's comment: Dell learned a harsh lesson about the financing business by thinking they could do this piece of the transaction themselves rather than hiring out expertise. This is the reason why most vendors use small independent financing companies rather than keeping a 'captive' in house financing company, such as the joint venture was in this case. It's too easy for the captive to engage in deceptive practices if they get to much 'in bed' with their vendor as CIT did here with Dell.