Loveland, COA landmark decision in California paints a revealing picture of excessive bank overdraft fees and just what some major banks are up to in an alleged effort to keep the cash flow from unsuspecting consumers.
At issue is the common practice of altering the order of debits as they come into a bank, allowing the bank to pay (on behalf of the consumer) the debits in descending order, starting with the largest dollar amount and ending with the smallest.
The banks—Wells Fargo among them—claim that the practice is actually a service to consumers, helping the bank ensure that important liabilities such as mortgages and car payments are paid first. However, the practice has caught many consumers by surprise. Expecting debits to come out of their account in the order by which the transactions occurred, many consumers are surprised when debits are shuffled and, as a result, overdraft charges are often higher.
That's what happened to Lynn Egan, a Colorado mother of three who was quoted in the New York Times News Service as "losing it" the day she found out that a $70 error in her account resulted not in a single overdraft charge of $35, but $245 in overdraft charges, by virtue of how the debits were arranged by her bank for that day.
Egan, who sued Wells Fargo in federal court last year in a bank overdraft fees lawsuit, is not alone: there are, according to the 8/22/10 issue of the Chattanooga Times Free Press, no fewer than 60 such lawsuits in 23 states against 33 banks that have been consolidated into a single class action in Miami.
Egan alleges that the practice of the so-called high-low method of debiting accounts for purchases or withdrawals by bank clients, only to reap huge rewards in bank fees, is deceitful.
A judge in California has already agreed with that sentiment. Last week, US District Court Judge William Alsup, in his decision concerning a similar case against Wells Fargo, said that in the court's view the practice of shuffling was both deceitful and fraudulent. He ordered the bank to cease the practice and required the defendant to repay customers more than $200 million in excessive fees.
"Wells Fargo constructed a trap—a trap that would escalate a single overdraft into as many as 10 through the gimmick of processing in descending order," Alsup wrote in the California case. "It then exploited that trap with a vengeance, racking up hundreds of millions off the backs of the working poor, students and others without the luxury of ample account balances."
The reordering process leads to a "bone-crushing multiplication of additional overdraft penalties," Alsup wrote.
Wells Fargo is appealing. In the wake of new federal rules, the bank is reported to have lowered the limit on overdraft fees in any single day to four. However, the updated federal statutes do not set a cap on the amount that can be charged within the confines of an overdraft fee. What's more, the new federal rules don't require that items have to be paid in any particular order. Thus, the banks continue to have the freedom to shuffle at will.
According to the New York Times News Service report, overdraft fees earned by the major banks last year were estimated at $39 billion. That's a 62 percent increase from the $24 billion collected in 2008.
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