Banking Fees and Morality Integrating Values:

The Legal, Moral, and Social Responsibility of the Government, the Banks, and the Consumers

Legal Section

Statement of Relevant Legal Principles and Rules of Law

Application of Law to Topic and Legal Analysis

Ethics Section

Utilitarian Ethical Analysis

Kantian Ethical Analysis

Additional Ethical Analysis

Social Responsibility Section

Introduction to B. Definition of term "Social Responsibility"

Application of Social Responsibility

Banking fees in one form or another have existed in the United States hundreds of years, however the degree of regulation on the bank fees has varied over time. Regardless of whether banking fees are being regulated liberally or conservatively, legal, ethical, and social responsibility questions arise. This three value approach assists in analyzing which of the three parties -- the government, the banks, or the consumers -- owe which duty regarding the functionality of the banking fee system. Arguably, all three parties owe a duty to the system. The legal duty owed is one in which the government enacts the appropriate laws and both the banking industry and the consumer abide by the laws. The ethical responsibility has been studied numerous of theories including the Utilitarian Model -- which measures morality in terms of the consequences and Kantian -- which believes that humans are rational and act accordingly. Theories such as these help define which rules and resulting behavior are moral and which are immoral with the hope of understanding behavior and initiating change. Finally the social responsibility has been defined narrowly as the duty to one's business and broadly as the duty to society in general. Analysis of our current banking fees system using the three value approach will help reveal where each responsible faction of the system has acted accordingly and where there is room for improvement.

Introduction

The purpose of this paper is to analyze the "three value" analysis which includes legal, ethical, and social responsibilities relating to the assessment of banking fees in the United States. The banking fees are a phenomenon which if not regulated may result in a significant amount of consumer debt as a result of fees in any given year. These fees can come in the form of maintenance fees, overdraft fees, interest rates, and service charges on accounts and loans. The cumulative effect of assessing banking fees is that the banking industry generates revenue from the fees. This is significant because it is necessary for the consumer to utilize the services of the banking while it is necessary for the bank to generate revenue. Many would argue that the assessment of fees by the banks is unethical however the opposing argument is that fee assessment is not only moral, but necessary. Still, outside of this argument, most will agree that the each segment of the banking industry holds some responsibility to its successful functioning whether it's legal, ethical, or social.

Historically, banking fees have existed for hundreds of years, but the assessment of such has been closely scrutinized. Prior to 1978, national banks were prohibited from charging interest rates that exceeded state laws (Steiner 2007). However, the 1978 Supreme Court decision of Minneapolis v. First of Omaha Service Corp, gave banks more discretion regarding the amount of banking fees they could charge. The First Omaha case ignited a trend towards giving banks more liberty regarding how they operate, and legislation soon followed continuing this liberal trend. (Steiner 2007). In 1996, the Supreme Court decided Smiley v. Citibank and ruled that a bank could be permitted to charge fees to a credit card holder regardless of whether that person lived in the state or not (Steiner 2007). This decision resulted in the explosion of the credit card interest rates and credit cards fees in the banking industry. Until President Obama signed into law the Credit Card Reform Act of 2009, banking fees had generally been free from regulation. In the midst of the nation's foreclosure and mortgage crisis, one would question how this crisis could have been prevented. Was it the responsibility of the government to impose stricter regulations on the banking and mortgage industry; was it was the responsibility of the lender to use more discretion in extending credit; or was it the responsibility of the consumer to exercise more restraint. Clearly, all three owed a duty to the industry.

Legal Principles as They Relate to Banking Fees

Recall that prior to 1978, banking fees were not regulated to any extent. Nevertheless,...

Over the years, each of the three branches of the federal government -- the Congress, the Courts, and the President -- has each taken significant steps in implementing the laws in the banking industry, but the new laws have not always resulted in a beneficial effect to the industry.
The Supreme Court decided the Minneapolis v. First of Omaha Service Corp, based on a historical piece of legislation as it relates to U.S. banking -- the National Bank Act of 1864. The goal of the National Banking Act was to force state banks to nationalize. The Court relied on section 85 of the Act as the foundation for its ruling to permit banks to charges fees nationwide. The text of section 85 of the Act reads, "Any association may take, receive, reserve, and charge on any loan or discount made or upon any notes, debts, or bills of exchange interest at the rate allowed by the laws of the state, district, or territory where the bank is located."

The Court interpreted the Act to give the state where the bank is located the ability to charge the fee to the consumer. The state fees where the consumer resides are of no relevance.. . The liberal interpretation of the Act by the Supreme Court was the beginning of the liberal banking fee movement that still permits banks discretion regarding what fees to charge today.

Another significant piece of legislation as it relates to banking in the United States was the Banking Act of 1933, and it was signed into law by President Roosevelt in 1933 its goal was to raise the public's confidence in the banking system (FDIC 2010). This period following the Great Depression had resulted in severe bank closures resulting in millions of dollars lost by consumers and an absence of currency nationwide. The Banking Act was implemented with the expectation of alleviating this which initially it did, but a few years later the number of FDIC banks that had failed had increased once again. (FDIC 2010).

The next significant development in the laws relating to banking occurred in 1968 when Congress charted the Federal National Mortgage Association (Fannie Mae) which assisted low, moderate, and middle income families to buy homes. (FDIC 2010). Fannie Mae still exists today in the same capacity as it did when it was implemented in assisting low, middle, and, moderate income families in purchasing homes. The sister company to Fannie Mae, Freddie Mac was created by Congress in 1970 to provide capital to finance U.S. housing. Congress continued to legislate in the banking industry with its implementation of the Home Mortgage Disclosure Act if 1975 (HMDA) banks and S & Ls to lend money to low income areas and to document lending practices (FDIC 2010). The Community Re-investment Act of 1977 had similar motives regarding ensuring financing for lower income families, however it also made it mandatory that the FDIC monitor non-member state banks for compliance. (FDIC 2010). This was controversial action because it limited the state's discretion towards its lending practices because it made state banks subject to the federal government. Finally, in 1980 after the Supreme Court's First of Omaha case was decided, Congress passed the Depository Institutions Deregulation and Monetary Control Act of 1980 which raised the amount of interest and fees that consumers were being charged which had extremely negative effects on consumer debt and bankruptcy. The issue then remains whether the legal responsibility that the government has demonstrated towards the banking industry has been responsible in terms of its effect on the consumers. With the effects of the deregulation period of the 1980s clear upon the U.S. currently, would cause one to question whether the legal acts of regulation by the government during that time were ethical.

Ethics

Ethics as a branch of philosophy is defined as 1) "A set of principles of right conduct,"

2) "A theory or a system of moral values," 3) The study of the general principles of morals and of specific moral choices" (American Heritage, 1993). Ethics as a branch of philosophy is concerned with moral rightness and wrongness of particular conduct. Under the utilitarian model, an action at its outset may not appear to be immoral or wrong, but if the outcome is bad, the action is more likely to be viewed as bad, and vice versa. This model and the principles of which has been used for years to help determine if a particular action is ethical or immoral.

According to Cavico and Mutjaba, utilitarianism refers to a systematic theory of moral philosophy developed by the British philosopher Jeremy Bentham and elaborated and defined…