By: Kathy Chu
August 12, 2010
'Unfair' business practices drove up overdraft fees
A California federal judge has ordered Wells Fargo to refund $203 million in overdraft fees to customers affected by the bank's "unfair and deceptive" practice of clearing transactions from largest to smallest dollar amount.
The Tuesday ruling by U.S. District Court Judge William Alsup is the latest blow to overdraft fees, charged when consumers don't have enough money and banks pay the transaction anyway. While the ruling pertains only to Wells Fargo customers in California, it could lend momentum to overdraft-related lawsuits pending across the nation against 32 other banks.
Alsup said he is ordering restitution because Wells Fargo devised "a trap that would escalate a single overdraft into as many as 10 through the gimmick of processing in descending order. 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 decision -- which relied on internal bank documents as well as expert testimony -- provides an explicit glimpse into the secretive world of overdraft fees, which have increasingly become a profit center for the industry. USA TODAY's research has found that overdraft fees have become the single largest source of consumer fee income for banks.
At Wells Fargo, overdraft fees are the second-largest revenue source for its consumer deposits group, generating more than $1.4 billion in California from 2005 to 2007, according to court documents.
Richele Messick, spokeswoman for Wells Fargo, said that the bank plans to appeal. Wells Fargo processes transactions in a way that "has been appropriate and consistent with customers' interests and the laws and rules of governing regulatory authorities," she said. Banks, including Wells Fargo, have long maintained that they clear large before small transactions to give priority to important payments for mortgages and cars. But this also generated more fees because it empties the bank account more quickly.
A Federal Reserve rule restricts some of the most controversial overdraft practices, including requiring banks to get consumers' consent before paying certain debit card transactions for a fee. But the rule doesn't prevent banks from ordering transactions from largest to smallest.
Leslie Parrish of the Center for Responsible Lending, an advocacy group, said she is "pleased" with the ruling and hopes regulators will bar banks from reordering transactions to generate more profits.