2 Cents Episode: 2
So, we are back with another 2 Cents episode of Bank Chats, a mini episode of Bank Chats. A very small, shortened version of Bank Chats, if you will. I am Drew Thomas with me is Jeff Matevish as before. Hey, Jeff. Hello. And so, we sat down today to talk a little bit about subscriptions. And I think we all have some kind of subscription that we currently have signed up for, whether it's streaming or streaming services, even, even certain apps like weather apps that you know, you get some that are free, some that you have to pay for. There's all kinds of different things out there; car starters and different subscriptions you might order like, from like stores and things like that.
Magazines, I mean if people still read magazines, but yeah, well, you'd have
a digital magazine. Yeah, yeah, that's true. That's true, newspaper. Yeah, news. That's, you know, that's a really good one, like the newspapers out there that have gone to a digital model. And you're paying for that digital newspaper to be delivered to your inbox. Are you really reading it? Right, right. Maybe you are, maybe you're not. But that's kind of what we're going to talk about today are subscriptions that have sort of gotten lost in the shuffle that you're paying for, that you might not necessarily be using. And that money's being spent whether you're using it or not. Right. So, you know, I was looking at an NPR article, and in that NPR article, they were talking a little bit about subscriptions. They say on average, about 8% of customers canceled during the months when they're asked to actively renew their subscription. Only 2% of those who cancel are doing so during other months. And I think that that's kind of the key is that you get a lot of these subscriptions that do this sort of idea of, hey, there's a free trial, right? And you get you get your free three months, and then we're going to start, you know, then your subscription automatically renews. Yeah, right. Yeah. Do you have anything like that? Like, what do you, what do you subscribe to?
Streaming services galore, definitely. Because yeah, you can't have one app that does it all anymore.
No, that's true. I'm the same way I have. I have like every streaming service out there, I think, yeah, yeah. And I'm paying as much for those as I am for cable, which is sad. I'm probably I mean, seriously, when you add up all those individual likes, and, you know, like, $6.99, $7.99, and $2.90, whatever it is, and like, you add all that up, and all of a sudden, it's like spending $70.00-$80.00 a month on streaming services. Yeah, you know, pretty easily.
I want to watch this one movie while I gotta get out of this app and go to this app. I don't know where it's at. You know?
Yeah. And we get you is that there are some shows that are available on multiple streaming services and some shows that are only available on one and then you're paying for that one show. Like that was a big deal when, when The Office left Netflix, I remember that was a big, and Friends it, there's The Office and Friends that were, there were both on Netflix at one point. Yeah. And they, they moved to other platforms. And people were just losing their mind over the idea of having to switch to whatever platform they moved to. I can't even remember I think, I think The Office went to HBO Max? Something like that, which is no longer HBO Max it's now Max, because you know, we just keep changing names and colors and you know, gotta keep people confused. Fresh. Yeah, you know, fresh or con-, you say fresh, I say confused. So, so is that, is that why you have multiple streams is so you, so you can watch like one show on one thing? Oh, yeah,
I mean, pretty much. Yeah, yeah, pretty much. What other subscriptions do we have? Shopping subscription. So, you know, you may have Amazon you know, for example, Amazon Prime, you pay a subscription to be able to get two-day shipping. Go even further, you know, you have Amazon Music, which is still an Amazon product, but it's a completely different subscription, you know, yeah,
that's true. Well, that's true because you get well speaking of videos, so you get Prime Video as part of your Amazon subscription for Prime, but you only get a limited music library as part of your Amazon Prime subscription. If you want the full music library, you have to get the Amazon Music subscription. True, true. So, I think with this article, and there are a number of articles. There was another article we were looking at from a lesser-known publication called Techlicious, which I just love the name, is talking about what do you do whenever you don't realize you're, you're paying these, these fees? Because I think to your point about shopping, if I have a subscription for, I don't know coffee beans, right, I'm getting coffee beans delivered to my front door. Like I recognize that I must have paid for this because it showed up. You have something tangible. Yeah, yeah, exactly. The same thing like, you know if you talk about auto pay with like your electric bill or your water bill. Like if you don't have water, you know that something is wrong, your pipes are frozen, or you didn't pay your bill. Yeah, but with these streaming subscriptions, especially and sometimes you just don't realize you're paying the money. You, you, you to your point you, you bought it to watch one show or one movie, and then you forgot about it.
Yeah. Or you sign up for that, you know, 99 cents a month, you know, for a year, starter fee, and you know, you don't think about it, because you, like you said you wanted to watch one show. Yeah. And then your year is up, and it's now, you know, $20 a month.
Yeah, you bring up a good point, I just bought a, I just bought a car about six months ago. And as part of buying the car, they said, hey, you get three months of Sirius XM, you know, as a thank you for buying the car because the car came with Sirius XM, right? And then they said at the end of the three months for an additional $2 we'll extend we'll double your subscription. For $2, you can have six months of Sirius XM. And now I'm coming to the point where I'm getting close to that end of the six months. And I'm starting to think about how do I cancel this subscription? Yeah,
you better start thinking about that early. Yeah, because actually I had a relative that tried canceling XM Radio, and he had a heck of a time. Really? Yeah. Yeah. Because you mean, you make a phone call and now you talk to a robot, and you can't always get through to an actual person. He ended up going to his credit card company and said, you know, hey, just stop paying refused to pay this because I've tried and tried, and I can't get through to anybody to cancel this subscription. Yeah, that's crazy.
That's crazy. And well, you bring up credit cards, your statement. So, sometimes you can look at your bank statement, your credit card statement, and you see these entries on there. Yeah. And that's one way that you can take a look and see what subscriptions you're signed up for that maybe you're not using. Yeah, but sometimes it's tough to even tell what those descriptions are, you know, when you go down through and you see, you know, $6.99 and its sort of a gobbledygook of letters, that if you know what it is, you know what it is, but to the average person, it's, it's not easily decipherable. Yeah, yeah. And we have stuff, you know, even for things like computers, like you have to have subscriptions now, for things like Microsoft Office, a lot of times you have a subscription. Or, if you have a gaming system, like an Xbox or PS5, you might have a subscription to be able to just play games online.
Yeah, the physical disk is going extinct. Yeah. Yeah. I
remember, whenever I was a kid, you actually had friends come over and physically sit in the room with you and play video games. Now. Now, you may not even do that half the time anymore. Yeah, yeah. But those are the kinds of things that I think we're talking about, too, is this idea that okay, you, maybe you were a gamer three years ago, but you got a different job, you don't have the time, you had kids. Now you, you have other interests, but you're still paying that subscription fee to be able to play that video game online, even though you haven't picked up a controller in a year and a half. Yeah. Right. So, let's talk a little bit about how to cancel subscriptions that you're no longer using. Okay. Yeah. Because one of the things that I was reading here is that that's not always easy. You absolutely cannot always figure out exactly where your subscription is housed. Let's put it that way. I think if you go to like to your Apple iPhone, don't, isn't there a subscription section in your Apple iPhone? Like in the settings? There is? Yeah,
yeah. Under your Apple ID,
I think yeah, yeah. So, is that subscriptions that you signed up for on your phone?
I'm thinking, probably? I would think. Yeah. So,
if I sign up for a subscription on my phone, the subscriptions probably housed in there. Yeah. What happens whenever my subscription is through some other service? Say, for example, I get a new cell phone at Verizon, and Verizon says, hey, for the first year, you get a free subscription to Disney+, how do I cancel? Do I cancel Disney+ with, with Disney? Or do I cancel with, with Verizon?
Well, usually how it goes is you call one they tell you to call the other than that, that provider tells you to call the, the other one back. So, yeah, it goes around in a circle.
Yeah, that's frustrating. I mean, it's, and especially when you start thinking about like the, I think they are very, very deliberate in terms of what their fees are. I think most of these, these places, their fees are probably under $10.00, right? Per month. Yeah. So, you look at your debit card or your credit card, and you say, ah, it's only $7.00, I'll just, I'll just, I'll just let it go. It's only $8.00, I'll just let it go. Or maybe it was only $8.00, I thought, maybe that's what I spent at, at the convenience store yesterday, because I bought some chips, and I bought a soda. I mean, so they kind of fly under the radar a little bit. But if you think about it, if you had an $8.00 subscription to a service that you're not using, and say you have three of those. That's like $300.00 a year that you're wasting on stuff that you're not even using, man. Yeah, I mean, and you know, to some people, maybe $300.00 isn't much, but to me, it is something.
That's a utility bill. That's, that's a present, that's a Christmas present. That's true.
Yeah. And you know, we're recording this right at the beginning of December. So, I can guarantee you that there are going to be people out there right now listening to this, who have gotten introductory subscription offers at this time of year, that these places, they're hoping that you forget about them. Yeah. I mean, that's really what it comes down to. They're hoping that you forget about them, definitely. Yeah. So, there are apps out there and I think you did some research about different apps and different services out there that you can theoretically use that are, they say that they are designed to help locate and eliminate subscriptions that you're not using? Yeah,
some, you know, they will fight one of your subscriptions to try to get you a lower rate. Or if you're trying to cancel a subscription and you can't, they'll have an agent do it for you. But a lot of times there is a fee with that. So, you know, of course there is exactly it's another subscription.
I'm suppl-, supplanting one subscription for another
is what you're saying. Yes, yes. But in hopes that you're, you're gonna save money. Yeah. So that's, that's the big thing you got to look at, okay, how much can I potentially save? And is getting one of these apps or using one of these services worth it? You know, if the free version doesn't come with whatever feature you're looking for. So, what kind
of feet-, so, so you said about free. So, what, well, give me an example, like what would be something that would be part of the free version that isn't necessarily part of the paid version?
I think a lot of the free versions have budgeting tools. So, it may not be something to get rid of a subscription. But it may give you more of a visual of, hey, this is where I'm paying the most money on this subscription. Or, you know, hey, next year, I want to try to save, you know, $100.00 a month. Okay, how are you going to do that?
So, looking at some of the ones that you looked at, like you looked at like Mint, I think you, you looked at like a PocketGuard, Truebill, which is, which is I think Rocket Money, which is a pretty popular one, I think. And again, you know, just like everything else that we talk about on this podcast, we're not endorsing or trying to, we're not trying to sway you one way or the other. We're not trying to, we're not trying to tell you to use one and we're not trying to tell you not to use one, we're just trying to put the information out there about how they work. And whether or not, you can decide for yourself whether or not you think they're worthwhile. But I think, I'm looking down the list here, it looks like most of these come with some sort of a free version to start. Yeah. And then, you know, there's limits on how many subscriptions they'll track, there's limits on, you know, like this one here, like, you know, this, this one app here, I'm not going to looks like it's well, it's under Mint, but it's called Billshark? I don't know what that is, it says it keeps 40% of the savings, and then you keep 60%. So, if they save you $100.00, they're taking $40.00 as their fee, and then you're getting $60.00 back. So, that brings up a question, once they identify all your subscriptions, and you're able to pick and choose which ones you want to cancel, I don't need this anymore than right? I mean, theoretically, yeah.
I think that was, that was a complaint I did read because some of these apps, you know, you have to manually put in your information, your subscriptions and everything for them to be able to track it. By that point, you know what you're paying for. So, why are you using that?
Good point. And maybe it's so that they, maybe they know the secret that your, your family member didn't as to how to get in touch with people.
That, that could be you know, but you got to pay, you know, I don't think any of these, you know, the free version includes a subscription cancellation feature, you know, that, that's premium.
So, I mean, they get to coming or going, they really do. But I'm looking down here at this, this Rocket Money, so, it's like agent driven subscriptions, agent driven bill negotiations, but again, they're keeping anywhere from 30% to 60% of the amount that they're saving you. So, I think the, I think the bottom line is if you can identify some of this stuff on your own, it's probably just as easy for you to cancel your own subscriptions as it is to pay another company another fee to try to save money. I agree. You know, that's my take on it. I mean, I don't know, like, I know that a lot of banks, you know, will offer some sort of free budgeting software as part of their online banking service, things like that. And, you know, maybe that's it, maybe that's your avenue, you know, you look through there and you figure out your budget. I think, I think the big trick is just understanding where your subscriptions live and being able to cancel them that way. True. So yeah, so I think that's, I think that pretty much gives, gives a pretty, pretty good flavor about what we were talking about. I mean, just keep an, keep an eye on what you're buying, you know, and especially in the holiday season. When you're signing up for stuff, you know, put a little reminder in your calendar, you have a sma-, if you have a smartphone, put a reminder in your calendar that says hey, in three months, I gotta cancel subscription X. Yeah, you know, if you, if you look back and you think yourself, man, I haven't watched anything on that particular streaming platform in six months, cancel it. It's not like they're not gonna, they're not gonna, it's not like once you leave, they're not going to let you back in. You know, you can re-subscribe if you want to, but cancel it for now. Save yourself the money. Yeah. Right. Any other suggestions that you can think of? Don't just
pay your credit card bill. Look at what you're paying for first. That I
mean, that's, that's a really good point. I mean, you know, blind paying just all, I owe this much I pay it. Boy, that's, that can, that can definitely get you into trouble sometimes. And
it's so, so easy now that, you know, most people will go to paperless billing, you know, you don't get that piece of paper in the mail anymore saying, hey, this is how much you owe. You know, you don't open anything. You may get an email saying hey, your statements ready or something like that, but...
Which is buried in 25,000 other emails we
get every day, right, right, those emails from companies that want you to sign up for a subscription, right?
Exactly. All right. Well, you know what, Jeff, if we don't talk to anybody have a happy holiday season. Hey, you as well. Absolutely. And Happy New Year. I'm sure we'll talk again in January. It'll be completely fresh and new. And we'll be subscription free. Yes. Yeah, thanks. And if you haven't listened to the most recent full episode of Bank Chats, make sure you check that out. I think we were talking Trusts episode 5 was the one right before here. And we've got, we've got a good one coming up later this month on budgeting. So, we're gonna stick with that theme. Yeah, we're sticking with the theme. That's, you know, it's the holiday season. We're all overspending, we can definitely use some budgeting talk. So, we're going to talk some budgeting later on this month with a special expert guest as well. So, good deal. All right. Hey, Jeff, take care. Hey, you too Drew. Thanks. Thank you.
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Fast fact. James Smithson created the Smithsonian Institute through a bequest found in his last will and testament. I'm Drew Thomas, and you're listening to Bank Chats.
So today on the episode, we're going to have a general discussion about trusts. And we are pleased to welcome David Finui, the President & CEO of AmeriServ Trust and Financial Services Company. Hi, Dave, thank you for joining us today. Thank you. So, we are here today to talk about trust. And I think that a lot of people really have a difficult time fully comprehending what trust means, and what a trust company really does. So, I know we're gonna get a little bit, we're not going to get too deep today into everything. But let me let me just, you know, see if you can, if you wanted to go ahead and give me just a generic idea of what, what a trust company really does what it's there for.
It is the management, it's the management of somebody's financial lives, actually. What we do is actually manage money for people. We manage money for three types of people; those that don't want to do it themselves, those that shouldn't do it themselves, and those that absolutely can't do it themselves. Those that don't want to do it themselves, the best examples that I can give for, these are people that are building their wealth. They're, they're, they're busy in their own careers, they may own a company, they may be working for somebody as an executive, whatever that is, and they are busy with their own jobs, okay. So, they really don't have the time to manage their own money or invest their own money. And we can take care of that for them as part of their financial planning, and they're part of their estate planning. Where we run into really what a trust department or trust company does is when we manage that money for people that shouldn't do it themselves or can't do it themselves. If they shouldn't do it themselves, for instance, mom and dad have some money, they pass away, they want to leave it to their children, but they know their children can't manage their own money. They might be spendthrifts, they, if they, if they come into a pile of money, what they'll do is they will spend it down immediately, and then they'll be out of money. Okay, so they leave that money to us in a trust company or trust department. And what we do is we can control their financial lives a little bit that we can make sure that that money is preserved for them and for their best interests and for their best use.
Now, now, do you make that decision? Or does the person who opens the trust and the, the, for example, the parent, does the parent make the decision on how the money is, is managed or spent? Or, is that something that you would then do is as a, as an expert?
Well, what happens is that whenever the parents let’s use, keep with that example, if the parents set up a trust and, we'll tell you what a trust is in a second. But if they set up a trust, say under their will, they can leave specific provisions within that trust that can direct us, okay. Normally, we're allowed, for instance, to make distributions for what is known as health, education, maintenance and support of that individual. But the parents can leave some, some specific directions. For instance, yes, we're allowed to spend money for a house, we're allowed to help them with a business, we're allowed to be a little more liberal or a little more restrictive. And they established that within the trust document, okay. Okay. Third category are those people that absolutely cannot do it for themselves. Two examples, one would be very, very young children, they just don't have the legal capacity, in essence, to manage that money themselves. Or, if they, if somebody becomes incapacitated, in some level, and they are adjudicated incompetent by a court of law, and we can establish a guardianship for those people, and we manage 100% of their lives. And those are under the rules of engagement by law as to what we are allowed to do with a guardianship and not allowed to do with a guardianship.
So, when we talk about trusts, and before we get into too much detail, can you talk a little bit about what a trust is.
A trust is a legal arrangement. It can be verbal, but normally it's put on paper. It's easier to manage that way because there's no ambiguity about it. But it is an arrangement that involves actually three different parties. One is known as the grantor, and the grantor is, is the originator of the trust. That's the person that is drawing up the trust and they want something to happen with that agreement. Okay. A trust then takes control of the assets of that individual that they want to put into the trust, and those assets are then managed by the second party, which is the trustee. You have to name who that is going to be, and, and that trustee then manages those assets for the benefit of the beneficiaries. So, there's those three parties, the grantor, the trustee, and then the beneficiaries. Okay. Okay. What are the duties basically, of that trustee? The duties are the trustee must manage the assets for the benefit of the beneficiaries in their best interests. And where we get into a little bit of ambiguity, is what happens if there are multiple beneficiaries?
Sure, yeah. Because everybody has, you know, maybe a different goal or different needs.
That's exactly right. Some, some beneficiaries might be, look, I need income. That's what I need, I need that right now. Other beneficiaries at that same trust, might say, look, I'm not concerned with what happens right now, I need growth for the future. I want to preserve this money; I need it for some time in the future. So, it becomes a very tricky situation in which the trustee must manage for the benefit of all of the trustees. And that's under law, that it has to do that. So, it's a fiduciary relationship.
And I'd like to take a moment to talk about that term, because I don't think a lot of people know what a fiduciary relationship is. Can you explain what a fiduciary is?
Well, that's, that's really what it comes down to is a fiduciary must act in the best interest of the beneficiaries. In a non-fiduciary investment management relationship, normally, what happens is the financial advisor can act and recommend things that are simply suitable for the person. So, there's a difference between the suitability rules and the best interest rules. Okay. One of the things I do want to make a distinction of here, though, too, is the trustee does not have to be a trust company, or a trust department, what we call corporate trustees, it can be individuals, and you can name an individual as the trustee of your trust, okay. However, under law, those trustees still must act in the best interest of the beneficiaries. And in Pennsylvania, in particular, and most states are very, very similar, where we op-, we, we operate under the Uniform Trust Code. Pennsylvania has the Decedents, Estates and Fiduciaries Code, specifically for Pennsylvania, that operates under the Pennsylvania Uniform Trust Code. And it doesn't distinguish between corporate trustees or individual trustees. It is trustees, so who polices that? The Commonwealth of Pennsylvania, like I said, you know, is, has a regulation that all trustees must follow. The problem is whether they know that or not. And who would regulate that on an individual trustee? Normally, what happens is the beneficiaries are the ones that bring action against the trustee, because the trustee has done something that they view is incorrect. So, what will happen is they'll petition the court and sue the trustee for breach of trust. And one of the, it's sort of a tangent at this point, but one of the hardest things for a trustee to do is to interpret the need for discretionary distributions from the trust. A lot of times the trust, trustee is given full discretion in making distributions. And I'd mentioned earlier, health, education, maintenance and support. Well, let's use a quick example. So, we have a sum of money for a child, and we're allowed to make those distributions for his education, his or her education. So, the first thing is, is where to go to college. Okay, so somebody gets accepted to Harvard, but their trust is only $100,000. You know, is this something that's in the best interest of that child? Well, they have to understand we're not going to be able to pay from the trust the full part of that education for them, because that's much more expensive than that. Sure. Okay. Now, if we're looking at a much larger trust, that becomes a little bit of an easier decision. I use another example, what happens, you know, they need a computer for school? Well, that's a very legitimate thing right now. Now, do they need a computer that has full gaming capabilities, you know, too, for their college education? Well, if we have a very large trust, maybe that's not such a big deal. We have a much smaller trust, and we have to be concerned about preserving for that child for their entire four years or six years, whatever their education is going to take, then we must be a little bit more conservative about something like that. So, those are just two examples.
