Customers of San Francisco-based Union Bank were granted class-action status in a lawsuit over wrongfully charged debit card overdraft fees. The lawsuit alleges that Union Bank processed debit card transactions from the largest charges to the smallest, rather than in the order that they were made, to increase the chance that a customer would overdraw.
The case, involving about 30 banks, will be heard by US District Judge James King in Florida. Judge King selected four individuals to represent all Union Bank customers who were assessed overdraft fees before August 13th, 2010. According to an attorney for Cynthia Larsen, a plaintiff from Riverside, California, the bank made $18 million a year by shuffling the transactions.
The charges: reordering to raise fees
The Union Bank class action suit alleges that the bank reordered debit card transactions so that consumers would unknowingly overdraw on their accounts. For example, assume a customer had $50 in her checking account. Over the course of the day, she bought a $5 latte in the morning, a $10 sandwich for lunch and $110 of groceries in the evening. If her transactions were processed normally, she would incur a $35 overdraft fee only once (for her grocery purchase).
According to the lawsuit, Union Bank’s computers reshuffled her transactions and processed the groceries first, the sandwich second and the latte, the cheapest purchase, last. Because of this, the customer now overdrew on each of her transactions, incurring $105 in overdraft fees and possibly taking a hit to her credit score. “It’s the resequencing of the debit card charges in order to maximise the fees that is the heart of the case,” argued Bruce Rogow, a lead attorney in the Union Bank case.
A sordid history of overdraft fees
For almost all of the 2000s, banks could charge checking account customers overdraft fees without their knowledge or consent. The classic complaint of the time alleged that consumers unknowingly overdrew their accounts for a $3 cup of coffee and incurred a $35 overdraft fee. Resequencing programs, like the one Union Bank is accused of running, took hold around 2000, and by 2008, three banks in four automatically enrolled customers in overdraft programs. Sandler O’Neill, an investment banking firm, said that overdraft fees represented a median 8%, and as much as 28%, of banks’ operating revenue in 2009. Banks argued that customers would want certain checks, like rent or mortgage payments, to clear even if they incurred fees, and that no one wanted to be denied at the point of sale because of insufficient funds. But others argued that everyday customers were unaware of or confused by overdraft policies, and a Federal Reserve study showed that most consumers preferred to opt-in to overdraft fees rather than have them be automatic.
In 2009, the Federal Reserve ruled that consumers had to opt in to overdraft protection, fully aware of the charges they’d incur. The move was hailed as a gain for consumers, but more than a year on, advocates worry that aggressive marketing tactics steer vulnerable customers towards opting in against their best interests. These customers would not only incur heavy fines, but they would be saddled with bad credit for overdrawing on their accounts. Nearly one in three customers opt in to overdraft protection, often for incorrect reasons (“I don’t want to incur a fine” was a common one, though no such fines are levied) or to simply stop banks from hassling them. Says Leslie Parrish of the nonprofit centre for Responsible Lending, “What really matters is who is opting in. Is it that very profitable group of customers that overdraw their account frequently? Unfortunately, those are the most financially vulnerable customers.”
Still, customers like the ability to opt in when they need to. Bank of America, after numerous customer complaints, ended overdrafts altogether and stopped customers from using their debit cards when they had insufficient funds. After another round of criticism, BofA reinstated overdrafts and the associated fees.
Aggressive marketing tactics by banks, while perhaps in poor taste, are perfectly within the letter of the law. Union Bank’s alleged practices, however, are not.
Could Union Bank be a precedent?
Union Bank joins a host of other major financial institutions in defending itself against overdraft class-action suits. Bank of America settled a similar case in February for $410 million, to be distributed among the 1 million customers who were charged overdraft fees. JPMorgan Chase, Regions Bank, US Bank and BB&T all face overdraft lawsuits as well. And last year, a California judge ruled quite strongly in favour of consumers against Wells Fargo. District Judge William Alsup called the reorganising policy a “bone-crushing multiplication” of overdraft penalties, saying that the policy was intended to “maximise the number of overdrafts and squeeze as much as possible” out of its customers. Judge Alsup ordered Wells Fargo to return $203 million to its California customers – a tab that could easily grow if the case is taken up nationally. The decision is now being appealed.
Rogow, the lawyer for the plaintiffs in the Union Bank case, was hopeful that his clients’ success would spread to other suits. The next step, he said, would be to notify customers that they could take part in the class action suit. He hopes that customers involved in suits against other banks would also be certified as classes, according to Union Bank’s precedent. “The policies are the same for all the banks, so I expect classes to be certified for the other cases,” he said.
Tim Chen is the CEO of NerdWallet, a website dedicated to helping consumers find the best credit cards.