We recently learned that Wells Fargo (NYSE:WFC) has decided to get rid of personal credit lines, a move that could hurt the credit scores of its customers. Why would the bank choose to get rid of a product that brought in hundreds of millions of dollars in revenue annually? In this Fool Live video clip, recorded on July 12, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss why Wells Fargo might have made this controversial decision.
Jason Moser: Matt, last week, there was an interesting headline out there regarding Wells Fargo that we talked a little bit about it among some of us on the team here, and you and I were taking this around. Wells Fargo notified customers that it's closing down all personal lines of credit. Now, this, to me, there are a number of different ways you can look at this. Having worked in the banking industry myself, I understand the perspective. I understand where they're coming from because it seems like they're saying, "Well, we feel like we can put our customers into a better product," a more appropriate product. Whether it's some type of credit card offering or whatever, but to me, the risk here is in the messaging. So far, to me, it feels like they're failing. But now, let's talk about this. Go over a little bit, what exactly is going on here with Wells Fargo?
Matt Frankel: Well, they're doing a terrible job of selling it to customers and the media, I'll tell you that much. They got Elizabeth Warren all riled up again.
Moser: Yeah. Well, that's not too tough to do, though.
Frankel: Not for Wells Fargo. The CEO walks in with their shoe untied, she'll call him out on it. I love watching Elizabeth Warren by the way. She keeps the banks on their toes.
Moser: She does.
Frankel: She's definitely a necessary part of the system.
Moser: Yeah. Checks and balances.
Frankel: They're getting rid of these personal lines of credit, which is a unique product. Most times, when you get an unsecured loan, it's usually in one of two forms. You either get a credit card, which is essentially a personal line of credit, or you get a personal loan, which has a fixed balanced, fixed monthly payment, things like that. This is kind of a strange product. You have to stop and think, why would a bank get rid of any product? Is it unpopular? Were they just not getting enough people signing up for it? Was it inefficient to have? Meaning, like they said, that we could better serve our customers with other products. Is it just draining resources? Is it losing money, meaning are they doing a bad job of underwriting it and seeing a high level of defaults? We don't know the exact reasons. They say it has nothing to do with the Fed's growth cap, because that was my first reaction. Remember they're not allowed to grow right now. My reaction was they were getting rid of that to be able to add more profitable loans to their books. But they said that's not the reason. It looks like it's a good business move. They're essentially consolidating the types of loans they offer. Because there's nothing you can do with a personal line of credit that you can't do with a good credit card, or that you can't do with a personal loan. Right now, remember loans declined at banks year over year over the past year. Savings rates are up, people are taking up fewer loans. They could just be seeing lower balances and are consolidating products. Also remember that, maybe not now because Jason's house is a construction zone, but our home values are through the roof over the past year.
Moser: They are.
Frankel: People have home equity to borrow against, which is a much more efficient way of borrowing money than getting a personal line of credit. Right now if I wanted to get a personal line of credit, I would pay 7% or 8% interest most likely. If I were to borrow money against the equity in my house, I would pay 3%. Why would people use these personal lines of credit if they can borrow other ways? I'm sensing it's a demand and an allocation of resources issue here.