Now, now I think those are fantastic examples. And one of the things that you, I think we were kind of getting into and we might have gotten a little deviated was, there are different, there are different ways to classify trusts and different ways that those basically types of trusts that are out there. And I'm sure that they have different rules as to how they, how they are managed.
And again, just from a very high level, we really look at trust, maybe coming into again, three types. One is a revocable living trust, the grantor sets up the trust for their financial planning, for their estate planning purposes, while they're alive, that's why it's called a living trust. Okay, and revocable, meaning that that grantor can amend the trust or revoke the trust at any time. They don't need permission; they can just do it. So, those are very, very flexible, there's not a lot of tax advantages for anything like that, you're really looking for the investment management of the trustee, you're looking for the expertise and health of the trustee. But it's really a very open document that they can, they can keep control of as long as they're alive. Okay, the second type of trust, though, would be an irrevocable trust. This is where a grantor wants to actually put money into a trust and give it away, take it out of their estate, give it to somebody else, beneficiaries, but still not give it outright to the beneficiaries, they still want some control over those funds, they still want, you know, the trustee to be able to preserve those funds for the beneficiaries. But they actually do put it into an irrevocable trust. That trust, just by its name, cannot be revoked, and cannot be amended. There's always, you know, exceptions to that, because it can be revoked or amended by the court. And there are certain ways that it can be revoked, but generally speaking, they have made a completed gift, and they've taken the money out of their estate, and they've placed it into an irrevocable trust for the beneficiaries, and that's gone. And then the third type that we talk about a good bit is a testamentary trust. Testamentary just means testament is under will. So, they place a trust under will to take care of their children or take care of the whatever beneficiaries they want to take care of, when they die. That trust does not come into effect and has no assets until the person passes away. It's under their will. Okay, and those trusts are irrevocable once they're established, once the person passes away, trust is established for the benefit of the beneficiaries. And the trustee manages and preserves the assets for the benefit of those beneficiaries as we talked about earlier under a fiduciary capacity.
Okay. So, and you kind of mentioned a will, so is that, is that really what a will is as a testamentary trust in in all situations or is a will something different?
A will is something different. A will, a will is just how you want to distribute your assets after your death. It does not have to contain a trust. For instance, husband and wife situation, I can have what we call I love you wills where I simply say that everything goes to my wife, okay, okay? And she gets it outright, doesn't have to be in a trust. However, if my wife is a spendthrift, then we can use the opposite example, if the wife is the business owner or the main and the husband is a spendthrift, it can work both ways. But what happens is then that trust can be established and the money can be placed into a trust instead of giving it to the surviving spouse outright. Okay. Those are just quick examples. Okay.
It sounds like there are a number of advantages really to having a trust versus something as simple as a will. So, what, do you want to talk about maybe some of the advantages of why trusts are created and why people tend to use them?
Yeah. Several reasons why, why trust. The first reason or first advantage of the trust is it does give the trustee control of those assets for the benefit of the beneficiaries, like we talked about earlier. So, the beneficiaries don't receive the money outright. And there, like I said, there's, there's a lot of reasons for that. But then we get into the technical reasons for trust, for instance, where to minimize estate taxes. And when I talk about estate taxes, I want to talk about both state taxes and Pennsylvania inheritance taxes. There's a difference between the two. But one of the only ways to avoid estate taxes or in a particular Pennsylvania inheritance tax is to give the money away now, you take it out of your estate, and you give it to somebody else's estate and you, you make an, a completed gift to that person right now. You can either do that in cash, or you can utilize a trust, like I had mentioned earlier an irrevocable trust, which means the grantor now can't take the money back, can't revoke the trust, can't do anything to get that money back. But they can still control that money for the benefit of the beneficiaries through the trust, and through the trustee. So, it takes it out of their estate, and puts it in someone else's estate. Okay, so that estate taxes and inheritance taxes are avoided in that particular situation. The other one is and, and we talked about this is to shield the beneficiaries from their creditors. If you hand over a sum of money to your child, and that child has debts, that becomes their asset, and it becomes subject for those creditors to take that money, in essence, to pay the child's debt. Okay. By utilizing a trust, even though the money has been given to that child for the, for their benefit, they can have a spendthrift provision within the trust, that's said, only the money that we distribute, becomes that child's asset directly for the creditors benefit. They can keep it in the trust, and if it's not distributed, the creditors cannot come back and get that money for them. Okay, so it can shield that. It can preserve assets for children, until they're grown, until they can, they can take control of it themselves. Now we've seen trusts where they, they shield money from their children, up until their 60s and 70s. But in most cases, what happens is that look, the child is 15 years old, something happens, the trust is established, and what we want to do is we want to preserve that money for them until they can take care of it themselves. And we determine what age that is normally 21, 25, somewhere in that area, and you say, okay, at that point in time, the trust ends, and the money goes to them. Because normally by that time they've been educated. And sooner or later, they have to stand on their own two feet.
Right. Either, either by school or by life, they've been educated exactly right.
A lot of times what will happen is, say that we must distribute the income of the trust, we can hold the principle under a discretionary authority. Okay, other times, the whole thing is discretionary. And just thinking through this a little bit, another way that a lot of trusts are structured, is that they give out portions of the trust at different times in that beneficiary's life. For instance, at 21, we'll give a third of the trust to them, okay, and a 25, will give half of the remaining trust and 30, they get 100% of everything. And what happens is, is somewhat of a teaching experience, because if they get it at 21, and they blow it, they get their second distribution, they should have a little bit of an education and say, okay, I gotta be more careful this time around. Sure. And, and we've actually seen that work very well, very well.
And I would suspect, and I could be completely wrong here, but I would suspect that there are situations where someone has earned their money and built their wealth, you know themselves from the ground up, and has an appreciation for all of the work and effort that it took to accumulate that wealth. And they are followed by certain family members that have never had that experience of having to work as hard or overcome the same challenges that the person who earned the wealth in the, to begin with had. And so, they don't have as much of an appreciation of how quickly that money can, can disappear.
There is an old saying in, in the industry is that the first generation makes the wealth, builds the wealth, the second generation enjoys it, and the third generation wastes it. And we've seen some very ingenious trust structures, in essence to bypass that inevitability. So, it is used, trusts are used for that purpose so that it stays preserved for future generations for a long period of time.
Yeah, that makes a lot of sense to me. What would some other, what would be some other advantages of trusts?
One of the advantages that we would want to get into with, especially establishing, say, a revocable living trust. Why, why would somebody do that even for themselves naming themselves the grantor is actually their own beneficiary until something happens to them. So, the grantor establishes the trust, the trustee manages the trust for them, but the grantor is also the beneficiary. And what happens is then, the trust document can say that the trustee has discretion to make distributions should the grantor become incapable or incapacitated to make those distributions or to direct those distributions for themselves. So, it somewhat bypasses the need for a court to come in and declare somebody incompetent. A court declaration of incompetence or through guardianship is a very, very messy situation. A lot of family members fighting over all of that type of thing as well. And the revocable living trust can bypass that situation as well. The second thing gets into a specific type of trust that we would like to go into maybe in a future presentation is the special needs trust. This has become one of the biggest growing areas of trust that I've witnessed in my career. And what a special needs trust does is that the money in that special needs trust should the person be incapable, and also receiving government benefits, for instance, Medicaid, or Supplemental Security Income. If they have too much money in their name, or if they have too high of an income in their name, and those, those limits are very, very small, then they are not eligible for those government benefits. They're called needs-based benefits. But the special needs trust can be established, that takes the money out of their assets, for those purposes, but they still have the right to use the money or the ability to use that money for their benefit, to keep them going. So, that's another, and normally, like I said, that is somebody that's incapable of handling their own assets, they, they have some type of special need.
Okay, now, we've talked a lot about money, literal, you know, money changing hands, but can trust also be used, I would assume, for things like property? If you have a, you know, a family estate, or something, a house, a place that, you know, you can, you can pass that along through a trust as well, correct? It's not just cash?
No, any, any asset at all can be placed into a trust. You know, that just reminds me a little bit, some of the things that are happening now, that we didn't worry about in the, in the, in the past, and not too distant past are such things as digital assets. You know, your phone, for instance, right now has, has a wealth of information on it about you personally, that is a digital asset. And, and there are specific provisions now in trusts and in wills, giving the executor and the trustee the right to access those digital assets. So, so that's one thing, that's just a little bit of a sideline. But yes, real estate, property, can be placed in trust, any, anything along those lines. And the trustee is responsible for preserving those assets in accordance with the trust document. And one thing they do want to be very, very careful of, though, and I do want to mention that placing a house in a trust, and it is a personal residence trust, there are specific provisions that can be used with that. But people do have to be careful with that, because their personal residence is considered an exempt asset for Medicaid, whenever we were talking about that earlier. So, I can only have so many assets in my name, and still be eligible for medical assistance. Okay, if I placed the house in a trust, that becomes a non-exempt asset now, which means that it is counted in that person's assets when applying for medical assistance. And you have to be very, very careful about doing that. It depends on the specific situations and the financial condition of the people setting up that trust. If they are extremely wealthy, and they are looking to transfer that house with, you know, outside of the tax base, and we talked about that earlier, yes, that you can place it into a trust. But if, if you're like most of us, and you don't have those huge assets, then we want to be concerned with that and we really need, and we'll mention this here, all of this advice, we are not attorneys, this is not legal advice. This is not accounting advice, please, that is something that you really want to check with your attorney on to make sure you're establishing that correctly and for the right purposes.
You had mentioned earlier that you're obligated to work in the, in the best interest of the beneficiary. Right, and that in some, in some cases that those interests are different if there are multiple beneficiaries listed. So, have you ever encountered a situation, I know you can't get into details about specific you clients or customers, but have you ever encountered a situation where someone was just being vindictive? And just decided they wanted to give you 95% to one child and 5% to another. And how do you handle something like that? When, because you can't just ignore the rule, right? Or what the intent was. But, but, or can you?
Well, that is interesting, that does bring up a specific example. And I obviously can't say names, but it was a trust under will that I was reviewing for workability. And the gentleman that drew up the trust, or the gentleman, the will was for, extremely wealthy, and had five children and had disowned one of them. Okay, so the, the, the will was really set up and trust for setup for the remaining four children. And they did give $1 to the disown child, basically, just to say, I didn't forget about you, but this is what you get. But there was a provision within the, in the trust under will, that said that the children, his living issue, could remove the trustee or change trustees, if they had 100% vote, and did not specifically say that that, the disown child did not have a vote. And so, you know, the four could have said, Yeah, we want to change trustees, but the one that was left out could have ruined the whole plan. Yeah, when that was pointed out to the attorney, they did say that cut and paste, copy and paste is a bad thing sometimes. And that's it. Yes. The other situation is that, as I mentioned earlier, I've been involved in a situation where one child needed income and wanted the trust to be invested solely for income, because it said, we could distribute the income or must distribute the income to them. The other child was like, I don't want income right now, I want this to be preserved for my children later on, and I want it to grow. And so, there were two competing beneficiaries there. And simply becomes a matter of the trustee having to balance those, those needs, and to invest it accordingly, to make sure that both of them are, are treated as fairly as possible.
And I think this goes back to what you were saying earlier that, you know, it's nice to have an objective party, and not a family member, not one of the beneficiaries making those decisions on behalf of the others.
You know, one other thing, I'm gonna mention this Drew, just as we were discussing this, because we were saying about maybe the advantages of a corporate trustee, as opposed to an individual. But I do want to mention, you know, for the people listening in on this, one of the ways to handle both situations is to name co-trustees. You name, and, the corporate trustee, for instance, that manages the investments that handles the discretionary distributions, that type of thing, but you also have a co-trustee, that's a friend or a relative that has some special knowledge about the family needs. And that's always advantageous to the corporate trustee in trying to determine if the distributions are reasonable or not.
That makes sense. Okay.
That makes sense. Those situations do occur.
So, I, again, we're trying to, we're trying to keep this very high level, and I really appreciate I think we've covered a lot of, a lot of ground. And I think we've, we've given people a really solid preview as to some of the other things that we might want to talk about on this, on this, on this podcast, you know, as we as we progress through but the one other question that I had before I let you go today is, is there a, a limit, in terms of how many assets you have, how much income you have? What you have available to you, you know, before a trust becomes a benefit to you? Is there, is there a, is there a level that you just generally don't, don't get into trusts? Or is there, is it something that almost anybody might benefit from in some way?
As a corporate trustee? Yes, we do have limits as to how much money, how much in assets you must have before a trust can be established within a Trust Company. But remember, we're also talking about individual trustees and that other type of thing. So, that, you know, there's no real specific limit. On a realistic level, if you do not have a lot of assets, or, you know, if you have very small assets that are passing along, or if they're all going to one place and you don't mind them going out right to that individual, then, then there's no need for a trust. Let me put it this way. I had a situation years ago where a number of companies were going through the area, and they were selling the benefits of trusts. And they come with a pre-made package of trust documents that are fill in the blank, and you, and you, the, the biggest thing that they were trying to do was say that trusts are not subject to probate and probate expenses. When it really comes down to it, probate is not a very big expense in comparison to other expenses of dying. And they were selling these to people as a package. And I had an individual come to me, and they came to me and said, I need to borrow $2,500. And I said, okay, well, first of all, it's the wrong area, but what do you need the money for? And he said, well, I'm buying the living trust from the trust company that was setting these up. And I really said, well, first of all, if you have to borrow the $2,500, for the trust, you probably don't need a trust. And that's really what it comes down to. Okay.
And I think that it is important to know that, that, like you said that there are companies, and I'm air quoting, there are companies out there that will sort of try to lead you down a path that is maybe not in your best interest. And it's important to know that who you're dealing with is reputable and working again in your best interest and not in theirs.
That's extremely well said.
All right. I thank you very much for your time today, David, I welcome you back anytime to talk more in depth about some of the subjects we briefly touched on today. It's, it's truly been a very beneficial and educational experience. So, thank you.
This podcast focuses on having valuable conversations on various topics related to banking and financial health. The podcast is grounded in having open conversations with professionals and experts with a goal of helping to take some of the mystery out of financial and related topics, as learning about financial products and services can help you make more informed financial decisions. Please keep in mind that the information contained within this podcast and any resources available for download from our website or other resources relating to bank chats, is not intended and should not be understood or interpreted to be financial advice. The host, guests, and production staff of Bank Chats expressly recommend that you seek advice from a trusted financial professional before making financial decisions. The host of Bank Chats is not an attorney, accountant, or financial advisor, and the program is simply intended as one source of information. The podcast is not a substitute for a financial professional who is aware of the facts and circumstances of your individual situation. Thank you for listening. Before you go, we'd like to thank our guest, David Finui, President & CEO of AmeriServ Trust and Financial Services Company, for joining us today. While we hope that this podcast provided some good information about the general workings of a trust company, we plan to delve deeper into some of the particulars of trust products and services in the future. If you have questions or would like additional information, we invite you to visit our website at ameriserv.com/bankchats or leave us a comment. We look forward to hearing your thoughts about the show. AmeriServ Presents: Bank Chats is produced by AmeriServ Financial Incorporated. Music by Rattlesnake, Millo, and Andrey Kalitkin. Production assistance from Jeffrey Matevish. If you haven't had an opportunity to listen to our previous episodes, we invite you to check those out either by visiting ameriserv.com/bankchats, or by finding the podcast on your favorite podcast service. Don't forget to like, follow, or subscribe to be sure you never miss an episode. And sharing the podcast with your friends and neighbors is always appreciated. For now. I'm Drew Thomas, so long.
2 Cents Episode: 1
All right, so we decided we are going to try to do something a little bit different. Of course, you know me, I think at this point, I'm Drew Thomas. And for those of you who can't remember, but with me is my compatriot, my partner in crime, Jeff Matevish. Hello, hello. And you may, you may recognize Jeff's name from the end credits when he does all the extra production work on the full episodes of Bank Chats. But we found a really interesting article and we just decided to sit down and talk about it. Yeah, yeah. And so, so for all of us that have, have done this, we were having a discussion here that contactless payments, and let's talk about like Apple Pay and Android Pay and Samsung Pay, and every other brand out there that we are not endorsing, pay, and contactless payments with cards, do you use contactless?
You know, I, I don't but you know, now working at a bank I may get into it a little bit more. I came from a software engineering background, and you were always like, very skeptical of anything, technology that you weren't in control of. So, I can appreciate that. So, yeah, anything where I'm putting my information out that I don't know what actually is happening? I'm a
little skeptical. Yeah. I will say that, there's, I guess there's some legal drama going on with contactless payments, right. And you really only have Apple and Google that are, that are handling contactless from a smartphone perspective, not necessarily what is on your cards. Because like, there are contactless credit cards out there too. And yeah, debit cards and things like that. But I guess there's a lot of sort of hand wringing happening between whether or not Apple and Google have too much control over your contactless payments and how they work. And I will say, you know, I get both sides. You know, it is, it is a scary situation to start wondering like, well, if I'm giving my credit card information to Apple, what are they doing with it? And how is it being handled?
Right? So, you, you're a user, you're a supporter?
I am, a why, yeah, I am. I have to, I have to admit I am. But some of it is because I helped set it up for our bank. So, I got a really early introduction to Apple Pay and how it works. And ironically, right now, statistically, it is one of the most secure ways you can make a payment. I've heard that too. Yeah. Because it doesn't share any information with your, with your vendor. So, when a vendor gets hacked or something, your credit card information, like your card number, your, your CVV number, your expiration date, your name is not passed to that vendor. The, the Apple Pay converts it into a code key that is delivered to the vendor, the vendor delivers that code key to Visa, Visa says yes or no, and then it sends it back through the vendor, and it's completely anonymous. So, it's
tokenization on tokenization.
It is yeah, yeah. Talk tokenization Mr. Technology, what's tokenization?
Usually, you know, if you're doing some sort of like eCommerce, and you're storing credit card information that, that's hashed, you create a token, where it's encrypted. And you're, you're sending that encrypted data across to, you know, the end processor, I guess. So, Visa, MasterCard, Discover. That's right. So, it's completely encrypted, you know, it's safe, can't be intercepted, you know?
Okay. So, so I guess that's why like, when I look at this, and I say, well, when I use Apple, and first of all, I mean, I'm not endorsing Apple Pay, because Google Pay is very much the same, but I just happen to be an Apple owner. So, that's the one I'm most familiar with. But I don't want to say that there's anything wrong with Google's or Samsung's or any of the other kind of Droid versions of this. Yeah. But it's simple. I mean, it's just so easy to be able to use your thumbprint or your face or something, some biometric to prove that you are who you say you are.
And I think that's what scares me. That's the simplicity that if it’s if it's too simple, you know,
It’s yeah, but sometimes it's one of the things where, you have a voice assistant all through your house. I yeah, I do and so, so you can appreciate it's so complicated it's simple, right?
Yes. And that took me a long time too, to really use it. Yeah, I was, I was one of those you know, I'm never gonna have an Alexa or I'm never gonna have Google Home or anything like that. And you get one device and hey, that's pretty convenient. Yeah, and you get one for every room in your house and all of the sudden your lights don't work if they don't go off, if it goes offline. Oh, yeah, yeah, yeah. Yeah, don't even worry about a power outage just the network outage is yeah horrific. Now see, I now see I'm in the same boat as you I have some of that stuff at home, but I have a lot of times I have switches that are connected. So that worst case scenario I can still use this switch even if it's not connected to the Wi Fi.
