Bank Overdraft Fees Coming Home to Roost

Posted August 12, 2010 in Banking Law by Arthur Buono

A federal judge Tuesday ordered Wells Fargo to pay back more than $200 million it bilked from California customers in overdraft fees. The banking giant faces even bigger claims from another class action covering customers in several other states. Wells Fargo says it will appeal the judgment, claiming its overdraft policy was legal and not deceptive.

  • High-low debiting practice caused multiple overdrafts
  • Overdraft fees charged on as many as 10 items daily
  • Wells Fargo defends practice of paying important, big ticket items first


Wells Fargo High-Low Debiting Called Profiteering

The case involves Wells Fargo’s policy of debiting withdrawals from checking accounts. Instead of subtracting items in the order they happened, the bank took the largest items from the account first – even if they were last in time. This often caused many smaller items to bounce. Wells Fargo charged $35 for each bounced item. Had the items been subtracted in order, the customer might have been charged only one $35 fee for the large item.

Critics have attacked bank overdraft fees as unfair for a while now. Banks get huge profits from overdraft fees, which totaled nearly $24 billion in 2008, according to the Center for Responsible Lending. Banks charge the fees for overdraft protection. In response to the criticism the Federal Reserve enacted a new rule governing the fees last fall. As of this Sunday banks will no longer be able to charge the fees for debit card transactions unless the cardholder opts in to the service. This rule went into effect for new accounts on July 1st.

Since the financial crisis began regulators have enacted a number of rules to protect consumers from unfair banking and lending practices. In addition to the opt-in rule, The Credit CARD Act and new Fed rules protect credit card holders from arbitrary interest rate hikes and other costly fees. There’s much more to come. The new financial reform law set up the Bureau of Consumer Financial Protection. This new agency will have the power to adopt additional protections for consumers in all areas of finance. Look for new rules on mortgages, credit cards, student loans, and other financial services in the future.

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