Judge: 'Gouging and profiteering' drove bank's overdraft rules

In a scathing, 90-page ruling, a federal district judge in California has ordered Wells Fargo Bank to return $200 million to account-holders he says were unfairly harmed by practices that encouraged the accumulation of $30-plus overdraft fees.

It's unclear how the ruling by U.S. District Judge William Alsup, who held that the practices were "unfair and deceptive" under California law, might affect practices at banks outside California, including Wells' subsidiary Wachovia Bank. Barbara Nate, a Wachovia spokeswoman, sayst the decision was limited to California and that Wells planned to appeal the ruling.

But the decision provided ammunition for consumer advocates, plaintiffs' attorneys in similar class actions, and angry account-holders who have been burned by the practices of Wells and other large banks - in particular by their willingness to approve small debit-card overdrafts, and by the practice of booking debits and checks from largest to smallest rather than in, say, chronological order. Alsup said:

The essence of this case is that Wells Fargo has devised a bookkeeping device to turn what would ordinarily be one overdraft into as many as ten overdrafts, thereby dramatically multiplying the number of fees the bank can extract from a single mistake. The draconian impact of this bookkeeping device has then been exacerbated through closely allied practices specifically “engineered” — as the bank put it — to multiply the adverse impact of this bookkeeping device. These neat tricks generated colossal sums per year in additional overdraft fees, just as the internal bank memos had predicted. The bank went to considerable effort to hide these manipulations while constructing a facade of phony disclosure. This order holds that these manipulations were and continue to be unfair and deceptive in violation of Section 17200 of the California Business and Professions Code.

A lot is happening with regard to overdraft fees. Under a Federal Reserve ruling that went into effect this summer, account-holders will not face debit-card or ATM overdraft fees anymore unless they "opt in" to banks' overdraft policies that allow them to spend or withdraw beyond their balances. I explained the new rules in a news article here, and offered my top 10 reasons to Just Say No to 'Standard Overdraft Practices' in a column here.

Consumer advocates have long argued many of the conclusions that Alsup reached, such as:

Weighing all of the evidence presented at trial, this order finds that gouging and profiteering were Wells Fargo’s true motivations behind the high-to-low switch and the allied practices that soon followed. High-to-low posting was adopted exclusively to generate more overdraft fees and fee revenue at the expense of depositors.

You can read Alsup's entire 90-page ruling here.  Jeff Horwitz, in an online article for the American Banker, suggested that it could have a large impact outside California because of similar statutes and class actions around the country:

The ramifications of a federal court's order for Wells Fargo & Co. to repay $203 million in overdraft fees extend far beyond the price tag one company has to pay for its California operations.

The ruling bolsters similar class actions around the country involving the alleged manipulation of the order of customers' payments — including a consolidated 32-case action in pending in Miami. Though Gutierrez v. Wells Fargo was decided under California consumer protection laws, plaintiff and industry attorneys say most jurisdictions have similar statutes.

"I don't think there's anything unique about Wells Fargo," said Richard Heimann of Lieff Cabraser Heimann & Bernstein, a litigation firm that assisted the plaintiffs. Similar processing methods are common among large banks, Heimann said, "and most states have consumer protection statutes of one kind or another."

To advocates such as Jean Ann Fox of the Consumer Federation of America, Alsup's detailed findings are a vindication of arguments they have made for years: that some leading banks' policies were designed to extract fees from financially pressed consumers and young people just learning how to keep their accounts balanced.

In essence, banks found a gold mine in Visa and MasterCard debit cards that were ironically favored by consumers who wanted to avoid the perils of credit.

The banks issued them debit cards, touting the advantage of spending their own money rather than borrowed money. Then they let them spend beyond the limits of their balances - Alsup says Wells Fargo called this the "shadow line," as in "shadow line of credit" - and used bookkeeping policies to maximize the number of overdraft fees that could be generated from a single mistake. The result, for all too many, was the "$37 cup of coffee at Starbucks" or the "$40 Wawa hogie."

"It's a scathing decision," Fox says. "It verifies everything we’ve ever said was wrong about bank overdraft practices designed to maximize fees at the expense of consumers who struggle to make ends meet."