Yeah, well, and I have some fail safes too. most of my house is on uninterrupted power supplies. So, you know, even if I lose power, I can still watch that that movie and surf the web. So, that's interesting.
So, yeah, so you understand so complicated that it's simple. Yeah, that's when it comes, when it comes to money, I guess I'm a little more, you know, skeptical.
Yeah. Well, there's and you know, we could go into a whole big conversation about things like FinTechs and stuff too. But you could argue Apple is trying to become a fin-, FinTech is financial technology meshed. Right. So, you could argue that Apple is trying to be a FinTech at this point. Yeah. With their good, they have a relationship with, who I don't know, who does the credit card. Is it Goldman Sachs? That I don't know. I don't know, they have a credit card through, through some of the, one of the bigger banks. Okay. And, so it seems like they're trying to get to that point where they're doing more financial stuff, but, and trying to make it easy, but easy, doesn't always mean safe. Yeah. And so I get your point there.
So, this article about this subject by Craig Guillot, they're talking about, you know, Apple Pay, and Google Pay being the two top dogs, actually the only top dogs. Do you see that, you know, staying? Or do you see one of them becoming the top and the only contactless payment processor?
Yeah, that's a good question. I don't know. I mean, I can't see either one of them becoming the, the payment processor, because there's a pretty even split, I would say out there between Apple and Google, in terms of people who own phones. And they both have their strengths and weaknesses. Yeah. But I think if one of them was going to become the dominant, they would have by now like, there's enough, I think there's enough Android acolytes and enough Apple followers, yeah, to keep that separate. Whether you'd ever see a third or fourth, I don't know, because I think they both have such a head start. I don't know what you do.
Yeah. I mean, you don't even, well, look, we only have a handful of, you know, cell phone makers to begin with in the United States.
Yeah. Oh, yeah. Well, and we're even seeing like, not that they're not the same, but even cellphone providers are getting smaller, smaller. I mean we got the big three now. I mean, T-Mobile acquired Sprint. Right, right. So, you got Verizon, AT&T and T-Mobile. That's the, those are your big three. Right. And all respect to Ryan Reynolds, Mint Mobile is not...
Yeah, your wholesalers are, you know, getting smaller and smaller too.
Yeah. Now. But that kind of goes back to what you said about our little sort of side discussion about, about home assistants. I mean, you had a couple that you had, you had Amazon with, with Alexa that got a very early start. You had Google with the, the whole, you know, hey, Google, OK, Google, you know, Google Home, right, platform. And then Apple, one of the biggest technology companies, arguably in the world, wha-, if not the biggest technology company in the world right now, monetarily, came late to the party with Apple HomeKit, and nobody uses it. Yeah, yeah. So, you know, you get a head start. And all of a sudden, you're kind of out of that. But I don't know,
you know, like, it'd be a price point to I don't know, I'm not sure what the going rate for, you know, Apple HomeKit products are but could be, you know, yeah, it could be if it's like any other Apple product, it's it's, you know, significantly higher price than competitors.
Yeah. But I don't see that. I don't see how in terms of smartphone, I don't see how a third or fourth party gets involved with with NFC payments. I mean, even Google's, what's, what's Google's Pixel phone took a while to hang on. And the Amazon that's in contrast, and Amazon tried to get into the smartphone market with the, with their Fire Phone. Yeah. And it went nowhere. Yeah. So I think that I don't see a third or fourth party. I think that's, I think, I think the, the, the author has a point in the article that you're kind of stuck. You have you have Apple or Google as a choice. Yeah. Yeah, I have to agree with you. I don't see how you're gonna get somebody else in there. No. So, yeah, so, so these are, our little conversations are not a full episode. I mean, we're gonna wrap this up, I would say, you know, pretty, pretty rapidly here. But I think it's important like we can, we can grab some of these little articles and we can kind of talk about things when they come across, and we'd love to hear your feedback. Oh, absolutely. Yeah. You know, what platform do you use? Do you use, do you use contactless payments? I don't know. Yeah. That'd be interesting thing to talk about, the next time. Thanks Drew. All right. Don't forget, episode four is currently available, the full episode of, of Bank Chats is available and episode five should be coming out later this month. I'm excited about it. It's good stuff. Thanks, everybody. Thanks, Jeff. Thank you Drew.
Fast fact, human error accounts for 95% of cyber-attacks, which makes them preventable. I'm Drew Thomas, and you're listening to Bank Chats.
Welcome to the next episode of AmeriServ Presents: Bank Chats, I am Drew Thomas and today we are going to be talking about cybersecurity. And, in this episode, we are not going to delve super deep into any one particular aspect of cybersecurity. But I want you to know before we even get started that what we're going to talk about today is high level. And quite frankly, we are we have plans to be able to go much much deeper into a lot of these sub sections of cybersecurity, but we want to, especially this being Cybersecurity Awareness Month, we're releasing this in October of 2023, for those of you that may be listening at a different time. It's really, really important to start to understand what cybersecurity is and how that relates to your financial health and education. So with that in mind, I want to introduce our guests for the topic today. We have Kevin Slonka, and Michaels Zambotti from Saint Francis University in Loretto, and welcome gentlemen, we really appreciate you being here today.
Thank you. Glad to be here. Thank you.
Yeah, absolutely. Thanks for having us. So I'm just going to randomly pick somebody because I don't want to play favorites, so Kevin, we'll start with you. Clearly favorite. Yeah, just give us maybe a little bit of background about your education and your history.
Sure. So I have been in academia since 2007, currently teaching at Saint Francis University, I teach computer science and cybersecurity. I've also worked in industry since around 1999 for various government contractors around the area. Let's see, got my doctorate at Robert Morris, various IT certifications, you know, not going to bore anybody with with that whole list. But uh, my focus in cybersecurity is kind of more on the the offensive side, what most people would call hacking.
Oh, okay. Excellent. And, Mike, did you want to go ahead and give us some background about yourself as well?
Sure, absolutely. I went to Penn State University, graduated from Penn State, and graduated with a degree in finance. And I worked in in the financial sector as a financial advisor for about 10 years. And then I went back to school, got my Master's in cybersecurity, and I've been teaching and working in cybersecurity for about the past five or six years. So, where my focus is, is a blend between the financial sector and cybersecurity where they intersect, and also looking at cybersecurity as a business problem. Not necessarily just a technology problem, but a business problem. This is something that impacts companies across the board, from profits to their customers to their potential customer, so looking at it, in that respect.
I was reading something in, and I may be misquoting myself because I'm doing this from memory. But the the total number of fraud related events in businesses last year was in the in the billions for the United States alone, I believe.
No, absolutely. And look no further than the newspaper. You know, if anybody's reading the newspaper or whatever, news website, you read, the casinos MGM and Caesars recently have been in the news, both had had cyber incidents. And you know, it looks like Caesars paid out about $30 million in ransom. Clorox, which is a company that you wouldn't think maybe is a big cyber target. They had an attack back in August, and it's going to impact their supply chain out to next March. Wow. After the news came out, you know, they have to, they're required to file to the SEC, and the stock fell several percent, so there was definitely a business impact. You know, it's not just a technology thing where they say, hey, you know, we had a ransomware attack, and our technology doesn't work. It's impacting the shareholders, it's impacting people that want to buy Clorox wipes. You might go to the store, and you know, not see so many Clorox products and because they're having a supply chain issue, so there's a real-world impact to what we see in the cyber world.
So, before we get too deep in any one particular example, or any of it, let's, let's talk about just what is cybersecurity? I mean, that's a term that is thrown around a lot. You hear it on the news, you know, but what exactly does that entail?
Yeah, I mean, for most people, you probably know what security is right? Like locking your house, you know, keeping your person safe, things like that. This is really the same thing. It's just you know, the combination of two words, cyberspace and security. So, it's doing all those same things, but to your online presence. So, we all, I'm sure that we all if you're listening to this podcast, access our bank, online, we have an app on our phone, everybody probably shops online. So, you know one way or another you have personal information, online credit card address, social security number in some places like your bank's website. So just being able to protect that, you know, that's generally what we're talking about when we talk about cybersecurity. It's protecting the data that we deemed sensitive.
And it's not exclusively, I think that, you know, there are a number of people who think that if they're, if they're not particularly active online, I know that like my, I'll just use an example from my personal life. My dad is not a technology guy. He got his first iPhone last year, and it was mostly because his flip phone broke, and I had one sitting in a drawer, and I said, you're getting a smartphone. But even if you're not particularly active online, or in cyberspace, like that, you still should be concerned about cybersecurity.
Oh, absolutely. I like to always tell people, you know, you can never have touched a computer ever, but do you have a house with a mortgage? All of that information that you filled out and wrote on those papers are stored on your bank's servers, which are connected to the internet. So, if your bank got hacked, all of your information goes with it. So, you could be living out in the middle of nowhere. But if you're a human being with a social security number, your data is on the internet somewhere for somebody to be able to steal.
And I think you made a good point like is, okay, so using a mortgage as an example, since you said about filling out mortgage papers. If you bought your house 30 years ago, is that still something to be worried about? Like, do you how long did your bank keep that information, and would it have been transferred from paper to digital whenever they moved their servers and created new things?
I mean, that's a that's a good question for you. Just, you know, from personal experience, I know like in the medical field, with doctors’ offices, you know, some of them are very slow to convert their own paper records to digital records. But, my assumption would be that every company will, at some point, do that. So eventually, if you bought a house in the 50s, your data is going to be on a server somewhere. Yeah.
And banks are pushing people toward, not, not pushing people, but strongly recommending people look at the app, you know, look at the ways to, you know, don't just wait for your monthly statement to come in. Yeah. So, so you're seeing more people adopt that technology, even people that are older, you know, and, you know, sometimes we think, oh, older people, they don't use technology. Well, I look at my father, he's in his 70s, he uses technology every day, my grandmother is in her 90s, she does online banking. So, people in that age group, I think, are still using the technology and sure, there's some people that don't use it. But, like Kevin said, even if you don't use the technology, whoever you're interacting with does. So, your information is digitized, it's computerized. It is possibly available to somebody who would like to see it that might have malicious intentions.
Yeah, and you're absolutely right. I mean, I use my dad as an example of the of the of the group that does not generally use technology. My mother is the same age and she has a laptop, she's online every day, she's doing stuff on her phone, she's taking pictures, she's doing everything that you would you might expect of someone younger. So, you're absolutely right, it's not just an age group thing. You know, older people might use technology, younger people might shun technology to a certain degree. But that doesn't mean that it's not, that cybersecurity isn't something that you should be concerned with either way.
Right? Even things like email, emails, a very large attack vector. You see a lot of scams come in over email, they're called phishing scams, I'm sure we'll go into that in detail how they work and, and how the attackers might operate. But, even people maybe that don't use online banking, might use email, and might have a situation where they get an email that says, hey, something happened to your bank account. And the attacker tries to get you know, activate your brain in a in a fear, uncertainty and doubt and get you to act before you have a chance to think about it. And hey, I better do something. My account's been compromised, I better interact with this person who's telling me this. They seem, it looks like it came from my bank.
Yeah. So that kind of dovetails right into the, the question that I was going to ask next was, the most common cyber threats that individuals and businesses, which I'm sure Mike can talk a lot more about in detail, will face, so it sounds like email phishing scams, those are probably some of the most common but what other types of scams should people be aware of? Or how does, maybe scams is a bad term. What other types of cybersecurity events should people be aware of?
Well, I mean, Mike mentioned phishing, which is probably the biggest, you know, for most people to get those emails to try to trick you into doing something, but not only email, there's a similar attack called smishing. Ever, you know, we love these weird words in cybersecurity, but it's the same thing just over SMS text message. So, you can get the exact same thing from a text message, you know, click this link to reset your password or whatever. And if you fall for it, I mean, who knows who you're giving your information to. So, a lot of the attacks that people have to be aware of are just things that are, like Mike said, they're trying to play on your fear, or your, your emotions to make you react without thinking. And, I think both of us can agree that whenever we teach this stuff, that's really what we try to tell people. Just stop and think, you know, take a minute, does this make sense? Should I really click on that?
Yeah, um, and what I've seen too, is that it's not always people trying to make you, I mean, you are, you're trying to make people react rather than think. But sometimes they're even getting crafty and saying, like, well, we're trying to prevent a cyber incident for you, click this link to make sure that we can reset your password. It's not even just trying to say that you were hacked, or something you're trying to say that, we were trying to prevent a hack. And we need you to give me your information. So, like, as speaking from a bank's perspective, we will never, we will never call you email, you text you and say, we need your username and password for your online banking, that will never happen. We have that information already. We don't need to ask you for it. And I would say in a lot of other industries, it would have to be the same.
Yeah, most companies, they do the same thing. You know, they will tell their people don't ever give it out over the phone. Nobody needs that. And like you said, with those emails, I mean, that goes back to rule number one of email, stop clicking on things, like never click a link. And even if the email looks like it's from a friend, it might not be right, phishing attacks are really good. Don't click on links and emails, because you never know, unless you're technically savvy, you know, we could tell you in great detail how to figure out where those links are really going. I don't know that, that would work in an audio only form, probably need some video to show you. But unless you know how to do that, just don't click the links, you know, if you need to reset your password for your bank's website, go to the bank's website on your own. Type it in the browser yourself, so you know that you're going there.
And one of the things I do in class, one of the themes that I will consistently present in every class, is building a healthy skepticism. Like the great President Ronald Reagan said, trust but verify. Yeah. And you know, I'll tell you, you know, a couple of interesting stories Drew, you hit on a scam where you get an email that says, hey, somebody tried to compromise your account, and they weren't able to, so we're here to help. That's actually how one of the DNC hacks a couple years ago against John Podesta occurred. He actually received an email, and if you search online, you can see the email he received, and it said, hey, somebody tried to access your account from I believe Ukraine, click on this link and change your password. So, he actually did that. He clicked on a link and he put in his password which was given to the attacker, now they had access to his account. They didn't actually change it. And there was another one, you know, you talk about other scams, phishing is a big one. Invoice scams, invoice scams are a very big deal. And what that is, is an attacker will email an invoice to a company and say, hey, you owe us money. Now you wouldn't, you might think, who's gonna pay that? Who's going to just pay an invoice? Well, Facebook was in a scam, Facebook paid $10s of millions, actually, I think it was up to around $100 million, over a couple years of fake invoices. This fella was just sending Facebook invoices, and Facebook kept paying them. So, he was eventually caught, but you know, a lot of money. And, you know, locally. Sometimes people think well, you know, we're in, we're in a small area who would target us? Somerset County last year was the target of an invoice scam. And the county lost about $17,000. They got an invoice, they wired out money to the attacker and, and the money was lost. So that's right here, right in our right in our backyard.
I think some, some of the time, and again, I'm making a generalization here, but I think sometimes older people, they came from a space mentality where if someone said they owed them money, they felt very obligated to immediately make that right. They didn't really question it, because they just assumed that they had forgotten to pay the bill or that they had misplaced something and not follow through. And they didn't want to have that reputation for having not been, you know, making good on their debts. So, when someone comes to them and says, you know, you didn't pay your electric bill last month, they don't really question it at all. It goes back I think to what to what you were saying was, you know, this idea of reacting rather than thinking, you know, they just assumed that they must have forgotten to pay it and they don't want that reputation for having, you know, been behind on their bills. So, they just immediately send money.
Yeah, and to get all sciency for a second, you know, any, you know, biology experts will be familiar, but there's a term called amygdala hijacking. Amygdala hijacking is actually that, it's getting your body to short circuit, the logic part of your brain and act before you can think. And that's what whenever we talk about fear, uncertainty and doubt, you get these emails and they're scary. You know, somebody, hey somebody got my password, somebody has information about me. I better do something right now, I'm not going to think I'm gonna just act and you know, it's a chemical reaction, our brains, we can't really control it. But it's over time, you can start to realize, and once you develop that healthy skepticism, yes, I got this email, but let me take a step back from my computer. Let me just take a minute, take a breath. Is this something I need to react to? There's a biology behind this. It's not you know, if you're a victim of one of these scams of a phishing attack, don't feel bad, don't feel like you did something wrong. You know, these are the something that these are professional criminals who are really, really good at what they do. So, there's a lot of victims out there, the most important thing is to be educated to prevent yourself, hopefully becoming a victim. But if you are, well, what are the steps you can take to, to limit the damage, limit the blast radius of whatever. If you've gone and, you know, changed your password, you thought you change your password, but you actually gave it to an attacker. Well, okay, maybe it's a case where you actually type in the website and go specifically to that website, change your password that way, the correct way, rather than a link that's in your email. But, you know, going back to what Kevin said, you know, rule number one, stop clicking on links in your email. You know, banks, I think you've become educated to the fact that, hey, let's not put links in people's emails ever. Let's direct them, hey, don't click on a link and email go directly to the AmeriServ website. Yeah, type in your credentials the correct way. So that they can say, well, I'm never gonna send you a link. So, if you do get a link that says it's from us, it's not from us.
Yeah, it's, it is a difficult thing sometimes. Because, you know, from a banking perspective, we're sending out communications at times that involve accessing things like, like privacy policies, and letting them know like, we're legally obligated to tell you like, hey, your bank statement is now available if you're receiving them electronically, because you're not getting that envelope in the mail anymore, right. So, we have to send you an email. And usually in that email, what it'll say is, your bank statement is available, we encourage you to log into online banking, and then access your statement. We may provide you for your convenience, here's a link, but there is always a really a way to reach that information without clicking that link. Because of that reason, because we want you know, we're constantly preaching to people don't click on links and emails, and then, you know, yeah, we'll send you an email that has a link in it, which is a little counterintuitive, but we want to make sure that people understand that you don't have to click the link, there is always a way to get to that information some other way.
And what we always like to tell people, you know, your, your one, you might be wondering, you know, why can't I just click the link, I see where it's going, the link says, you know, HTTP ameriserv.com, it says where it's going. But, when it comes to putting links in emails, you know, attackers can change where it actually goes, what you see in the email doesn't have to be the link, then it'll actually take you to. So, one easy way around that, you know, let's use AmeriServ as an example. If you, for customer service reasons, provide people a link, they still shouldn't click it, but what can they do to make their life easier? Well, they can copy and paste it. So, you can see the letters on your screen, and you can see what the link says, rather than clicking it, highlight it, copy it pasted into your web browser. And then you can literally see on your screen what got put in your web browser and where it's going to go. Yeah, because it's very easy to hide, you know, www.hacker.com, behind a link that says ameriserv.com. But if you copy and paste what you see on the screen, that can happen.
Yeah, and going into, this may be a little deeper than we wanted to go, and we can maybe touch on this in a future episode, if we want to get really deep into how this works. But, I recently received an email from Meta, which is the parent company of Facebook, for those of you that may not be in the know. And, the funny thing was, is that it was, it was not in fact, from Meta, but they had used an ASCII character that looked like a letter M. But you could tell that it was slightly more narrow than the rest of the font that was being used. And, so it was not coming from Meta it was coming from random ASCII character that looks like an M, eta. And, they can get very, very creative in trying to make it look like it's coming from a company that you recognize or respect or deal with, when it's not actually coming from that particular company.
Even an uppercase L or an uppercase i or an L. Sure. Yeah, don't look identical. And you're right, attackers will buy domains, and they'll look very, very similar and you know, our brains are awesome error correcting devices. And whenever we read something If we see the first couple letters in the last couple letters, we kind of tune out the middle, and we can make sense of what the word is. And you'll see often one switch of a letter in the middle of a longer word. And your brain just tosses that out and says, I know what that word is, and you read on. So, you know, we see that as in spoofing, you know, we see that in domains, we also see it in who it looks like it's coming from, you know, hey, I'm gonna send an email to somebody and say, I'm Kevin, and it's gonna look like it came from Kevin, but it didn't. And then all of a sudden, you know, the people that got it, thought it was, they think they're interacting with a different person than they are.
I want to, I want to stop just for half a second and go back to something you mentioned spoofing. Let's talk about what that is. Let's define that for people that may not know.
