Bank customers continue to fight overdraft fees in the courts

Bank customers fighting overdraft fees in court

DES MOINES, Iowa — Bank customers fighting high overdraft fees got a boost on Tuesday with a win in federal court in California against Wells Fargo & Co., but that case has limited legal impact.

A similar federal court case filed in Florida against 30 banks including Wells Fargo, Bank of America, Citibank and others could mean much more.

At issue is the practice of banks processing debit payments according to their size, from largest to smallest, rather than by the timing of which transaction came first. This drains customer bank accounts faster, causing them to pay more overdraft fees.

In the California decision, U.S. District Judge William Alsup accused Wells Fargo of “profiteering” by changing its policies to process checks, debit card transactions and bill payments from the highest dollar amount to the lowest. He referred to the practice as “gouging and profiteering.”

Alsup ordered Wells Fargo to stop posting transactions in high-to-low order by Nov. 30 and to reverse overdraft fees charged to customers over a period of several years. The cost to the bank is estimated at about $203 million.

Wells Fargo spokeswoman Richele Messick said the bank will appeal the ruling.

Judge Alsup’s ruling won’t have sweeping legal implications because it was limited to a group of Wells Fargo customers in California, said Charles Delbaum, a senior staff attorney for the National Consumer Law Center.

The case in Florida, however, making similar allegations against 30 banks from plaintiffs in 14 states will have more impact if it’s successful. It recently passed a major hurdle when the judge denied a motion to dismiss by the banks. The case is proceeding toward arguments to determine whether class-action status will be granted.

NCLC attorneys are co-counsel in a couple of the cases against the banks.

Lawsuits over bank overdraft fees are not new. Consumers have been challenging them in courts for years.

Within the last decade various cases alleging violations of federal truth in lending and other laws have failed. Attorneys then turned to filing claims under state regulations, which is what happened in the California and Florida cases, Delbaum said.

Consumer advocates say the practice of processing payments in a way that causes more overdrafts is common.

“It’s absolutely widespread and the thing that’s so horrible about it is that bank regulators have known about it for years and turned the other way,” said Kathleen Day, a spokeswoman for the Center for Responsible Lending, a consumer advocacy group.

Consumers typically pay a fee of $35, though the average overdraft is only $20, she said.

That means banks are essentially charging a huge interest rate for covering small amounts of money for a very short period of time, often only a few days.

What’s more, banks can charge the fee several times in a day if a customer passes several checks or debit charges after an account is depleted.

“How is that possibly reasonable or proportional to what it costs banks,” she said.

Banks and credit unions collected $24 billion in overdraft fees in 2008, according to the Center for Responsible Lending. Such fees rose 35 percent from 2006 to 2008.

The American Bankers Association said only a small number of large banks process transactions largest-to-smallest and most mid- to small-sized banks process debits and checks as the charges against an account come in.

Nessa Feddis, the ABA’s senior counsel, said many customers actually want the highest value transactions processed first because they are frequently car payments or mortgage payments.

She said new banking regulations that go into effect Sunday require customers to opt in to overdraft coverage, which may solve some of the legal issues brought up in the lawsuits.

Some people may not have gone through with a transaction if they knew they would have to pay an overdraft charge. But under the new rules, by signing up for overdraft protection consumers acknowledge that they’ll be charged if they spend more than they have in an account, she said.

Consumer advocates say, however, the new rules don’t completely solve the problem.

They argue that the fees are simply too high and in no way reflect the cost incurred by banks to cover the amount of the overdraft.