Walt Books knew something was amiss as soon as soon as he opened his Wells Fargo bank account statement and discovered $140 in overdraft fees.
Books, 78, a retired business owner from South St. Paul, dug into his bank account records and discovered what happened. Wells Fargo had drained his bank account faster than necessary by processing a large, $130 check for his health insurance before a series of smaller items, causing him to be hit with four $35 overdraft fees. One of the fees was for a $3.09 purchase of a cheeseburger and cup of coffee at McDonald's.
Had the bank processed his transactions in the order in which they actually occurred, with the insurance check processed after the McDonald's cheeseburger, Books says he would have incurred just one overdraft fee. "They made $105 [extra] by doing nothing other than manipulating my account," he said. "It's crooked."
At least one federal judge agrees. Late Tuesday, a judge in California blasted Wells Fargo's practice of processing larger checks and debit-card payments before smaller ones, rather than in the actual order. The judge referred to the practice, known as "high-to-low" check clearing, as "gouging and profiteering," and ordered the bank to pay $203 million in restitution to Wells Fargo customers in California who were hit with the fees over a four-year period.
"Internal bank memos and e-mails leave no doubt that, overdraft revenue being a big profit center, the bank's dominant, indeed sole, motive was to maximize the number of overdrafts," wrote U.S. District Judge William Alsup.
A Wells Fargo & Co. spokeswoman said the company was "disappointed" with the ruling and does not intend to change its policies as a result. The bank has argued that its customers prefer that their higher-priority transactions, such as mortgages and car loan payments, go through before the smaller ones. "We don't think the ruling is in line with the facts of the case, and we're going to appeal," said Richele Messick, a Wells Fargo spokeswoman.
Similar lawsuits pending
Books won't benefit from the ruling because it applies only to Wells Fargo customers in California. But the ruling is significant because it marks the first time a federal judge has denounced the practice. It also was good news for lawyers suing banks across the country over overdraft fees. In class-action lawsuits consolidated in Florida, about 30 large banks, including Bank of America, Citigroup and U.S. Bancorp, have been accused of posting charges in non-chronological order to maximize income from overdraft fees.
Big banks have already come under sharp criticism for collecting billions of dollars in fees on small purchases, while their customers struggle through a severe economic downturn. This week, new federal rules go into effect that prohibit banks from automatically charging overdraft fees on debit-card and ATM transactions. Instead, customers can decide whether they want to "opt in" for overdraft protection.
Financial experts say more regulation of overdraft fees could be around the corner now that Congress has approved the toughest restrictions on banks since the Great Depression. The bill passed last month creates a new federal regulatory agency designed to protect consumers from abusive and deceptive financial practices.
"In Washington, overdraft protection is a hot-button issue," said Bob DeYoung, a finance professor at the University of Kansas. "I'm very sure that, as more light is shining on overdraft practices, that this new regulatory agency will want to take a closer look."
Practice is common
High-to-low check processing is widespread. A 2006 survey by the Federal Deposit Insurance Corp., a federal agency that insures banks, found that 25 percent of banks process transactions from largest to smallest, which can increase the number of overdrafts, the agency said. What's more, banks that used high-to-low processing reported higher fee income than those that did not, the FDIC found.
Chuck Cano, 50, of Eden Prairie, said he decided to close his Wells Fargo account earlier this year after he found nine overdraft charges on his bank account statement, totaling more than $300. He says many of the overdraft fees were for small debit-card transactions, like the purchase of a can of soda at a gas station, that actually occurred before some larger ones. Cano said he never would have made the purchases had he known that Wells Fargo processed the larger-dollar payments first.
"The bottom line is, it's a con job," said Cano, a salesman for a roofing and siding company. "I'm amazed they can get away with it."
According to the California judge's ruling, Wells Fargo formerly processed transactions from the smallest to the largest, which minimized the number of overdrafts. Small purchases were deducted from the customer's checking account first, the ruling said. However, the bank changed its policy in California in April 2001, and began posting debt-card purchases in highest-to-lowest order, the ruling said.
"Thus, a customer purchasing a two-dollar coffee would unwittingly incur a $30-plus overdraft fee," Alsup wrote.
Wells Fargo made another significant change late in 2001, according to the ruling. The bank began to commingle all debit card, check and automatic clearing house (ACH) transactions, rather than processing them separately. Before, all debit-card purchases were posted prior to checks, and checks prior to ACH transactions. This change generated more overdrafts because checks and ACH transactions tended to be for larger items, and they drained accounts faster, the judge ruled.
The judge dismissed Wells Fargo's arguments that customers preferred having their larger, more important payments processed first. "It is extremely implausible that depositors would prefer a system guaranteed to turn what would ordinarily be one overdraft into as many as ten," the judge ruled. He said the practice made the "bone-crushing multiplication" of overdraft charges "categorically assured."
Chris Serres • 612-673-4308