No great point. Spoofing is whenever you are assuming somebody else's identity, you know, it's almost similar, like identity theft, lite? We're going to see an email that it just says, hey, this is coming from John Smith. Okay. So, you look at the, where it says from, he says, John Smith, and it's coming from John Smith, you know, you're not reading any further you, you've got the information, especially if it's somebody you know, you know. I'll tell you a funny story that several years ago, my mom actually got an email that was spoofed, and it was spoofed in that it looked like it was coming from me, okay, and it said, hey, great news, I'm recommending this new weight loss product. And, you know, and we're at this family event. And my mom kind of sheepishly said, hey, did you, did you recommend me this, this this diet pill? I was like, no. What? I got this email that said it was from you. And, you know, I'm gonna, I was, you know, looking into it. I was like, so whenever we went back to her house, I looked at the email and said, okay, it's definitely not for me, and there are ways to look at the technical details, but you know, it's really about to have that healthy skepticism. Does this make sense? Okay, this email that, that looks like it's coming from somebody I know. And to find out somebody, you know, it's easy to look you up online, see who your relatives are, you know, anybody can do that. And attackers will take advantage of that.
So, I think that goes to one of the other terms that, that I think we may have mentioned, but I wanted to sort of touch on is social engineering. The idea that you know, what you put out on the internet, you may put it out there for completely benign reasons. But people can use that at times to try to make things look more legitimate.
Yeah, this is, this is something that I actually teach my students how to do in our ethical hacking classes. And I'm sure Mike also teaches it in some of his open source intelligence classes that we can take the things that people put online, and make really good guesses about what your email might be, what your username might be, what your password might be. You know, a lot of people when they're making their passwords, they make them something that somebody who knows information about them might be able to guess. You know, a lot of people might use their dog's name, or you know, their family name or something easy to guess. So, the more you put on Facebook, the more you put on LinkedIn, the more, I'm sure everybody have seen these on Facebook, when people say, you know, I just want to see you know, what my friends will say? And there's like a 30 questions survey that they copy and paste asking you, what's your favorite movie? What was your favorite vacation? If you fill those out, you're giving attackers everything they need to make really good guesses about what your password is, or anything about you. Like those security questions. If you forgot your password, and it makes you answer three questions to prove that you're you. Those were probably some of those things that you answered in that Facebook post. So, you've just been socially engineered, and you didn't even know it, people are able to just trick you into giving out information that you probably shouldn't be giving out to random people online. So, you know, less is more. Don't, don't fill out those stupid surveys, don't post things that you don't need to post. And more importantly, don't accept friend requests from people you don't know, just so your follower count goes up on Instagram. Yeah, like, I know, that means a lot to some people, but don't do that.
Yeah. I was gonna ask a question, one of the things that I had read at some point, and I don't know if this is a good idea or not, you don't, you mentioned security questions that a lot of people, businesses and so forth will present to you to confirm your password or to reset your password. You don't actually have to answer the question that's asked of you.
Because the bank knows what state I was born in? They don't know.
So, you could put anything.
Yeah. So, I mean, you could, you could choose the question, what state were you born in? And the answer could be your favorite color, right? As long as you remember that you change the answer, the prompt doesn't really have to correlate to the, to the response you provide.
Don't outsmart yourself. Right? Exactly. Whenever you go back in, you have to remember what you put down. But you know, I think social engineering, you brought up a really interesting concept. You know, sometimes whenever people think cybersecurity and hackers, what, what comes to mind is that, that person with a hoodie, hunched over, typing away and doing all these very, very technical things. Some of the classes that we have, we teach extremely technical things where you can break into a computer. And that's what people will think a hacker looks like. Sometimes a hacker will do something called social engineering, which means they're using non-technical methods to get you to do something that is not in your own best interests. And it could be something as simple as a phone call, many, many scenarios, there's a two-minute video on YouTube of this woman, and if you saw her you'd never think hacker. But she socially engineers, a phone company into changing the interviewers password, and also adding herself to the interviewers account, and he's just facepalming. He's like, but what she did was, she actually put a baby crying audio on her computer. So, she's talking to the rep, and then she says, oh, I'm sorry, my baby's crying, my husband was supposed to add me to the account, he didn't, can you add me on? And the person said, sure, I can add you on, you seem, you know, without going through the security protocols. Because he was trying to help you know, he's the service and customer services, that person is trying to help. And social engineers take advantage of that all the time.
That is, that is a crazy story. But that's, I never would have thought I mean, I guess I would make a terrible hacker, I never would think to do that. But it's a, that's a really interesting story.
Well, you can try to, you know, hack into somebody's devices with a technical means, or you can go the simple route, and just ask them for their password. And, you know, sometimes it's just that easy. And, honestly, in a discussion like this will say, well, who would fall for that. But in the moment, it is very, very effective method. You know, it's, it's social engineering, we want to think of that non-technical hacking of a person.
And again, you'll find different statistics on, on cybersecurity, no matter, you could, you could Google today and get different stats, but it's something on the order of 90 to 95% of cybersecurity breaches could have been prevented had somebody just stopped to think before they provided the information, right out right in the clear. Without anybody having to hack into your account or anything else.
Yeah, movies tend to glorify the guy in the hoodie in his mom's basement. Yeah, typing away at a keyboard. But in real life, it's much easier than that, you just have to trick somebody.
So, we started talking and then, and this is, this is fantastic information, but I want to make sure we get to a number of the different sort of overview topics that we were talking about. So, let's talk a little bit about passwords and how they, how they're either acquired, or, you know, how do you create a strong password? What is this? What is something you should be doing to create a strong password? Yeah,
let's start there. So, the way I like to explain this to people is there are two things you have to think of when you're trying to make a strong password. You have to be able to trick a computer, and you have to be able to trick somebody who knows you, a human. So, tricking a computer, you know, how do you make sure that that hacker with a supercomputer can't break your password. So, the way that you do that is very simple, you make it long, the longer you make it, the longer it takes a hacker with a supercomputer to break it. You know, once you go over 12 to 16 characters, that supercomputer will not be able to break that password within your lifetime. So, we can essentially say it'll never be broken. So, length is the key, make it long, but then you get people saying, you know, how do I remember something that that's long? So, then we get into the part about being able to trick a human, and what it means for you as a person to be able to remember that password. Don't think of the password as a word, think of it as a sentence, or a phrase. So, what I tell people to do, I give them the example, what if your password was this, my house is the color dog. And there was a capital M on my, there was an exclamation point at the end. That sentence is over 20 characters long. So, you're already able to trick a computer, it's long. It's a sentence, so it's easy for you to remember, and it doesn't make sense, right? Dog is not a color. Right. So, if your best friend who knows everything about you tried to guess your password based on things they know about you, they wouldn't do it because it doesn't make sense. So just make it a sentence. You know, most places that allow you to set a password will allow spaces in passwords. So, you can do that. And even if they don't allow spaces, just remove the spaces, just run the sentence together. But either way, it's something very easy for you to remember and it's really long, so computers won't be able to break it. Okay, and
that that certainly may make sense. Mike, did you have?
Yeah, I saw an interesting cartoon. I love memes online and it said, somebody gets my password. So, I have to rename my dog. And because so many people will use a pet's name or something close to them, or add 2022, and attackers know this. And going back to what we talked about social media, hey, I just got a new pet my name, my dog's name is Fluffy. Well, I'm going to try to guess your password, I'm going to start with Fluffy, Fluffy2023. So, like Kevin said, right on target, think about a passphrase. Think about a sentence, you have the length of that thought that is going to be something that's close to you. And whenever you look into words, hey, what winter 2022 or so things like that, the attackers will get those. And like whenever Kevin mentioned the supercomputers, there's libraries of possible passwords, popular passwords, they'll try all those first. And if you have a sentence, you have a passphrase, it's not going to be in any of those, what we call dictionaries of popular passwords.
You okay, so we're talking about how to create a strong password. But what do you do when you have so many passwords to remember, and everybody is telling you to use a unique password for every site, or every app you're using.
That was the key that I was just going to key in on there, having different passwords for every site, that's actually a good thing. You should never ever use the same password for multiple places. So, before I answer the real question that you're asking, I just want to touch on this part real, real quick. So, you know, if you are a person who uses the same password for every site that you have, let's think about why that could be a problem. So, you know, let's say somebody breaks into the McDonald's app, because McDonald's has bad sec-, I don't know that they have bad security. But let's just assume, McDonald's
does not have bad. So, we are not saying from a legal standpoint, McDonald's is not a bad security.
But, but let's just assume that they did. And somebody hacked McDonald's, and they were able to get all of the passwords for everybody's McDonald's account. And you might think, who cares? It's McDonald's, they don't have any of my personal information, I don't care. But if you use the same password for everything, now, they also have the password that you use for your email. And you might think, Oh, who cares? Who do I email? You know, what am I doing with my personal Gmail, but isn't that email, the same email that you use to reset the password for your bank account? And for Amazon, that probably has your credit card saved, as well, and all of these other places? So, you know, if, if hackers can get back to your email, they own your entire life, you know, you don't want them to have access to your email. So, if you use the same password everywhere, you're just making it one step easier for the attacker. So, use different passwords for everything. And that sounds awful.
Oh, absolutely, Kevin, that sounds like wow, I'm gonna have to remember like, you know, hundreds of passwords. How am I going to do that?
How are you going to do that? Well, there are apps out there to help you. You know, I used to recommend LastPass to people. But LastPass recently had a very big lapse in security, that we in the in the government sector have decided let's stop using that. So, I don't recommend LastPass anymore. But there, there are other ones such as 1Password, and that's kind of the one that I tell people to use now, but we call them password managers. So, say you want to go make an account, and again, we are not saying go do this, because we're not endorsing anything on this podcast, but if you were to pick something like 1Password, that would be a thing that you could use, you remember a single master password to get into this app. And then the app keeps track of all your 100 other passwords for you. So, you don't have to remember 100 other passwords.
Now, when it comes to that, how do you access the passwords, right? Because if it's being stored in a database of sorts behind your master password, you have to enter that password and then go search out the password for your app and then find it and then enter it, or do these apps sort of make things a little more streamlined than that in most cases?
Some have a plugin where it'll actually plug into your browser, or you can do a copy, paste. And honestly, some people, we talked about healthy skepticism, will say, you know, password managers sound great, and then you say, well, where's the password stored? It's stored on someone else's computer or in the cloud, in the application. So, you might say, well, hey, I don't don't really want all my passwords stored in that type of environment, which is fine. You know, you can also get a password manager that's local to your computer, which passwords will be saved on your computer. So, either in the cloud or on your computer, either one is going to be in an environment where you have all your passwords behind that master password, which will be very long you know, when we talked about the sentences, the past phrases, make it very, very difficult to guess. And, and then you have your passwords there and hopefully makes your life easier. And also, you know, some of them will actually have alerts and say, this password was in a breach. I've seen those before with password managers. And because they have your passwords, they'll say with this password was, was found in a data breach, make sure you change it.
Okay, so we've so we've, we've established essentially, and again, I feel like I keep needing to reiterate this, this is all just, we could go into a 40-minute conversation just on passwords. I mean, there are so many different things to consider and things you can know. But that's the general, the general overview that I think that we wanted to make, make sure that we touched on today. I do want to take some time to talk about, what are some some of the other cybersecurity practices that people should be following regularly when it comes to their, their smartphones and their, their, their, their laptop, computers, things like that?
So, one that I'd like to add on the kind of goes along with passwords is this idea, if any of the listeners have ever heard or seen this acronym, MFA, or 2-FA you may have seen, it stands for multi factor authentication, or two factor authentication. And even if you haven't heard of that, you've probably used it whenever you go to sign into your bank's website, and they send you a text message. And you have to enter that code as a second thing to be able to log in. So, while a lot of people might say that's annoying, I hate that it takes 10 more seconds now to log into my stuff, that is one of the best things that you can do to protect yourself online. If a website allows you to set up or turn on MFA, you should do it. And the reason we tell people to you know, take that extra 10 seconds is because in the cybersecurity world, we always tell people assume your password has been stolen. You know, passwords have been around for decades, hackers are good at getting them, like we've already talked about, social engineering and all these other things, you should be living your life, assuming that hackers have your password for everything. So, what does that mean? Well, that means they can access everything, right, your email, your bank, whatever. So, if we're assuming that they have our passwords, and they can access our stuff, what can we do to make sure that they can't access our stuff? And MFA is one of the best ways to do that, because if they have your password, what don't they have? They don't have your physical cell phone, that you're getting that text message on, or that you're opening up Google Authenticator and getting that randomly generated six-digit code. So, they don't have your physical device, that second factor of authentication. So, if you turn that on, that is a great way to prevent bad guys from getting into your accounts. And we can go down that rabbit hole with you know, other attacks that can happen with MFA. But, you know, that's always suggestion number one, turn that on, if you have the ability to turn it on. And, you know, most financial institutions will force that to be turned on or you don't have a choice, but some don't, and some other websites that maybe aren't financial institutions, don't turn it on by default. But if you go into the settings, and you look, and it's available, turn it on, for everything, you know, every account I have has that turned on, you should see my list in my authenticator app of all the different codes I have. It's crazy, but it's necessary. It's one of our only protections, you know, against the bad guys who we know are going to get our passwords somehow.
From what I've seen, too, there are now companies that are sort of experimenting and password managers that are experimenting with the idea of not using the password at all. Like you put in your username, and the only way to gain access to that account is for them to you, you put that username in, and it says okay, we've sent a link to your app on your phone, we've sent a text message, you have to respond to that, or you just can't get in.
Yeah, we are starting to see some websites try to move away from passwords, and you know, passwords have been around a long time. Eventually, we'll see the end of passwords, we'll see other authentication methods, but it's not going to be in the near future. Like, as Kevin mentioned, it's so important to have those, those extra protective measures, multifactor authentication. You know, another one is, you know, you want to assume your information has been at a data breach, you can actually check to see if it has been there's a great website, it's called have I been poned. Okay, and then in cybersecurity, we like to spell words wrong, and we like to use acronyms. So it's haveIbeen, b-e-e-n, and then pwned, okay. You can go to that website, and you can put your email address in and you can actually see if you've been in data breaches. It'll say, you've been in data breach, and it'll give you that information so you can find out for sure. And we can probably provide a link in the show. I actually, I believe it's haveIbeen pwnd. Okay,
we'll make sure we put it in the description. Yeah, but it's
free service, you can put your email address in, or you can actually put any anybody's email address and, and see if they've been in a data breach.
Yeah, well, we'll put it in, we'll put that in the description of the show. It is a link, you can click on or copy and paste, the link.
We'll email you the link.
That's, it's a slippery slope, you know, you really it really is, you know, it's a slippery slope to tell people, you know, to make absolute statements of don't do this. And then, well, how else am I gonna get you this information? Right. So now that we'll definitely put that in the description of this episode. Some other things too, that I just wanted to get your, get your take on things like keeping your operating system up to date. You know, right now, as we're recording this, Apple has just released their latest iOS version. And if tradition holds true, in about a week, there will be a point one version of that, that comes out. Because there's some sort of a security issue or some other kind of fix that has to go in. How important is it to keep your windows up to date, your, your smartphone up to date, things like that? And for some people that aren't technologically savvy, how easy is that to do?
It's absolutely critical. I mean, and it's another, I feel like I'm, you know, a broken record. Because every time I talk about something, I say, well, this is something that everybody hates, because it takes 10 extra seconds. Yeah, doing those updates, you know, whenever you see on your Windows machine, that little pop up that, you know, once a month, Microsoft, we've given it the name Patch Tuesday, because the second Tuesday of every month, Microsoft releases all of their updates that you should be installing. And you know what, why should we do that on our phones on our computers? It's because these companies are finding vulnerabilities that hackers have taken advantage of. And they know that if we don't fix these, your computer or your phone now has a hole in it, that hackers know about that they can break in and steal your data. So yes, clicking that button to update your machine, you know, once a month, it is going to take five to 10 minutes for those updates to install, your computer to reboot, it's going to be a hassle. But again, it's just one of those easy things we can do to make sure that we are protected, and our data isn't at risk. Okay.
Right, for the security updates, yeah, it is a bit of a hassle for us. It's also a bit of a hassle for the companies. Microsoft doesn't want to have to come up with patches all the time. It's expensive to them. What it means is every time there's a security patch, that means there was a vulnerability found, not just for Windows or Mac OS, but any of the applications you have on your phone. You'll see they're constantly hey, there's a new update, you always want to have the most recent updates, because you run into a situation where if you have an older one, well once the vulnerability is exposed, attackers are like, you ever, you ever go down to the water in the lake and throw some food in and all the fish come? That's what the attackers look like. That's what we're going for is that vulnerability. You know, we saw just a couple weeks ago, defense contractor in the UK that makes fencing for military bases. They were breached because they were still running Windows 7, Windows 7, went end of life back in 2020, January 2020. So, so anybody listening, if you are still running Windows 7, you want to make sure you upgrade to Windows 10 or Windows 11. Because windows 7 is not, they don't have any security patches, any vulnerabilities found can be actively exploited and are being actively exploited by attackers. So, it's just as simple as bumping that up. It's,
so wait, I don't want to do that because I don't want to pay Microsoft money.
Exactly. Right. Yeah, exactly. But a lot of times you can get a free upgrade. But in the case where you have a very old computer, if you do have to pay for it, great investment, it much better to have the most recent operating system then lose 1000s of dollars and hours and hours of your time. You know, we talk about MFA, you know, Kevin mentioned an extra 10 seconds. It's so aggravating, you know, in our fast-paced lives, 10 seconds is an eternity. But we think about it, do I want to be on hold with the bank for hours or sitting there dealing with a cybersecurity event or incident? That's a lot of time, that's a real hassle, that 10 seconds becomes well I wish I would have done that. And
and honestly speaking from experience when, when we're dealing with identity theft, hours, cleaning it up is a, is a really, really good scenario. You're normally talking days, weeks, depending on, on the severity, it can drag on for quite some time it can involve litigation. There is a lot that comes from having your identity stolen that, that is I agree, Mike, you'll want to spend the 10 seconds.
What's the phrase, an ounce of prevention is worth a pound of cure? Yeah, that sounds like it would be apropos in the situation.
Yeah, absolutely. So based on what we've talked about today, some of the key takeaways that people should probably have and maybe a few resources that where they can go beyond the one that we're already putting in the description to try to find some good resources on, on cybersecurity prevention and things like that.
So, if I was to pick, you know, one, one take, or let's pick two takeaways, because I can't narrow it down to one, stop clicking on things and emails, and enable MFA. You know, if there were two things, I would say from this show that you want to go out and do right now, do those two things that will probably pay dividends in the future.
Another one is awareness. You know, I hear this so often from small businesses and individuals as well, oh, I'm just a small business. I'm just one person, no one's coming after me. If you are on the internet, if you have an email address, if you have access to an application, you are a potential target, by what's called an opportunistic attacker, somebody who's just looking for that low hanging fruit. So, you are a potential victim. Even if you're a small business, even if you're just an individual, attackers will find those scenarios that find your password in a password dump. So, awareness is important to understand, yes you could be a potential victim, the positive is there are things you can do. Like I've mentioned, stop clicking on links. You know, if you have a link in your email, that healthy skepticism, do I really want to click on this? Do I need to click on this? It says it's from Amazon, let me just go to the browser and type in amazon.com and go in that way. And see, does that match up with the reality of what this email says.
And there's, there are a lot of places online that offer free cybersecurity awareness, I don't want to call them courses, but videos that you could watch. I mean, even the Department of Defense, you know, we're not necessarily talking to federal contractors, you know, who are listening to the show, but their cybersecurity awareness training video is free that anybody can sign up and take it. And it covers the basics of pretty much everything we've been talking about. Yeah. So, you know, if you wanted a really good resource to go and learn the basics of what to look out for, you know, just do a Google search for Department of Defense, a cybersecurity awareness, and you'll find their website and be able to watch their course.
