Why $30 overdraft charged for $2 cup of coffee bought by debit card still raises legal stink
Wake up and good morning. All those complaints by bank customers that their financial institutions gouged them by ordering account overdrafts to maximize fees may now be reaching a tipping point. Federal lawsuits regarding overdraft fees now consolidated into one class-action suit in Florida this week were given a legal road map by a judge's ruling in a related case in California.
Various lawsuits claim that big banks -- including Bank of America, Citibank, JPMorgan Chase, U.S. Bank, Wachovia and Wells Fargo (which now owns Wachovia) -- manipulated transactions to maximize overdraft fees. In California on Tuesday, a federal judge ordered Wells Fargo to pay California customers $203 million in restitution for claims that it had manipulated transactions to maximize the overdraft fees it charged. As reported by the New York Times, instead of processing transactions in the order in which they were received, Wells Fargo put through the largest to smallest, U.S. District Judge William Alsup in San Francisco wrote in a stinging 90-page opinion, calling the practice unfair and deceptive. Said Alsup:
"The bank’s dominant, indeed sole, motive was to maximize the number of overdrafts and squeeze as much as possible” out of customers who spent more than they had in their accounts."
Wells Fargo collected an astonishing $1.4 billion in overdraft fees in California alone from 2005 to 2007. The bank said the ruling was in accurate and plans to appeal. Here's the New York Times story and here's Judge Alsup's opinion.
As Alsup noted, the core of this controversy focuses on a bookkeeping device adopted by the bank called "high-to-low resequencing" that transforms one overdraft into as many as ten overdrafts -- ten being the voluntary limit the bank imposed on what could otherwise be an almost limitless prospect.
This week's California ruling should help the consolidated federal class-action suit in Florida. Earlier this year. a Miami judge ruled that the big banks could not derail the class-action attempts. U.S. District Court Judge James Lawrence King said consumers pursuing these lawsuits are "not trying to prevent banks from engaging in the business of banking, they are merely asking the banks to do so in good faith."
More recent overdraft changes instituted by Bank of America and other big banks -- as well as new bank regulations restricting how banks charge overdrafts -- may ease the pain of consumers previously blindsided by those banks allowing (but not informing) customers to overdraw their accounts and then incur stiff overdraft fees. But the class action lawsuits are aimed at wrongdoings that already have occurred and could mean some restitution for the millions of bank customers earlier zinged by the piling on of overdraft charges produced by banks' use of the "high-to-low resequencing" strategy of gouging their own clients.
New federal rules on debit card overdraft fees require banks to get your permission for overdraft protection. The requirement for new accounts went into effect July 1, and the rule for existing accounts goes into effect Aug. 15. Some consumer advocates urge consumers to forego the overdraft protection programs and choose less-expensive alternatives, such as linking a checking account to a savings account to cover overdrafts.
-- Robert Trigaux, Times Business Columnist