Banks Defraud Customers with Manufactured Overdraft Charges

Posted July 31, 2012 in Banking Law by Roy Rivenburg

Nobody wants to pay $35 for a cup of coffee or loaf of bread, but that’s essentially what has happened to debit card users around the nation, according to class action lawsuits against dozens of banks. In July, U.S. Bank, Bank of the West and Bank of Oklahoma joined a parade of financial institutions agreeing to fork over millions of dollars to settle claims that they manipulated debit card transactions to trigger overdraft fees.

Other cases are still winding through the courts.

At issue is the order in which banks process debit card purchases. Instead of processing transactions in chronological order, some banks reshuffle payments from highest to lowest dollar amount, which overdraws customer accounts faster and often causes multiple overdraft penalties. For example, if a customer with an account balance of $50 makes four debit card purchases of $10 each and then finishes the day with a $100 purchase, he can be slapped with four overdraft fees if the $100 transaction is processed first versus a single penalty if the items are paid chronologically.

Banks have defended the high-low system, saying it ensures that a customer’s most important bills, such as home and car loans, get paid first. But consumer advocates, federal officials and judges have condemned the practice. When Wells Fargo was sued over the method and ordered to pay $200 million, U.S. District Judge William Alsup called the bank’s overdraft system “a trap” that “racked up hundreds of millions off the backs of the working poor, students and others without the luxury of ample account balances,” according to a report in the Denver Post.

Lauren Saunders

Many banks have since modified or halted the practice, said Lauren Saunders, managing attorney for the National Consumer Law Center. So most of the pending lawsuits, including a just-approved class-action case against San Francisco-based Union Bank, “are about past behavior,” she said.


Steps for Consumers

For bank customers who suspect they’ve been hit with unfair overdraft fees, Saunders suggested several steps. First, check to see if your bank is already being sued. (Try a Google search for your bank’s name and such terms as “class action lawsuit” and “overdraft fees.”) If a case is pending, contact the attorney and ask to join as a plaintiff. Another option is to file a complaint with the Consumer Financial Protection Bureau, the federal agency established by Congress under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Or you can search for an attorney by location and specialty via the National Association of Consumer Advocates, Saunders said. You can also locate an attorney in your area who is experienced in the area of consumer banking and advocates consumer causes on 

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It’s also important to prevent overdraft fees on your account, she said. “There’s really no reason to have it, especially on debit transactions,” Saunders said. Cheaper alternatives include linking your debit card to a savings account or credit card, or simply ask your bank to reject any card swipe when you don’t have enough money in your account to cover the purchase. “Most people would rather have their purchase denied than be charged a $35 overdraft fee for a $3 cup of coffee,” Saunders said.

Visit for more information on consumer banking and consumer law, and locate an attorney in your area who can answer your questions.

For another recent example of banks behaving badly read How JPMorgan Chase Gouged its Credit Card Customers.

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