I can speak from my own side and say that there is the National Cybersecurity Alliance, stay safe online.org, where you can go, and you can get a lot of really great free information about cybersecurity and information security and things like that. And we'll put, again, a lot of these things in the description for you to find the, there is information on the AmeriServ website. If you go to ameriserv.com/fraud, we have a lot of great information, links out there that you can find that will, you know, be able to, to hopefully help you through some of this information as well. So yeah, gentleman, I mean, I really, really appreciate your time today, going through some of this stuff. And again, really looking forward to talking with you in future episodes to really delve into some of the stuff that we talked about today in more detail, because believe it or not, there is more detail. There is so much more detail. We, it may seem overwhelming, and we seem to have gotten into some, some weeds, but believe it or not, there are more things to talk about. Different types of, of malware and different terminology that's used, I think that we could probably do a significant conversation just on some of this some of these terms that we've tried to identify a little bit throughout our conversation today that are thrown around by people that maybe assume that you know what they are, but maybe you don't. Any final thoughts before we, before we wrap things up?
No, not really, stop clicking on links.
You know, I would say ask questions, reach out to us. We are always happy to engage with you any questions, you want to reach out and say, hey, I had a specific question. I'd be glad to answer it on a future show.
That'd be great. So, with that, I think that we'll wrap this particular episode up and I thank you both very much. And we'll talk again in a future time.
All right, thanks a lot, man great.
This podcast focuses on having valuable conversations on various topics related to banking and financial health. The podcast is grounded in having open conversations with professionals and experts with the goal of helping to take some of the mystery out of financial and related topics, as learning about financial products and services can help you make more informed financial decisions. Please keep in mind that the information contained within this podcast and any resources available for download from our website or other resources relating to bank chats, is not intended, and should not be understood, or interpreted to be, financial advice. The host, guests, and production staff of bank chats expressly recommend that you seek advice from a trusted financial professional before making financial decisions. The host of Bank Chats is not an attorney, accountant, or financial advisor, and the program is simply intended as one source of information. The podcast is not a substitute for a financial professional who is aware of the facts and circumstances of your individual situation.
Our thanks once again to Kevin Slonka and Michael Zambotti from Saint Francis University for joining us today. We opened the episode with a fast fact that 19 out of 20 or 95% of cyber-attacks are a result of human error. That statistic should not make anyone feel badly about having been a victim. We all make mistakes. But this statistic is actually great news, because it means that we can make a significant impact on reducing cybercrime through education. And that has been our goal today. Don't forget that links to websites and other educational materials discussed in our conversation today can be found in this episode's description. Please make sure to like, follow, and subscribe to the podcast to make sure you don't miss any additional episodes on cybersecurity, or our other discussions on topics related to banking and financial wellbeing. AmeriServ Presents: Bank Chats is produced and distributed by AmeriServ Financial Incorporated. Music by Rattlesnake, Millo, and Andrey Kalitkin. Production assistance by Jeffrey Matevish. Previous episodes can be found by visiting ameriserv.com/bankchats, or on your favorite podcast service. For now, I'm Drew Thomas, so long.
Fast fact. Money lending can be traced back to about 3000 BC in ancient Mesopotamia. Before currency was widely used, ancient peoples used food as a way to pay their debts. With the promise of harvest in the spring, farmers would borrow seeds, and then share their crops to pay their debts. I'm Drew Thomas, and you're listening to Bank Chats?
Today, we're pleased to have with us, Senior Vice President of Retail Lending at AmeriServ, his name is Rusty Flynn. Hi Rusty, how are you?
Good Drew, how are you?
I'm great. I'm great. So, tell us a little bit about yourself. Tell us a little bit about your background.
I've been lending money for 32 years. I started with a finance company for about seven years, and then over the last 25 years, I've been in community banks, last 17 with AmeriServ.
So, 25 years and community banks. Yeah, it's been a long time. So, we're going to talk a little bit about consumer lending today. When, when someone comes to a bank to ask for a loan, where does that money come from exactly?
The vast majority of our money, our funding sources, come from our depositors. So, we take in deposits, whether it's checking accounts, savings accounts, CDs, generally, what we do is try to turn that money into lending opportunities. And the difference between what you lend out compared to what you have on deposit, that's how we make our money. One of the simplest sources of how, you know, banks make money over a period of time. So banking, at its simplest source, is really it comes down to interest revenue, fee income, or investment income. So, when it really comes down to it, well, what we're trying to do is take loan interest, what we get on our deposits, you lend it out, and the difference is interest revenue. So that's really what it comes down to is a simple source of use our own funds to make money.
So, theoretically, I come in and I deposit you know, we'll use, we'll use vague numbers, I come in, and I deposit $1,000. And I can take my money back anytime, anytime I want, correct? Correct. All right. But, at the same time, you're using some of my money to lend to other people to generate interest is what you're saying. Right?
Absolutely. Who I mean, we're pooling everybody's money in there to generate income for everybody that's involved in a process.
So, it's not that the bank has all this money, right? We're just holding that money and then reallocating it to, out into the community.
Absolutely. I mean, we're reallocating it and the bank has other funding sources too; lines of credit, that we have to cover sources if we would happen to need it overnight, borrowing from the Federal Reserve, and other lending sources, but generally speaking, you know, our first funding source is our deposit base.
Okay. All right. So that makes sense. So, I think a lot of people have the misunderstanding sometimes that the bank is just full of money, and that we just give it out to the people we like the best or something. And that's not really the case. It's the depositors that we have that give us the ability to lend that money back out.
Yeah, absolutely. I think everybody has misconception that the vault has, you know, piles and piles of cash, we're just ready to get out. So yeah, there's limited sources of actually cash on hand. But, you know, at the end of the day, we're trying to lend out what we have on deposit.
Okay. All right. Well, that makes sense. So, what kinds of loans would, would use, like, what's the difference between, for example, a secured and unsecured loan, maybe we just start there.
I'll start on the simplest ones. The unsecured loan is just a personal loan, as somebody who might take out you know shorter term, it's a term loan, a term loan, just means you're taking out a fixed amount of money at a fixed interest rate paying it back over a period of time, okay? So, if you want to take out $5,000, over 36 months, your payments gonna be equal over 36 months, and once it's done, it's paid off, you're down to zero, the loan is gone. Okay? So, a line of credit, on the other hand, is it's a fixed amounts where the bank is going to say, you know Drew, you come in, you apply for $10,000. So, think of it as a credit card, it is a line of credit that you can use over and over again, you're only going to pay interest on what you borrow at any one time, pay it off, you can use it again. You know, it's there as a safety net. I always say credit lines are good for a safety net or for short term borrowings versus long term borrowings. So, you can use it pay it off. Generally speaking, you know, credit lines are going to be variable rate, where installment loans can be a fixed rate. So, variable rate might be something, you know, most loans are tied to prime rates. So, Wall Street Journal prime rate plus a margin. So, that can, and we'll change over time, and we've had a rate rising environment over the last couple of years, so, interest rates have increased dramatically. Whereas the fixed rates you know, generally speaking, are going to be lower than a credit line, because it's a one-time loan, it's fixed and locked in at the time you do the loan, and then it's going to be paid off over a period of time that lessens the risk for the bank. Where a credit line, the risk stays out there for a long period of time, because we're giving you $10,000 access at any one time, whether we know your financial situation, you know, three years from now.
Okay. Yeah, that's a good point. So, in a fixed loan, you're looking at a snapshot of what my financial situation is today. And then you're making a decision whether or not to give me that loan, because you know, in advance how long it's going to take me to pay it back and what the interest rate is, and how much I'm likely to be able to make those payments. But if you give me a line of credit, and I lose my job five years from now, you can't, you can't possibly know that ahead of time. So, that's why the interest rate tends to be higher is what you're saying.
Generally speaking, that's absolutely correct. Because what happens is on a term loan is you're paying it down, our risk is down, because your balance goes down over a period of time. Where if you're at financial struggles over time, generally speaking on credit line, most people are going to tap into those resources, you know, maximize the amount they have borrowed out there. They might be using it to live on and things like that. So, typically a bank is not going to find out that you're having financial problems until probably maxed out that credit line, and then all of a sudden you stop paying or you get past due. So, that's when a bank knows that the risk is a lot higher. And that's why credit lines typically are riskier than term loans.
Okay. Yeah. And that's a good point, you don't realize, the bank doesn't realize that it's an issue until you've racked up a lot more debt on that credit line, because you've basically maxed it out.
Most times the banks are not going to know until it's too late. Because if it's too late for a customer paying on their loan, generally speaking, they probably already have other bills that are past due too, whether it's her house or car, other credit cards. Generally, people pay for their housing first, their car second, and then anything else after that. You gotta keep in mind, people still got to eat, buy groceries, pay insurance and things like that.
Yeah. And I'd like to come back to, to the topic of debt here in a minute. But one of the questions that I wanted to sort of clarify, you mentioned that a line of credit is kind of like a credit card. So, what's the difference?
Generally, I would say a credit card is good to have, especially for people to travel with, or have different things, but credit card interest rates are much higher than what a credit line interest rate at a bank is going to be. So, flexibility of a credit card is, you can use it at any kind of retail or anything like that, just by swiping a card or tapping a card, where a credit line is through your bank, you're gonna get a set of checks where you can do online transfers, or stuff like that. It's going to have more than likely a much lower interest rate. So, the credit line of the bank is still a good choice, it's just offers a little less flexibility, where the credit card is generally accepted. At any kind of retailer where you can use it almost anywhere.
Yeah. And I would have to think too, with a line of credit at your bank, if you need access to cash, that's probably a better option than, than a cash advance on a credit card. Because I know with credit card companies, a lot of times your cash advance interest rate is even higher than your purchase interest rate. So is a credit line the same either way, whether you take out cash or whether you write one of those checks, it's the same interest rate? It's the
same interest rate, there's no fees for taking out any kind of cash advance and things like that. So, like a credit card, like you said, it's going to have a higher interest rate. And a lot of times it may have a fee that goes along with it, where credit line to the bank, you're just going to be transferring your own money that you're already pre-approved for into your account. It's not gonna have any kind of fees on it, it's gonna have the same interest rate, whether you write a check, or you're doing online transfer or transfer by any other mode.
Okay. So, you mentioned, and I said I wanted to kind of go back on this, you mentioned about accumulating all that debt, right? And why the interest rates are a little bit different based on the different account types. So, can we talk a minute about consolidation loans, right? You, you hear about that all the time, like you can lower your debt, and you can try to get out of debt with a consolidation loan. And it seems counterintuitive, I think, sometimes to people that, why would I take on more debt to get out of debt?
You take on more debt to get out of debt, because you can consolidate into a much lower interest rate. I typically like to tell people, if you're going to consolidate that, do it into a term loan, where you're going to have a fixed interest rate to pay it off. Because if you just put it into a credit line to extend it, and maybe pay interest only, you're not doing yourself any kind of favor because all you're doing is extending the time in the interest savings that you potentially get. So, you don't want to trade debt for debt where it's not being paid down over a period of time. People can go through and consolidate debt, if they do it responsibly. They're going to have a term loan, pay it off and hopefully they use a credit line, you know to more responsibly for short-term borrowing needs versus long term.
Okay, so would you recommend or does the bank normally recommend that you close those other lines of credit? When you do a consolidation loan? Or do you leave those out there, because if those credit lines are still out there, you could theoretically continue to use them. And then you wind up right back where you were?
It really depends on the customer and their situation and things like that. If people were just consolidating debt, and they're not overwhelmed with debt, we may not require them to pay off and close those credit cards. But there's times where we do say, hey, you're coming in to pay all these debts off, you might be a marginal borrower, we might, you know, mandate that those credit cards are paid off and closed. If you're not, we may leave them open. And most times, people will let you know, you know, what kind of credit cards they want to do. I'm not opposed to having credit cards out there. But I think, you know, generally speaking, if you have two or three, that's plenty of capacity on a credit card, especially if you're traveling or making hotel reservations, you need a credit card for necessities, most people do. Most people don't need 10, 12, 15 credit cards. And we see that every day in our business where very average normal income people working class people coming in with 10, 12, 15, 18 credit cards. And if you have that many credit cards, typically they're carrying balances of a few $1000. Or we've seen people with 40, 50, $60,000 in credit card debt. Wow. So, that's not an uncommon occurrence that we see on a day-to-day basis. So, that's why we try to tend to shift people into more secure, debt long term debt, and I'm sure we're going to talk about home equity loans at a point here, too.
So, home equity, I think that goes to one of the first things we were sort of, sort of touched on I think we kind of got away from was, the idea of a secured loan versus an unsecured loan.
Right an unsecured loan is just your signature, and we're hoping that you're gonna pay us back on time pay us off through the end of it. And if you have another financial need, you're coming back, a secured loan, you know, could be against her own money, it could be a CD secured loan could be an auto loan or holding some type of piece of collateral. And the biggest kind of collateralized loan or secure loan is a home equity loan where we're filing a mortgage or a lien against your house as collateral. However, when you do that, you're going to get a much lower interest rate on any kind of borrowings, whether it's a credit line, or a term loan, you're going to get a much lower fixed interest rate, if you do it that way. And that's where we do a lot of consolidations, where we're using equity in your home, paying off on a term loan paying off all those unsecured debts, typically, to give you the savings and give you the access to that equity in the future.
So, with something like a home equity loan, would you be looking at the average mortgage rate that's out there right now and then basing the home equity on that? Or is it a different thing entirely?
Generally speaking, in a normalized rate environment, home equity rates are going to be slightly higher than what you would find on mortgage rates. However, currently, the market environment you know has been rapidly escalating for first mortgages. Home equity rates have actually been slightly lower than mortgage rates, because what happens is, you're taking a second lien, typically on a home equity loan, so the risk is higher when you're taking a second mortgage against the house versus the first mortgage. And it all depends on the terms. The shorter the term on a home equity loan, typically, the lower the interest rate. You go 3 years, versus 10 or 15 years, the interest rates going to be higher, because the risk of that for the bank is a lot lower, because you're going to pay off, you know, in 3 years versus 10 or 15 years is where the risk is.
So, when it comes to home equity, you have to have equity in your home too, right? So, you can't necessarily get a home equity loan if your mortgage is a year old? Or could you?
Generally, no, you're not going to be able to get a home equity, because I've had a lot of people over the years, say what do you call a no equity home equity, I call it an unsecured loan. If you have no equity in your house, you cannot get a home equity loan. Most banks, including AmeriServ, might lend up to 85 to 90% of the value of their house, and then minus your first mortgage, and that's your lendable equity. So, just in round numbers, if your house was worth $100,000, and say we're gonna lend 90%, that's $90,000 minus whatever your first mortgage is. So, if your first mortgage is $50,000, we can lend you $40,000. So, that's just kind of the simple math behind it, where you know, 90% of whatever the value is, minus your mortgage is your lendable equity. Well, we potentially could lend you on a home equity loan. Now you have to qualify and a lot of other standards, whether you have good credit, your stability as in your job, your housing history, how much debt you have, what the ratio of debt is, how it's made up and things like that. So, there are a lot of factors that go into.
Okay. So, I think that's one of those terms that gets thrown around that maybe people don't always, don't always pick up on is equity, right? Because it's, it sounds very, I don't know, mysterious, I think to some people that don't have a banking background and stuff and they say oh, well do you have equity in that? But equity is essentially what you have available on the, on the piece of collateral you're putting up.
I mean, true equity is just the value of anything, whether it's a house, a car, or anything physical. And if you have, owe anything against, so it's the difference between the two. The lendable equity is, we're taking a little bit smaller factor, in a home equity, in our case, it's 90% of that value, minus if you owe anything on it. And that's your lendable equity. So, there is a little bit of a difference, but generally speaking, equity is just the difference between the value and anything that's owed.
Okay. And one of the other terms that you had mentioned earlier that I wanted to touch on, too was marginal. You said if the lender, not the lender, the applicant, the loan, the borrower is marginal what's, what's marginal in terms of banking?
But those are the kind of things, marginal bar might be someone that has marginal or average credit, and they have too much of it. You know, another term we use is debt ratio. I don't know if you want to talk about it. Yeah, absolutely. I mean, a debt ratio is just simply, its gross monthly income. So, whatever your income is, before all taxes and deductions are taken out, that's your income for the month, we take all your monthly bills, you know, your housing payment, the new payment we're gonna have on our loan, and any other credit card debt, student loans, any other kind of auto loans, all those monthly payments are added up. And then we divided by your gross income to come up with a debt ratio. And most lenders out there on the consumer lending side of the house, you're looking for somewhere in that 40% range, give or take, as being the high side, if it's over that, that's probably means that you don't have enough money to live on. Here again, there's a lot of other factors that come into play.
So, your gross income is obviously your payment before all your deductions, right? And your net is after your taxes come out and after your maybe your, your health care is paid for by your employer that comes out. Maybe you have a retirement saving that comes out. So, why do banks use gross income rather than net?
The real answer comes down to it's a consistency thing, it's a way for everybody to be judged on a consistent basis. Because your net income can be greatly changed by a lot of discretionary items, like what healthcare you choose, and how much are you taking out for a 401k or any kind of retirement savings, those kinds of things can change. So, if you have a lot of money going out or a 401k, technically, you could reduce that to bring home more net income. So, there's a lot of things that you can do on a discretionary basis, that would be, really minimize what could be taken out there. So, it's a way as a level playing field for all lenders to look at all borrowers on a similar basis, versus looking at it from a discretionary side.
Okay, that makes sense. So, really, it's, it's a, it's playing fair, you know, with everybody. Playing fair
with everybody, from a gross standpoint, gross income, because the net income is your take home pay. Yeah. And that might come into a decision where we look at how much take home pay when I talked about marginal, do you have excess disposable income? If your margin on your debt ratio, like we talked about a couple minutes ago, how much discretionary income do you have to pay utilities? To put food on the table? Pay insurances, homeowners, auto insurance? So, those are where your net income might come into play into the decision for consumer loan.
Is there anything that is exempt from that, that you don't consider discretionary income? Like something like say, a cell phone, for example, you know, most people used to have a landline, right? And that was just the, you had the landline for the house, and that was considered pretty necessary. But as cell phones sort of bridges that gap, right, you have the necessary part of the phone, you have the unnecessary part of maybe having a smartphone with an unlimited data plan and things like that. So, what, what kinds of things are considered in that calculation, what and, what kinds of income or spending is not?
We're just taking any kind of debt, any kind of loan you have. So, any kind of utility, cell phone, things like that, that's not included in a debt ratio. So, that's why we use the gross income as our calculation method, and we realize that people are going to have lots of other debts, or bills that don't show up on a credit report that you got to pay for on a monthly basis. Okay.
I've heard of a lot of people, and I'm sure you have too, who come in and say, well, I've never had a loan, so I should have no trouble getting a loan, right? I don't have any debt. So, I should have no trouble. Is that always true? Or is it kind of one of those things where having no debt could end up actually hurting your chances of getting a loan?
You need to have some stability, and generally most lenders are going to want to have somebody co-sign with you or maybe ask for a secure kind of loan depending on the situation. If you're maybe just starting out and have no history whatsoever, your real short time on the job, you're probably going to need someone to co-sign or be a co-applicant on the loan to get you started. Once you illustrate that you can pay a loan over a period of time, I personally like to see seasonality on a loan. Can you pay a loan three or four seasons, because sometimes people make the mistake of coming in, say, have no loan, loan, experience, they borrow and pay me back in two months. Well, you didn't really prove to me that you could pay me over a period of time. So, the next time you come back, we're probably gonna say, hey, we still need to have that same kind of stability or someone else back and you want that. Generally, what I see, the other side of it is, people try to get, you know, some credit cards, some loans, they go out and get 6, 7, 8 of them all at one time. So, that's not good either. So, it's a good balance to you know, take it kind of slow, you know, maybe get a credit card, get a term loan, pay that term loan over a period of time, get some experience and then you'll be able to do things on your own, you know, from there on out as long as we're responsible.
I think it's important to make the differentiation or the, or to explain the difference between a co-signer and what their responsibilities or their, their liabilities are, versus co-applicant. Yes, thank you.
Yeah. A co-applicant versus a co-signer, a co-signer is obligated for the debt in general, whereas a co-applicant, you're obligated for the monthly payments. So, lenders typically like to see a co-applicant because if you're going on with somebody, you're obligated for that monthly payment, you're gonna be much more aware earlier, there was an issue with repayment, where a co-signer might be a little bit late to the game, where they find out that personally, we're trying to help out to get established, not living up to their obligations. So, generally, most lenders like to see co-applicant versus co-signer. I've always said in my history I've been known as 32 years is, a co-signer or co-applicant, if you're helping someone else, that's a strength to them, to the loan, that's why you're making a loan because of their strength. Somebody's not paying me I'm going to them first, because that's why we made a loan.
Yeah, I think maybe some people don't always quite realize what they're signing on, what they're signing on the dotted line for when it comes to that. And I think that's important. If you're, if you're being asked to co-sign or co-apply for a loan, to understand that you're, you're just as responsible for paying that loan back as the other person is.
Yeah, I mean, even 25 years ago, and I'd be face-to-face with customers, they had co-signers or co-applicants, I would be much stronger with the co-applicant saying, this is your responsibility to pay. Because a lot of times, way back in my history, I would collect loans also. So, you call a co-signer or co-applicant and they're like, well, I only signed my name so they could get the loan, I didn't really want to pay it back. We're like, well, that's why you signed your name. So, we're coming after you for the payment, and if you don't perform your obligations were coming after you from a legal perspective.
So, really, if we break it down, if your friend asked you to borrow money, right, you're most likely going to ask your friend well, how are you going to pay me back? And you might ask your friend, well, have you ever borrowed money somewhere else? And did you pay them back? So, it's in simpler terms, it's really just the idea that having no credit history means that we have no knowledge either for or against the idea that you could pay me back we just, we just don't know. And so that's why usually ask for somebody just co-sign that does have a credit history that you can say, okay, well, you can't pay me back this other person could.
I mean, lenders are always looking at the, there's, I mean, there's lots of different scenarios and acronyms out there. But the four C's of credit, whether credit history, collateral, capital and character, so if you're borrowing from your friend, they know their character, you know, what's the likelihood of Drew pay me back over a period of time, if he comes to me and asked me for money? And we're looking at the same kind of thing, but we're looking at your work history, your credit history, your income, all those factors are taken into consideration, and what's the likelihood of you paying us back? So, the same thing as a family friend or something like that would be the same. With a bank, you're gonna get credit on a credit report where the friend you're not going to get any kind of credit for
that? Sure. Sure. So, let's, so let's talk about a credit report, because we hear all the time about whether it's your credit card company or an ex-, maybe it's Credit Karma, or all these different places that you say, well, you can look at your credit score anytime you can get it once a month, once a week, once a day. But what goes into a credit report?
Credit report is going to memorialize your history, your address history, any kind of work history, if, as long as lenders are putting it in whenever they're doing it, in any kind of loans or credit card history out there. Anytime you inquire for a loan, so if you go try to buy a car and they send it to six different banks, you're going to have six inquiries on there. So, we're going to see, are you shopping for debt? Are you doing things like that? Not all credit reports, or, you know, credit scores are equal. You hear you know Credit Karma, and some of those or different times customers come in and say my credit score is 950. Well, the banking industry typically uses the FICO score, Fair, Isaac and Company, FICO score, that's the most widely used by the banking industry. So, that number goes from 450 to 850. So, your highest credit score is 850. So, when someone tells me they have 928, I know they're using a credit score from a credit card or something like that. So, it might be a good indicator that they might have good credit. But not all credit scores are made the same. And there, they don't have the same kind of scales, so credit scores really just an indicator on, what's the likelihood of you paying us back on time. So, it's not a be all and end all just because you have a high credit score, we're still going to look at your stability, your ability to repay. I mean, that's the big thing, do you have the ability to pay us back based on our debt ratio, like we talked a little bit ago?
And are there different things you said about an inquiry? There are things such as soft inquiries and hard inquiries, what's the difference between those two kinds of things?
A hard inquiry is when you're going out to look for a loan or apply for a loan, there's going to be hard inquiries thrown at Drew, you applied for a loan, at XYZ bank last week, and then you come to us today to do an application. So, we're going to see that you applied somewhere else, and we're going to question, what did you do there? Did you get another loan? Did you get turned down? What happened there? Okay, soft inquiries, typically, for an existing account. You might be doing a credit line review, any kind of, we talked about credit lines earlier, we put them out in certain kinds of loans, like home equity loans, we review on a periodic basis, just to make sure that your credit hasn't deteriorated. So, there's only certain things we're looking at. But lenders always have a right to do a soft pull to see the performance of the loan, how it's being done on a credit line kind of product.
So, it kind of goes back to what we were talking about before your, your you can't do it all the time. But you're, you're kind of, you're kind of testing the waters to see if somebody's getting in over their head before it's too late.
We, we definitely try to do it if it's only on a periodic basis. So, generally, when you're doing those kinds of reviews, if you see it, it's probably still too late, because, you know, it's already out there and people are struggling. Yeah, yeah, it's like I said, when you go back to the credit scores, you know, different variables we look at, I've always looked at credit scores just being an indicator, not a be all and end all. So, you can have a 720 credit score, that's on the average above average side, but that doesn't mean you're gonna get a loan, you might be overloaded with debt. You might have a 650, which is on the lower side. It might be just because of one small item might have hit it, you might have a small collection account, a medical collection account or cell phone, or those kinds of things impact you and no stay on your credit report for at least seven years.
So, you're getting into a little bit of the weeds with credit reports and credit scores, there are things that impact that score more than others. What are some of the ways that you could most effectively impact your score in the least amount of time, like what are the things that are most important when it comes to your credit score?
The most important thing is always pay all your debts on time. The other thing is don't take on too much debt. Don't be out there getting credit cards every month, and racking up things like that. The type of debt you have, and the availability of debts also comes into play. Do you have a lot of term loans versus credit cards and credit lines? Credit cards and the availability of what you have, you know can fluctuate on a day-to-day basis because you make big purchases, you might pay them off. Ultimately, your credit score comes down to a handful of factors, and everybody's credit score is different. And it can change on a day-to-day basis based on whether you bought more items, you paid things down. So, like the FICO score is really based on the four most prevalent factors on your credit report. On your specific credit report. Yours is going to be different than mine and yours could change on a day-to-day basis. So, I always tell people pay your debts on time. Don't take too much out. You don't have to worry about what your credit score is. So, a lot of times people get fixated on they want to 800 credit score. Yeah, and I'm one of those people and sometimes I'm like, alright, if it's not 800 or over if you're 798 you have no issues no problems. At the end of the day 798 is a very high credit score.
And there are three different primary credit card or credit score, I don't want to say providers, but I guess they are providers, Experian TransUnion, and Equifax, right? And the credit scores could vary slightly between those three.
Generally, they're going to vary between the three, most debts are going to show up on all three. But you might have regional lenders or credit unions who only report on one of the three. So, that's where the differences can come up. Or if you have a collection or something that's more on a regional basis, certain credit reports are more prevalent in certain areas.
So, the idea that you should get your credit score from one of those three providers every, every year, like you can get your annual credit report, things like that, is that still something that people should consider doing?
I think it's just, it's a good idea to keep an eye on where you're at. If you stagger them, at least you can see if there's inconsistencies or any kind of potential fraud or something like that. If you stagger them, you're also going to be more aware of what your debt situation is. You're going to see that over the summer, I've racked up a lot of debt here. So those kinds of things, if you're gonna do it, probably more on a staggered basis, that way you can see if there's anything unusual that sticks out to you, or maybe it's more self-awareness for your financial pictures and build a budget on it. Yeah, build a budget and financial awareness.
Yeah, and, and I don't want to get too far into it. But you actually mentioned fraud. And I think it's important to mention that too that, you know, if you're noticing something on one of your credit reports that you didn't do, that's also a good thing to sort of keep an eye on to make sure that you can report that if it's something that is out of the ordinary.
Yeah, if you see anything out of the ordinary, reach right out to, you know, whoever it is, a credit card or lender right away. If it's not yours, make sure you're reaching out to put a stop to it. And then put an alert on your credit report, you can reach out, and the credit reports are obligated to share with the other two credit reports. So, if you do one, it does flow over to the other two.
You can put a notification on your credit too, right? You can tell them that if they get anything, you can basically freeze your credit.
You can freeze your credit, you can put a statement on if anybody inquires for credit, call me at X number and it can put a time period on. A lot of times we'll see it where people will put it on for the next 12 or 18 months, if you see any kind of inquiry, you have to reach out to me to verify that I'm the one that applied for the loan. So, we see, see it on a periodic basis, and we reach out to the customer. And then we're gonna go through and verify that your identity for you know a couple qualifying questions that you would only know the answer to Okay.
Keeping things on track with lending in this episode, I think is important to spend a minute talking about repayment, because you're making your payments on time is obviously a huge part of your credit score, and your credit report. But it is also something that I think people have a little bit of a misconception about when it comes to what the lender expects. The lender is not necessarily looking to collect on your collateral, right? I think it's in the best interest of the lender to have you make your payments on time, is that right?
Banks are definitely not in the collection business. I mean, we collect loans, but we're not in a real estate or car business. We don't want your house; we don't want your car. We want to lend you money, yeah we want you to pay us back. That's definitely something over a long period of time that we want people to succeed. I've always said, I've never made a bad loan, I've had good loans good bad, because if I felt you couldn't pay me back, there was an issue with a loan up front. Of course, we've all had loans go bad, it's just the nature of the business. I've lent billions of dollars over the years. So, it's just a matter of, you're gonna have people that have, come on hard times, they lose their job, they're laid off, there's a sickness. But at the end of the day, we want you to succeed, we want you to pay back, and banks are going to work with you to pay back. They're not just going to come in and repossess your car foreclose on your house. I mean, there's gonna be a long period of time, and you're really trying to work with you to get back on track.
Yeah, I think that's, that's definitely something that people at times, I think have this misconception that the bank is just out to try to take, take whatever they can take. And at the end of the day, it goes back to what we started talking about, which was, I mean, yes, we are in business to make a profit, and we are a business ourselves. But we're basically in business to help our communities, to help the people that need the money to open their first business, to buy their first car, to get their student loan, whatever it might be.
And you're going to take a loss. Anytime you repossess something you're going to take a loss on no matter what the value is or what they owe, you're taking a loss on something like that. So, my job is to take our deposit money, lend it out and you said it correctly is, we want those people to pay us back, come back the next time they have a need. So, we want to be their partner for life. I mean, I know it's one of our slogans or our tag lines, but we want to lend money to people when they need it. And when they come back, we want to be able to lend them money again.
Yeah, yeah, absolutely. The only thing that I don't think we really touched on much and I don't know how you, how much you want to get into this is calculating interest on a loan.
From a lending standpoint you're going to use simple interest, it's simple daily interest. So, all loans are based on the amount your dollar outstanding balance based on your daily interest rate. So, it's really just taking your decimal point out two points, you know say it's a 7% interest rate. So, point 0.07 is 7%. If you divide it by 365, you get a daily interest factor multiplied by the balance, and that's how much interest on a daily basis. So, whether it's a credit card, or credit line or a term loan, your interest is always going to be calculated on the balance outstanding. However, many days in a period between your last payment in this payment. It's a little different for credit lines, because credit lines are based on a prior period, you just think about the credit card analogy I used earlier, you're always paying on a prior period. So that prior period, credit line works just the same way a credit card does is they're gonna find out what was your balance on every day, and what, what interest rate was established for those days. If there was a change in interest rate, it might be different, and every day is going to have what your daily interest is you add it up, that's what your interests are gonna be charged. Okay. On a term loan, it's going to be the number of days between the payments, so your interest paid from your last payment till the next one. So, if it's every 30 days, automatically, you're gonna see your interest go down just a tick, a little bit here and there. I think you might pay 25 days next month, and then you might go 35 to the next one. Here, you'll see a little difference in it but, the days of pre-computed interest that changed a long time ago, where you're paying top heavy interest, everything today is based on simple interest and a daily interest factor.
So, if I have that, right, you know, because sometimes we'll say, well, I want to pay off my loan early, I need to get my loan paid off. So, what you're doing when you ask for that loan payoff is the bank is calculating what you have remaining on the loan. And then the difference between your last payment and whatever date you're trying to make the payoff to calculate the daily interest that would have been added? Because you haven't reached your next payment date yet? Correct. Okay.
So yeah, I mean, a long time ago, you know where there was interest where it's pre-computed interest, and you're paying higher interest, cost on a monthly basis, upfront, the earlier in a loan versus the back end of the loan. So, when it changed to simple daily interest, you're not being penalized. So, you pay it off, it's only based on the interest that you've accumulated from your last payment or your last statement, to the day of pay off. Okay, you might hear the term per diem, per diem is just the daily interest rate, or the daily interest calculation, how much your interest you need. So, your payoff today, Drew is $5,240, and our per diem of $1.20. If you pay it off tomorrow, you add $1.20. And then each day after that, because your balance has a move. So that's how much your interest is on a daily basis until you pay us off.
Okay. And that's why you can't really use that same formula with a credit card, because you could change your balance on that credit card several times a day, if you really think about it. You could
change your balance on a credit card or interest rates could change, prime rate could change, or whatever the index you use could change midcycle. So, yeah, it's a little bit different on a credit card, where you can't use like you would on a term installment loan.
So, you had mentioned before, and you just did it again, about the Wall Street prime rate. Can you explain a little bit about what that is, and why banks use that as the rate of choice or their, their benchmark rate?
It's a widely used index, you know, it's based on various economic factors, and it's a consistent factor out there. So, you got your interest rate, and then any, everybody would add a margin, which is the difference what you're charging over prime rate. So, it depends if it's a secured or unsecured loan, how big a margin might be. Like a home equity loan, most lenders are at prime rate. So, if you use a credit line, home equity credit line, you might be paying prime rate, which today is eight and a half percent. So, that's dramatically climbed over the last couple years, what you're paying 3.5, 4%, two years ago is now 8.5%. So, that's why I always say, a credit line should be used for short term borrowings versus long term. But if it's an unsecured loan, it's going to be paid, you're gonna pay maybe 3% over 4 or 5% over prime rate.
Okay. Okay, so it's essentially a starting point for every bank in the US, and then they kind of take in other factors, regional factors, your particular factors and then calculated an interest rate off of that.
Yeah, I mean, generally, that's what's happening out there. There are other indexes that banks may use, but prime rate is the most widely used, I would say out there.
Okay. Well, I thank you very much for doing this with us. I mean, it's a lot of really great information and we can easily go much, much deeper into a lot of these topics, and I'm sure that we will at some point. But I think this gives people a good overview of what it, what it is involved in doing a simple, a simple bank loan that you might need. And you can, you can use bank loans for just about anything. When you come to your bank and you, and you ask for a loan that, does, does the purpose of the loan, get calculated into your decision as to whether or not you, you grant it? Or can you use a loan for a vacation as easily as giving your son or daughter a wedding?
It really depends on what you, the factors are using the debt ratio and things like that, because we see people use it for home improvements, vacations, weddings, education, debt consolidation. If you're consolidating debt, we want to know what debts you're going to pay off. If you're paying those debts off, we're not going to include that in your debt ratio. That might mean the difference between you qualify and not qualifying. So, very things we see people use. But if you're highly qualified, you're coming in for a smaller dollar amount. It probably doesn't matter what the purpose is. If you're marginal, and you're on the on the cut line, where we say, hey, we're comfortable, not, and a lot of times we have, you know, applications come in, it doesn't say what the purpose is. And say you're denied because you got too much debt. And then all of a sudden, while they wanted to pay off the six credit cards and all this stuff, I'm like, well, if we knew that we would have calculated differently, then obviously, we go back and recalculate and say, okay, Drew, now you qualify because you want to pay off all these debts. So, a lot of different things in there. So, we always want to know the purpose, it's not because we're being nosy, it's because we're trying to make sure we don't calculate things that we shouldn't calculate into the ratios.
Okay. Yeah, that makes sense. Okay, so thank you very much. I hope you, hope you enjoyed visiting with us today.
I mean, I definitely enjoyed it. Yeah.
Absolutely. Thank you very much.
AmeriServ Presents: Bank Chats. This podcast focuses on having valuable conversations on various topics related to banking and financial health. The podcast is grounded in having open conversations with professionals and experts to help take some of the mystery out of financial topics. We live our lives using bank products and credit products, mortgages, auto loans, credit cards, but many of us don't always understand what we're getting ourselves into. Please keep in mind that the information in this podcast and in the resources available for download from our website or other sources relating to Bank Chats, is not intended and should not be understood or interpreted as financial advice. We expressly recommend that you seek advice from a trusted financial professional before making financial decisions. Drew Thomas is not an attorney, accountant or financial advisor, and the program is simply intended as one source of information. We are not a substitute for our financial professional who is aware of the facts and circumstances of your individual situation.
Thank you for listening. Before you go, we want to once again thank Rusty Flynn of AmeriServ Financials lending division for joining us on the podcast today. If you have questions about the discussion or would like additional information, you can visit us at ameriserv.com/bankchats, or leave us a comment. We look forward to hearing your thoughts about the show. AmeriServ Presents: Bank Chats is produced by AmeriServ Financial Incorporated. Music by Rattlesnake, Millo, and Andrey Kalitkin. Production assistants by Jeffrey Matevish. Please check out our full library of episodes which can be found on the ameriserv.com website. You can also download or stream the podcast from your favorite podcast app. For now, I'm Drew Thomas, so long.
AmeriServ Presents: Bank Chats, with Drew Thomas.
Assuming that I put an offer in on a home, how long does it take from the day that you say yes, I want to buy this house, to the day I get the keys and can walk in and start painting? I typically tell people 45 days, but it can go either direction. A big chunk of that time is sitting around waiting for an appraisal report to be prepared. And the appraisal basically gives us dollar value, an estimate of the market value of the house at that moment, you know, the appraisals are ordered,
typically, once we have an idea that this is going to at least be conditionally approved, and then it's typically a 30-day window. Sometimes they float in really quick, and sometimes, depending on the complexity of the property, the circumstances around it, the location of it, it can go 45 days, sometimes even two months, to get an appraisal back.
So, the waiting really is the hardest part is what you're saying.
Tom Petty, indeed, was right. And, like I said that there's a whole process involved with the appraisals so, that it's kind of going into minutiae about that part of it. But an appraisal is assigned, the appraiser acc-, you know, accepts an offer, makes a bid, basically, it's accepted, it's assigned. And then the appraiser typically has a couple of weeks to actually go out, they'll actually walk through the property, they'll walk around the property, they'll take pictures of the exterior, take pictures of the interior, and then they'll sit down and start looking at recent sales of comparable houses. And they're called comps. And try to come up with a, an idea of comparing comp, one what might have, has a three-car garage, well, this only has a two-car garage. And that house sold for $200. So, I'm gonna say I'm gonna have to knock $20,000 off because it's got a smaller garage. Yeah. So, there's a bunch of adjustments that are made in it. And some of that science and some of its art.
I was gonna say it sounds like maybe there's, there's a little bit of, of subjectivity to it. There can be.
Yeah. Because it, because again, there's no formula for any of this. But at the end of the day, the appraiser is basically signed, and an appraisal would be like, by the time it's done, it's like 30 pages. Now, a lot of that is boilerplate. But you know, it's also, at the end of the day, the appraiser saying, I've looked at the house, I have my hands around the condition of the house, the quality of the house, I've, I've looked at the recent market activity, identified at least three houses that have sold reasonably close in geography and time. And I've made adjustments to those three sales, trying to more or less, get my hands around a number, even the playing field. Yeah, right. At the end of the thing, they boil it down to a number. Yeah. And there's, there's, like I said, it's part science, part art. But at that point, the bank now has dollar value for what the collateral, the purchase, you know, the property that's being purchased. And it's another one of our ratios that we look at, it's called the loan-to-value ratio. So, we can say, you're borrowing $100,000, the appraiser says the house is worth $200,000. Well, that's a 50%. loan-to-value ratio. Yeah. And that's where that 80% loan-to-value that we talked about, which tends to trigger this PMI, and yes, like that comes in. But that's, that's really kind of the biggest chunk of the delay. At the same time, while that's going off, going on, it should, there should be somebody doing a it's called title work. And it's basically going back in time and the history of that house as far as the ownership of it and making sure that there's no outstanding mortgages that were not satisfied. Outstanding liens of other types. We have their hands around who the actual seller is the legal seller, those sort of things that's being done by a vendor or a title agent. But that's going on roughly around the same time that the appraisers...
Yeah there's, from the I, I, I dabble in history, and it's one of those things where, you know, things like jokes and so forth come about from, from little tidbits of truth in a lot of ways. And the idea of being able to sell the, you know, there were somebody out there that that years ago, sold the Brooklyn Bridge, like 12 times. Because nobody confirmed that he actually didn't own it to begin with. Exactly. So, you know, you have to understand it, you know, you got to make sure that the person who's selling you the house is actually the person who owns the house to begin with and is legally allowed to sell it to you. It's very important. Yeah, that is a big deal.
Yeah. So, the title works going on at the same time, so usually within, once the appraisal has been in and an underwriter needs to look at the appraisal and say, alright, this will make some sense to me. And there's, like I said, because there's some, it's part art part science, and there's sometimes you look at an appraisal and you go boy these adjustments, some of them are just weird. And sometimes you push back, you go back to, to the appraiser, basically. And again, I'm trying not to go too into the, into the weeds here, but we actually use an outside vendor to manage our appraisers. So, we'll actually go back to that vendor and say, you know, I've looked at this appraisal, and I don't understand the adjustments that were made here, here, and here, I just need, it needs an explanation. And a lot of times a good appraiser will have, will already identify if there's some strange things on there, and they'll document it and they'll sort of articulate yeah, normally, I wouldn't use a house like this, but it was the only one within a five-mile radius... Yeah. At the same time, the borrower gets a copy of the appraisal after it's been approved by the underwriter. And we've had occasions where, you know, the borrower has said, I disagree with the appraisal and is appealed it. So, in that case, we basically get a, they fill out a form, we forward that to AM-, to the AMC company, the appraisal management company. And then that gets forwarded to the appraiser and the appraiser has to respond. So that can take up a little more time as well. But typically, once you have an appraisal in the title work in hand, it's usually at that point, it's really just a question of any final conditions that we're chasing? And scheduling it with the title agent to get it closed.
So, let's you know, as we're getting sort of close to the end of the process here. So, you know, people, when they're looking to buy a house, they know that they're going to need a downpayment, right? They, they know they need, and depending on the mortgage, that can be a certain percentage, it could be 3% 5% 20%. I don't know how many people actually have 20%, to put down on a house these days. I know that used to be very typical that you needed 20% down. But I think what a lot of people tend to look over are closing costs, and how much money you need to bring to the table to get your keys even after all of this process. So, what goes into a closing cost?
So, closing costs are typically things like, the bank charges an origination fee, that could be anything from $100 to a couple $1,000, depending on the financial institution, size of the loan, things like that. Other closing costs are things that are specific to the title company, the cost of the title insurance policy, because as part of the closing the, there's going to be a title insurance policy written to which I guess we probably should have touched on. And that's basically, the person that did the search on the property to make sure it was transferred correctly, everything else is basically ensuring that there aren't going to be any surprises on the bank's ability to have the first lien on that property. So that's a charge. There's two kinds of those policies, actually, the borrower has the option to get one too. So typically, the bank requires one, it's optional for the borrower, but the borrower may say, well, I'm buying this house for $200,000, if that turns out, there was a Native American burial ground that nobody knew about, and now it's a thing, which, which has happened, like in the south more, Florida, I know it happened. I have some way to recover my investment. Right, but the bank's gonna at least be covered for, like I said, like banks lending $100,000, the title policy is going to be for $100,000. And that's just making the bank whole. So other, there's various, there's the fee to actually prepare the documents or to get them signed. Those documents, some of them, the actual mortgage, which is the document that gets filed with the county saying that that's a lien against the property, that gets filed, there's transfer taxes, various document fees, things like that, that need to be covered.
And really your, your down payment is when you actually bring that to the table to, right, which is, which is kind of sort of backwards when you think about because you think about a downpayment being at the beginning of the process when you're, when you're starting everything, but it's actually something you bring to the table when you're, when you're closing.
So, it's a good point. So typically, on a contract, especially when, in times like they, like these that we're in and have been in for the last couple of years, the seller isn't going to want to take their property off the market for 45 days, without some kind of down payment an initial down payment. So typically, what you'll see on a purchase sale contract is, that requires, say, $10,000, due at signing. And that's typically held in escrow by the sellers, realtor or somebody else. But the, so there is that initial down payment that was written at the time of the sales contract. But yeah, but to get at the end of it, that's where, and that's why, like I've mentioned a couple times, we're looking at their deposits, deposit accounts, things like that, just to make sure that they have enough money actually to get to closing because, you know, most of the time, when you go to closing, except on maybe a refinance, you're writing a pretty, pretty stout check, because you're buying, you may be putting 20% down on top of the closing costs.
And that's why you're looking back several months, even from the, from the day is because you're trying to make sure that, you know, people didn't go to their, their buddy, and say, hey, can I borrow 5 grand or 10 grand or whatever, and throw it in my bank account, and then claim that I have the money to pay my bills, when, when I don't, right. So that's why you're looking back to make sure that...
And to put a finer point on that, actually what we're looking for is to make sure you didn't borrow money and then agree to repay it. Because part of that, you know that because that would need to be factored into the debt to income. So, what we're looking for is the $40,000 in your checking account is $40,000 of your own money. There are some exceptions, you can have gifts from family members and things like that. But that family member actually signs an affidavit saying, this is just a gift. There's no repayment expected, required, anything else, you know, I'll never see this money again. So, there are ways around that. But really what we're looking for is, did you borrow somewhere to get this $40,000? Or do you have $40,000 because you've been scrimping and saving for a couple of years to put that money together?
Okay. So, so, so now we have a house. Theoretically. Yeah. Which is awesome. And now we get...
...your headaches really start. Yeah. At least the homeownership headaches.
I really genuinely think that a lot of people, they, they don't appreciate what goes into a mortgage, you know, and they, and that also may speak to some of the reason why some of these ages that I talked about at the very beginning of the show have gone up because people don't have the savings. People don't necessarily have the income at 29 that they maybe did in 1981, even accounting for inflation and things like that. They, you know, people don't necessarily have that coming in at a younger age these days. And there are other factors that result in...
The cost of housing has gone up so much. Yeah. Actually, I was reading an article and I, I'm almost positive, it said the first-time homebuyer in San Diego is paying something between $400,000 and $600,000 for their first home. Yeah, a lot of times first homes are sort of classified as two-bedroom, one bath. Yeah, sort of things. I mean, this is a small house in San Diego for $600,000. So, because of that, because the real estate prices have gone up so much. It squeezed out younger people.
And I know too, like even just the, the, the, the income streams are not what they, what they may have once been. I mean, the days of you know, my grandfather, who was a single, had, was a single income household. My grandmother was a homemaker my grandfather worked, was the only one that got, and they, they had a house in a nice neighborhood with three kids and did all that on his income. That's not always easy to do these days either. Almost impossible. So, so, so I mean, owning a home is wonderful, and it has a lot of advantages, but there are a lot of responsibilities that come with it. And I think that just as a last point, I wanted to sort of just highlight something that you had said was that the house is your collateral, right? So, you're buying a house, but technically it doesn't belong to you until you've paid for it. So, kind of like your student loans or any other kind of loan that you're taking, if you don't make your payments, that for you, yeah, that, there can be consequences to that. Right. So, there can be consequences to it, you know, and typically the way a mortgage loan gets vetted, you're trying to weed out circumstances where somebody either can't afford it or has a history of not repaying their debts, things like that, and trying to weed that sort of scenario out very early in the underwriting process. But yeah, there are circumstances, things change, people lose jobs.
Well, you mentioned divorce earlier. And then, yeah.
The Right, exactly. I mean, it's changed jobs, change jobs, change circumstances. And if you find yourself in default, on a mortgage, it is a long, protracted process, partly because it's not in the bank's interest to take you out of that house, the bank will typically do everything they can to try to keep you in that house, as long as you're making a good faith effort to try to rectify the situation. But yeah, the bank doesn't necessarily want to be in that house, because a hou-, a house sold by a bank, it's basically a sign that you can buy that house, if you're an investor, you know, somebody's looking to buy that house for a lot less than if it was being sold under regular circumstances. There's a, there's a certain amount of duress in that transaction. So, the banks don't want to be part of that, unless they absolutely have to. But it does happen.
Yeah. And I think, I think you make a good point. I think that a lot of times when something like that happens to someone where they can't necessarily make their payments or something happens, you know, you don't always know, but you assume it's out of their control. Like, they maybe they lost their job, through no fault of their own or something like that. It's not really something where someone is predatorily trying to take your house away from you.
Right, right. I mean, that in, there may have been circumstances historically, where those sorts of things happened. Fair, yeah, fair. In today's environment, it's hard to imagine a lender would lend you $200,000 to buy a house, and not want $200,000 plus all the accrued interest back, that they'd rather have the house that you bought. But, the one thing, and just to bring this up, that's some people seem surprised by is, when you walk away from a house, it's not just done. You still owe 100, say, $180,000 on that house. If the bank sells that house for $140,000. You still owe $40,000. Right, right. Yeah. So, it's, you know, that, when I was living in Jacksonville in 2008, when the housing market crashed, I talked to a couple people who said, well, I bought the house for $100,000, and now it's only worth $60,000, I'm just walking away from it. And I told them, I was like, that's not a reason to walk away from a house. First of all, prices go up and they go down. They generally always wind up going up when you look at it over time. Yeah, give it enough time. Yeah, give it enough time. And I said, if you walk away from that house, you're still going to owe them whatever the deficiency is, after they sell it. And they're going to, they're going to accrue expenses that you're going to, that is going to come out of that and everything else. You're not just walking away from it free and clear. Yeah. So, you know, unless the bank agrees to something like that. And that's called the short sale. But the yeah, it's there, It's the same thing with cars too. You decide you don't like your car anymore, and you toss the keys to the bank, yeah, and you owe $10,000, and the car gets sold for $5000, you still owe a $5,000 deficiency, right. It's yeah. So, there are some people who are unaware of that whole concept and make rash decisions that can have long term effects for them. Yeah.
Well, listen, I, I really appreciate your time and everything and going through all this. It's been, it's really an education. It truly is. And well, it's been very enjoyable for me because I love to hear myself talk.
Yeah, it's not my typical procedure to berate the guest. So, I will not counter that statement. Yeah. Well, when I listen to this may I scheduled time on to, to rebut? Yeah, absolutely.
No, we would, we would love to have you back. I mean, we would love to have you back. And as I'm sure the listeners know that we're still early on in this process. I mean, I can imagine having you back on, you know, many times. And we can reiterate some of this conversation, some of the subjects can change, I mean, look at how much has changed just in the last three years, when it comes to mortgages and home buying, and it's really much more complicated than what people I think, imagine it to be. Yeah. But that doesn't mean that if you have, if you have somebody that's good at guiding you, if you have a good lender, if you have a good realtor that can help guide you through these processes, it's not something that's undoable, right, but it isn't something that should be taken lightly either.
Right. And I tell people, when they're, especially at my age, now, these tend to be children of friends of mine, who are buying their houses for the first time, and I'll talk to him about the process. And I'll tell him, like, first of all, like, the whole process is just fraught, emotionally. You know, I bought my first house in 1998. And I think I threw up in a trash can. It's, so it's fraught with emotion. But at the same time, if you, if you just work through the process, at the end, you have a 30-year loan, typically with a rate of percentage or two points less than if you bought a car for a five-year loan. So, the process is designed to sort of homogenize all of the loans to get everybody comfortable with the val-, you know, with, with what was put into it. And that, that what's on paper is actually what's true. But as a result, you wind up with a very, fairly low-price loan for a long term. And, and it's a house, houses is typically over time, an appreciating asset it builds wealth. There are neighborhoods where people don't own their own homes, and those, those neighborhoods tend to have lower incomes and lower levels of wealth. A chunk, a big chunk of it can be attributed to the fact that they don't own real estate. So, it's an investment. Work through the process. You know, you can it's certainly okay to ask for explanations of the process, but work through the process, because at the end, you're gonna own a home for a fairly low rate and fairly reasonable terms.
Yeah. And you get to pay school taxes. You get to pay school taxes. And you get to play in Pennsylvania. I don't know if that's yeah, I don't know. And
you get to every, every couple of years replace a, an outlet, or, you know, or a wall switch or, you know.
No, I think, I mean, all joking aside, I think what you just said is fantastic. And I don't know that I could really say anything that could sum it up better than that. I think that, you know, having that appreciating asset in your back pocket, especially like you said, compared to a car or something like that is more value than then I think people fully understand or appreciate sometimes.
Because a car is a depreciating asset. Yeah, yeah.
And I can't imagine a lot of, a lot of, a lot of people opening up a barn door in 40 years and saying, a Kia Soul.
Yeah. I can't believe it, when we're off or offline I'll tell you some stories about that, yeah.
Yeah, thank you. You're welcome. All right, have a great day, thank you, you too.
This podcast focuses on having valuable conversations on various topics related to banking and financial health. The podcast is grounded in having open conversations with professionals and experts with the goal of helping to take some of the mystery out of financial and related topics, as learning about financial products and services can help you make more informed financial decisions. Please keep in mind that the information contained within this podcast and any resources available for download from our website or other resources relating to Bank Chats, is not intended and should not be understood or interpreted to be financial advice. The host, guests, and production staff have Bank Chats expressly recommend that you seek advice from a trusted financial professional before making financial decisions. The host of Bank Chats is not an attorney, accountant, or financial advisor, and the program is simply intended as one source of information. The podcast is not a substitute for a financial professional who is aware of the facts and circumstances of your individual situation. AmeriServ Presents: Bank Chats is produced and distributed by AmeriServ Financial Incorporated.
We want to once again thank David O'Leary of the AmeriServ mortgage team for joining us on this walk through a typical home buying process. While there are often unforeseen bumps and detours along the way when purchasing a home. This does give a good sense of what the process should look like. We also would like to thank you, our listener for joining us on the second episode of AmeriServ Presents: Bank Chats, and hope you'll stick around for the next episode, and the next, and the next. We have a lot of great discussions coming up in the near future. Please check out ameriserv.com/bankchats for details about the podcast, along with any supplementary materials that may be posted. And don't forget to subscribe so you know when new episodes are available. For now, I'm Drew Thomas, so long.
AmeriServ Presents: Bank Chats, with Drew Thomas.
So, with me today, is David O'Leary, he is a mortgage professional with AmeriServ Financial Services. And yeah, so tell me a little bit, hi, Dave. Hi, Drew. Hi, how are you doing?
I'm well, how are you?
I'm doing, I'm doing good. So, tell me a little bit about yourself and your background and,
about my, my lending background, background? Yeah. So, I've,
I've, unless you were a circus performer at some point in the past,
I did have a career before, a brief career before, I was in banking and lending, but I used to go out repo cars, and Baltimore and things like that. And, yeah, and that's sort of taught me how it looks, how a deal when it's not done correctly, looks, okay. Postmortem of it. Eventually, I moved into consumer lending. I'm from like I said, I'm from Baltimore. I,
we won't hold that against you. That's
proud Baltimore. I came up here, and I worked commercial lending for a little bit. And then I, two years ago, I moved down to the mortgage department, Residential Lending, and I run the operation down there.
So what's, so what would you say is the biggest difference between doing residential mortgage versus the commercial mortgage you did before?
Well, it's a good question, because they're very different. Just to start off with residential lending, mortgages, and I'm air quoting, is really probably the most heavily regulated form of lending there is. Residential Lending is very much by the numbers. If you talk to a lender and you answer a certain number of questions correctly, well, that's considered an application at that time. The presence of an application triggers a bunch of disclosures, those disclosures have to be done correctly, or there's financial consequences for the bank on top of any regulatory consequences as well. Commercial lending is, every commercial deal is different. You, there's not a common thread that runs through them, for the most part. It's not very regulated, commercial lending has a certain amount of creativity to it as far as, you're able to structure things, customized to that particular borrower in that particular situation.
Okay. So obviously, we're talking today a lot more about mortgage from a residential standpoint, right? But I think sometimes people don't realize that there are business mortgages, there are commercial mortgages that are out there. Because when you think of a mortgage, you think of buying a house. Right. So, one of the things that I found interesting is I was sort of, you know, researching some stuff and preparing, you know, for the, for the conversation we were gonna have today is that the percentage of homebuyers who are first time buyers, was at the lowest percentage ever in 2022, just 26%. So do you have any idea like, have you seen that like the, the average, you know,
my gut on that is, in 2022, there was some financial ambiguity for people. And I think, plus, at the same time, home prices were skyrocketing between, from 2020 2021. And I think it just drove a lot of people out of the home buying market for a while.
Yeah, I mean, it's, it's been crazy. I mean, from 2020, with the peak of the pandemic, and interest rates going through the floor, to now whenever they're among the highest they've been in, what about a decade? Yeah, probably at least about a decade. So, what does that do to a price of a home when someone's buying a home, and the interest rate goes from, say, 3% to 5%? It doesn't sound like a lot, but I would expect that it probably is.
Well, what it's going to do to pricing is if I had a house, that's, I, that is worth $200,000 I'm trying to sell for $200,000, when the mortgage rates were in the twos, I had a huge pool of available buyers that would qualify for that house. As the mortgages really have doubled, obviously, that pool of buyers that could afford that house has shrunk dramatically. So, I think what we're gonna start to see and it hasn't really, I read that it's happening, but I haven't seen it necessarily yet, is there's going to be some downward pressure on housing prices, the actual cost of a house. And I think it's gonna just basically eat away at some of that dramatic increase in prices that we saw in the last couple of years.
Okay. So, when you say downward, what you mean, like the price of the house itself will go down, even though the interest rate may not necessarily go down? Yeah,
a year ago, I could have sold this house for $200,000. Today, I may have to sell it for $160-$170,000, something like that.
Which means if you paid $180,000 for it, five years ago, you're losing money, now. Where maybe two years ago, if you would have sold it, you made some money, time as everything. So that's, so from a seller's point of view, that's not, that's not so great. From a buyer's point of view, the housing price coming down helps but the interest rate being higher? Yeah, it's hard.
Yeah. And those are two, the prices going down are going to help a little bit, but the fact that the rates are so high is going to be an issue. And you know, the funny thing is, when you talk to people that work in this field, is we have we saw almost no refies last year, refinances, refinances. Yeah. Where that, where somebody has an existing house, and they refinance the, the mortgage loan they took out on it, because the rates, and for the last, say, four or five years prior to 2022, were so low. So, I kept saying like, sooner or later we're going to run out of people to refinance. Yeah,
yeah. Yeah. I mean, if you bought a house at 3%, and you may never refinance your house. Yeah,
it would be a strange circumstance to want to refinance your 3% loan at 6%. Yeah.
So, so let me circle back to what you had said, you had said something about paperwork. And, you know, when you do a certain number of paperwork and consent, it's considered to be an application and so forth. And you said, you know, things go so, so much by the books. And two of the terms that are, that are thrown out there a lot that I think are, are a source of confusion for some people, are the terms pre-qualified, and pre-approved, right. Okay, so what are the, what's the difference between someone who is pre-qualified versus someone who is pre-approved?
So, a pre-qualified loan is basically a lender, or, a pre-qualification is basically a lender saying, if certain criteria were met, and nothing else weird happened with the deal, we would most likely approve you for a loan. And so a lot of times when you're, somebody's looking for a pre-qualification letter, especially in the last year or two, where you basically had to have evidence that you were pre-qualified for a loan just to put a contract in, because there was so much competition for, for housing, that pre-qualification is not anything binding or anything else. And like, for example, AmeriServ, will do a pre-qualification, will issue a pre-qualification letter, after sort of getting an idea roughly of what the credit background is, the income looks like, their assets, their capital situation. And it'll be sort of a range, like we would do this pre-approval, which AmeriServ doesn't do is more actionable. It's basically saying like, yeah, you're approved. Yeah, we'll do this. Right, right. So that's why, that's why a lot of banks won't actually do a pre-approval. That term gets used interchangeably, sometimes pre-qualification and pre-approval, right. But most, most banks are going to actually be talking pre-qualification. And just to circle back to it, sometimes pre-qualification can be done without anybody, with a house in mind or anything else. They can just be saying, like, we're gonna go house shopping, and we think we would potentially look for a house between $200-$300,000. And so that, that's sort of based on that range.
Yeah, there was, I was reading there were, there were actually certain situations during, during the peak of the pandemic, during COVID, where, if you didn't have a pre-qualification, they wouldn't even show you a house. The realtor wouldn't show you a house, like, it was like because they didn't want people just going out on Saturday and going to open houses and walking through the house or something like that. They literally shut all that stuff down and said if you're not a serious looker, we don't, we don't even want you in the house.
I think some of that was partly because of COVID, they just didn't want people in the houses. But also, especially once we sort of worked our way out of that initial COVID locked down period, the realtors were so busy, I think they just didn't want to waste their time with somebody that at least hadn't talked to a mortgage company and yeah, at least had something enhancing. Yeah, that these people are credit worthy to some extent.
Gotcha. Okay. So, so as a, so as a first-time homebuyer, first time homebuyers, the age of those have gone up too, I mean, the, the average age of the first, the person buying their first house is now like 36, where it used to be, used to be much, much younger. Yeah, but if I'm a first-time homebuyer, what, what are some of the things that you said things are very by the book and very, very rules oriented. What are the some of the things that you have seen from first time homebuyers that, that maybe they were surprised by, like the biggest thing that kind of shocked them? Yeah, process.
This, the process of getting to an approval for a mortgage loan is very document driven. And I mean, it's, it's very specific, and because, just to sort of circle back a little bit to why that exists, why, and I hear that from people too. They're like, I can't believe how much work it was to get approval, and I went to the car dealership and filled out a form and I drove away in the car an hour later. Sure. Yeah. So, mortgage lending, residential lending, on the consumer side is document heavy. One, because of all of the regulations, two, because frankly, a lot of the loans that are originated, wind up being sold on the secondary market to other investors like Pennymac, or Truist, or Wells Fargo, until recently, was in that, that game to that, that secondary market thing. As, because of that, the fact that these are bundled up and sold to, sometimes multiple investors, and then eventually sometimes can wind up, and you may have heard this term thrown around a lot in 2008, mortgage-backed securities, everyone involved in that process needs a certain level of comfort that the loans were processed and documented and handled in the same way. Because these all sort of wind up not all, but a number of them wind up as various forms of collateral down the road. And the investors all have to have a belief that the loans are credit worthy, there's gonna be repayment without too much issue, things like that.
So, what kind of so, so as so, so kind of getting back to the what the documents are like, what, what do I need to provide you as a first-time homebuyer to start the process? Like if I just wanted to,
to start the process, typically early in the process, and let me just say, I'm not a Mortgage Loan Officer, I'm not on the front end. Fair enough. But typically, the conversation is going to be roughly, what do you look, how much are you looking to borrow? How much do you have to put down? And then a discussion about credit quality, your, you know, your FICO score,
which is probably not, I wouldn't touch on that too, which is probably not the number you're getting from your credit card company, or some of those free sort of yeah,
the those, those free FICO scores have a lot of strings attached, and a lot of fine print. When it gets to the point where we're actually pulling credit on somebody, we actually access all three major credit bureaus. It comes out in a single report, you know, it's Experian, Equifax, and TransUnion, maybe TransUnion, yeah. So those three bureaus have their own FICO formulas roughly, and they all report things a little differently too, so you'll see a swing of FICO scores between the three of them, and sometimes it can be a pretty dramatic swing, because one may be showing a collection or something else that the other two don't have. So, as a result, we take the middle score, and use that as, okay, and that's, that's your, that's what we use is your effective FICO score.
And that helps to determine what your interest rate offer is and things like that. Right.
So, because at some point, once your bureaus, your bureau has been pulled, we have a rough idea of what your debt to income is going to be, which is a ratio of your monthly debt service divided by your gross income. That's not your disgusting
income that's the, that's the, the income before you take out your tax, before taxes and Social Security, yeah.
Your health premiums and everything else so, right. And so, the industry standard is you typically want to be 43% or below, okay. With the other 57% of your gross income going to things like your taxes, your utility bills, your groceries, things
like that, because buying a house isn't just paying your mortgage, right? Buying a house is also having to pay for your electric and your sewage and your water and on and on and on. So, and I think a lot of people forget that, you know, they do one of these mortgage calculators online somewhere that doesn't take into account the taxes on the property. It doesn't take into account, the utility bills, the home insurance that you're going to likely need and depending on, and I'd like to touch on this too, in a minute, depending on the type of mortgage, you may have, different insurances that you have to have. Correct, right? So okay, so I'm applying for a mortgage I've given you, I'm assuming you have to give bank statements or something to prove your income?
Yeah, down the road, we're still sort of in the initial part of it here, where we're, a lot of this is going over the phone or in face to face with a loan officer, okay. And, at some point, the loan officer will say, will basically be able to say, well, you say you have, you make $5,000 a month, you have $20,000, in the bank, you know, we've pulled your credit report, you know, we, we should be able to move forward with this. Okay. At that point, and typically, you know, once we have an actionable credit report, they'll start chasing items, like, we need your last two months of bank statements, we need your last two full pay stubs, and it should be at least one full month’s backwards. So, if you get paid weekly, will be four, you know, there's usually an estimate of like what your homeowner’s insurance is going to be and what the taxes, the property taxes are going to be, trying to think of other documents that they'll, they'll be asking for upfront.
But this goes to show just kind of, to your point earlier, why you can't just walk in and sign a paper like you can with a car, exactly, and, and walk out with a loan the same day, like there's a lot of prep and a lot of research that goes into this to prove that you have the funds available, right, to do what you're going to do,
right. And then once that documents that we've discussed have been sort of accumulated, an underwriter, a credit officer is going to roll their sleeves up and dig in and then validate to the penny, every penny of income, every penny you have in deposits, try to get their hands around taxes and insurance, things like that, make sure it at least makes sense. If it's a refi, we actually usually have that information there too, because you will be your insurance isn't going to change shouldn't change too much. And your taxes obviously aren't going to change.
So, this also to me, speaks to why you always hear that thing, don't go open up a credit card, whenever you're buying a house. You know, if you're if you're planning to buy a house, and people do that, they'll, they'll go out and they'll say, well, I'm buying a new house, I need to buy furniture, right? Or I need to buy stuff to fill the house with and they go out and they get a credit card halfway through this process. And it's not just the bank or the or the financial institution just being jerks, it's about the fact that we've done all this research, and we validated all this information, and now you've gone out and changed the status quo on us midstream. And that just throws things into a
loop. We've had deals that went off the rails, because six or seven days before closing customer went out and bought a truck and suddenly added $450 of debt service to their debt-to-income ratio. And the debt-to-income ratio was already a little skinny. Wasn't a lot of room there. So yeah, I mean, you know, it is a wise thing to not get a credit card, not get a car loan, you know, obviously, you may have, like you mentioned, you're gonna have some expenses that you may want to finance down the road, but wait till you're 30 days out, you've closed in 30 days is gone. Because in a case like where you're, and this is the reason, in that case, we caught it, we'll actually do a, what's called a soft poll on your credit report a few days before closing, just to make sure that your credit situation hasn't changed. And also, an investor may do the exact same thing too. So, if you, if you've obtained credit, and it hasn't been disclosed at the time of purchase, or the time the application was taken, everything's off the table, you basically run the risk of having to start all over again. So, it's, it's wise advice. Stay. Don't, don't buy anything, don't finance anything, until you have the keys to the house in your hands. Yeah.
So, advantages and disadvantages to, to different mortgage types, right? So, you have, you've got you've got fixed rate mortgages, you've got adjustable-rate mortgages, FHA mortgages, I mean, there's, there's different letters behind all these mortgages that people go out and research. So, can you talk just maybe a little bit about what the differences are between those?
So, kind of starting at the, as an overview, there's a couple of different kinds of lending. There's conventional mortgage lending, which is what 90% of what we do, which is basically deals, a deal or it's not, it's closes, money changes hands it's sometimes sold to an investor, or we'll hang on to it for our portfolio, and it just moves on. There are government backed loans like FHA, VA, USDA, there's probably another couple of different sets of initials that are I'm forgetting, but those are loans that are mostly, there's some sort of guarantee by a government entity, FHA Federal Housing Authority, USDA, US Department of Agriculture. Yeah. And then the VA, which is for veterans of our armed services. So, there's, those have different, their own specific requirements and things like that. They have different paperwork, requirements, sometimes they require inspections of the house that don't come up and conventional loans.
Sometimes the home has to be in the literal certain location to yeah,
yes. Typically for USDA loans. They tend to need to be in more rural areas.
But the agri-, being agriculture, that makes sense. Yeah, exactly.
But, you know, in our footprint in our immediate area, like the greater Johnstown area, there are areas that qualify for USDA loans through their rural program, there are ones in the next zip code over that don't. So, sure, in some of those cases, it does require specific, being in a specific zip code. So, the other thing you brought up was like, a fixed-rate loan versus an ARM, which is an adjustable-rate mortgage. Okay, that is more or less based determines the pricing and the repayment of it. And how, over on the
volume No, no, no, no, that was No, no, no, that was me. I wouldn't I wanted to take a sip of coffee I had I had to do that.
Yeah, I was, yeah. Some of it, I can't help but look at the board, I sort of want to control it. I have control issues leave me alone, I have control issues. So, a fixed rate loan is basically say a 30 year term loan and your rates 5%, and it's going to be that throughout the entire length of the loan. Your interest rate it's not going to move. An adjustable-rate mortgage typically has an initial rate, which is usually, in theory, should be less than what the fixed rate loans offering at that moment, for a specified period of time. So, a lot of times, it'll look like a ratio, like a, like a fraction almost. So, you'll see like a seven slash one or a five slash six or, and what that saying is, the first number before the slash is the number of years where that initial rate is going to stay the same throughout the entire, throughout, throughout the course of that five-year period. So okay, using the five slash one example. So that's 60 payments. On the 61st payment, your rate is going to adjust, and that's typically using an index of some sort. AmeriServ uses the SOFR rate, which is I think, standard overnight finance rate? SOFR, we'll go with that. Yeah, we'll go with that. We'll go with that SOFR, and plus a certain number of percentage over the top of that. So, after the initial rate is over, your rate adjusts. And then it adjusts to say it's whatever the SOFR is that day plus 3%, and that's your new rate. And that would be for another five years? Well, that's, now we're going to talk about the, the second number in there behind the slash, okay, so that second number basically identifies how often that, that rate is going to readjust, in this case, that one signifies one year. So, on the anniversary of that readjustment every year, it's going to adjust again to whatever the SOFR rate is that day plus, using this example 3%. So, the ARMs are good for, like I, when I was with Chrysler Financial early in my career, there was a period where I was living in a different house in a different town every year. I moved a lot for a little while there. And after a while, I realized like, I'm not going to be in this house for more than a couple of years, so why get a fixed rate? When I can get a lower rate the ARM, and most likely I'm going to move out. So, if you're in that sort of circumstance where you know, you work for the government, you find yourself moving every couple of years, an ARM rate is actually a better deal than, than a fixed rate. Yeah, that makes sense. And to tell you the truth, when I moved to Jacksonville, Florida, I thought I was going to be moving again in a year or two and I wound up saying seven years because I got a, I wound up changing employers, I was tired of moving. And actually, I was sweating the first adjustment five years later, because I never had to deal with this before, and my rate actually went down. At the time they didn't have floors and things like that on the on the ARMs. So, it actually went down two years in a row, and I think the third year floated back up almost to the original rate it was the initial rate was so, ARMs can, they will fluctuate, but they're not necessarily going to be the worst thing in the world either. There are people who just are so concerned about that adjustment period that they would rather pay a higher rate for the, for peace of mind knowing that that rates are never going to move for 30 years. Right. My mortgage is going to be $847 through the next 30 years. Yeah.
Now, now, so let's talk about the monthly payments, since you kind of brought that up, like, you know, having that fixed payment idea. And let's, let's talk a little bit about what goes into an escrow. I think a lot of people again, you do these calculators online, and you say, oh, wow, you know, I can afford a $200,000 house, because this calculator online that I'm looking at tells me that my mortgage payments only going to be $600. Right? But you're not, that calculator, in that case, is most likely not taking into account the other stuff that you're gonna have to pay and, and that may, either may be in an escrow account with the with the lender, right, or you might pay it separately.
Yeah, majority of the time, at least with the loans, we see, taxes and insurance are escrowed. taxes, property taxes, insurance is just your homeowner’s insurance. Both those things are in the bank's interest to make sure are kept up and not, you know, falling behind or not being paid in the case of insurance. So, it's mutually beneficial to both because it helps the borrower sort of budget, and then the bank is sure that the taxes are getting paid, there's no notices that the house is going to take, you know, a sheriff sale or something else like that. Right, right. Or there's a big loss in a house and you find out that the insurance lapsed three years ago for non-payment. So, from the bank's perspective, escrows are attractive, they're a little bit of a headache, because there is some work involved with them. But
so so is it up to the lender to decide to do that, or is it up to the borrower? Or is there a conversation that says like, well, I want to do this, or I want to do that? Yeah,
so, there are certain circumstances where escrow can be waived, and I think, I believe it has an impact on your rate as well, because there's a little bit more risk involved. Stronger deal can get an escrow waiver, a deal that's closer to the bone as far as debt to income, or maybe credits, not 100% where you'd want it to be, are less likely to get an escrow waived.
And it is up to the homeowner, obviously, to find insurance for the home. Like that's not something you do through the, through the lender, right? That's
because, yeah, that because that's a different animal. If in a circumstance and, and it runs, they run into it in HELOCs, the borrower signed a document saying that they're going to maintain the insurance on this house throughout the life of the loan. And if the borrower doesn't meet that obligation, the insurance lapse or something like that, the bank actually has the right to, it's called force-placed insurance, and contact an insurance company and get at least the replacement value or, you know, the the amount of the loan covered so that in the event that there was a loss, the bank's covered. The premiums on force-placed insurance are very high, very high. So, you know, and that's passed on to the to the borrower as well. So yeah, it's, it's in the borrower's interest to, to shop for insurance that meets the minimum amount of coverage requirements, and is also the most affordable for them as well.
Now, so now sometimes, though, when it comes to certain insurances, you there are insurances you have to have over and above your homeowner’s insurance, right? So, like, for example, like on an FHA loan, don't you also have to have like mortgage insurance?
There is a, there is a premium on FHA loans, because they tend to be high LTV deals, loans. And, and that sort of ties into a discussion that people have heard PMI, private mortgage insurance. If a loan-to-value is typically over 80%, it's required to have PMI on it. And that's basically in place until the borrower can prove the loan is now at roughly 80% or less LTV, okay, that can go away. FHA, it can't go away, it's baked into the deal, it's gonna be there forever. So, but that is another kind of insurance that's on there. It's not on every deal. It obviously depends on the loan to value. And then there are certain loan programs that can waive PMI as well, but that's kind of getting into the weeds is yes, but the other kind of insurance that you may have to carry is flood insurance. If you're
which we know a lot about in this area. Yeah.
For good reason. Yeah. So yeah, so flood insurance, basically, that's, that's more or less identified at application roughly. We do a search, and I think every lender does the exact same thing, does a search on the address early in the process. And there's, there's a couple different databases that different vendors use, but basically, it goes into, FEMA maintains these flood maps. And if the house is in what's considered, I think it's 100-year floodplain, it has to have flood insurance on it. Because typically, homeowners’ insurance policies won't cover water damage, regular water damage. You know, if a pipe breaks in your house, that's one thing, but if you, the creek in the back of your house rises and floods your house out, your standard policy isn't going to cover that. So that's where the flood insurance comes in. Okay. So on, those maps do get rewritten. And typically, though, those floodplains are expanding, so one of the things you're required to do is even if you're not in the floodplain at that at the time of closing, if the FEMA rewrites those maps, and your house is suddenly in a flood zone, you have to at that point get flood insurance on it. Okay. So, the maps, like I said, those maps usually expand, they rarely contract. But if it, if it did happen, so say two years into your loan, you went and had a flood search done on it, and now suddenly, you're out of the flood zone, we can't require you to carry it if you're no longer in the in the floodplain.
Gotcha. Okay, so, so, okay, so, so we've kind of gone from, you know, this whole pre-approval pre-qualification, you can, you know, we, we might, we might consider giving you a loan at some point, here's, here's a piece of paper that says, you can go look at houses, yeah, to the point of, of acquiring all of these documented documents and bank account statements, and, and so on. So assuming that I put an offer in on, on a home, you know, how long does it normally take from the day that I say, yes, I'd like to buy this house, and of course, I'm just going to qualify this as saying like this assumes that there are no hiccups in terms of the seller deciding at the last minute, they don't want to sell you the house, or that there's
decided they don't like the cut of your jib. Yeah.
Or that, you know, a meteor does not come down and crashed through the roof of the house and in the process. But assuming that everything goes as smoothly as is typical, how long does it take from the day that you say, yes, I want to buy this house, to the day I get the keys and can walk in and start painting?
I typically tell people 45 days, but it can go either direction. A big chunk of that time is sitting around waiting for an appraisal report to be prepared. And the appraisal basically gives us a dollar value, an estimate of the market value of the house at that moment, you know, the appraisals are ordered, typically, once we have an idea that this is going to at least be conditionally approved, and then it's typically a 30-day window. Sometimes they float in really quick and sometimes, depending on the complexity of the property, the circumstances around it, the location of it, it can go 45 days, sometimes even two months.
AmeriServ Presents: Bank Chats. This podcast focuses on having valuable conversations on various topics related to banking and financial health. The podcast is grounded in having open conversations with professionals and experts to help take some of the mystery out of financial topics. We live our lives using bank products and credit products, mortgages, auto loans, credit cards, but many of us don't always understand what we're getting ourselves into. Please keep in mind that the information in this podcast and in the resources available for download from our website or other sources relating to bank chats, is not intended and should not be understood or interpreted as financial advice. We expressly recommend that you seek advice from a trusted financial professional before making financial decisions. Drew Thomas is not an attorney, accountant or financial advisor, and the program is simply intended as one source of information. We are not a substitute for a financial professional who is aware of the facts and circumstances of your individual situation.
We just finished discussing how waiting is a major component of the residential mortgage process and waiting is exactly what you'll need to do to hear the second half of our conversation with David O'Leary from AmeriServ Financial. Luckily, you won't need to wait long. We've already posted episode two of AmeriServ Presents: Bank Chats. It's waiting for you so that you can hear the conclusion of this conversation. And we have a number of fantastic guests waiting in the wings to discuss banking related topics such as cybersecurity and budgeting, additional lending topics, trust and financial services, topics, retirement and more. So please be sure to subscribe and we cannot wait to take this journey with you. For now, my name is Drew Thomas, so long.
This podcast focuses on having valuable conversations on various topics related to banking and financial health. The podcast is grounded in having open conversations with professionals and experts, with the goal of helping to take some of the mystery out of financial and related topics; as learning about financial products and services can help you make more informed financial decisions. Please keep in mind that the information contained within this podcast, and any resources available for download from our website or other resources relating to Bank Chats is not intended, and should not be understood or interpreted to be, financial advice. The host, guests, and production staff of Bank Chats expressly recommend that you seek advice from a trusted financial professional before making financial decisions. The host of Bank Chats is not an attorney, accountant, or financial advisor, and the program is simply intended as one source of information. The podcast is not a substitute for a financial professional who is aware of the facts and circumstances of your individual situation. AmeriServ Presents: Bank Chats is produced and distributed by AmeriServ Financial, Incorporated.