A Federal Judge in California ordered Wells Fargo to repay $203 million in overdraft fees that it had collected using dubious practices. We previously mentioned the ridiculous practice of banks ordering debit card charges in order of largest first in order to maximize overdrafts in our article Debit Cards: Wolves in Sheep's Clothing. The practice is known as high to low resequencing. If you have had overdraft fees on debit cards, you may just have a refund coming your way, even if you don't bank at Wells Fargo.
As we previously noted, banks long ago created algorithms that ranked your purchases in a given day by greatest amount first. So if you bought a $3 latte' in the morning and a $10 lunch in the afternoon and then charged something for $200 at night, but only had $195 in your bank account, you would expect 1 overdraft charge because only the last transaction would have exhausted your funds. But banks cleverly figured out that if they reordered the transactions from greatest to least, it would create 3 overdraft charges typically of $35 each. So being over by roughly $18 could net them a handsome $105 in fees.
Judge William Alsup wrote in his order "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."
The order goes into detail about how deceptive the bank's practices were. As recently as 2001, Wells Fargo ordered transactions from lowest to highest in an effort to minimize the number of overdrafts. Since these transactions were done shortly after midnight in a batch process, there was no reason why they couldn't do this to ensure that customers could use all their available money to pay the charges. But then according to the decision in 2002, when revenue from overdrafts, the second largest source of revenue for Wells Fargo in California, started to miss plan, executives devised a way to dramatically increase revenue. Over a two year period, they changed the way that transactions were handled to dramatically increase fees primarily on a very small group of people. Wells Fargo execs realized that 4% of their customers were generating 40% of their overdraft fees and they devised a plan to milk them even more.
Wells Fargo not only ordered the transactions from highest to lowest, but they also started to comingle transactions to magnify the effect. Previously, debit card transactions were handled first but the bank realized that if they comingled the checks (which usually had a higher value), they could dramatically increase the fees on all those $3 coffees. The bank then created a 3rd step in its program called "The Shadow line" that allowed transactions to have a shadow line of credit that would allow them to go over and generate overdrafts without them ever knowing they had the credit or notifying them.
The judge's order is extremely damming of Wells Fargo and its executives. Judge Alsup wrote, "The only motives behind the challenged practices were gouging and profiteering." The judge also called out specific testimonies of key executives as "not credible". Numerous internal documents showed that the only motivation for Wells Fargo adopting its new policies were to increase revenue.
What this means for consumers is that if they have been hit with multiple overdrafts due to the ordering of their transactions, they are likely to receive a refund. If they are a Wells Fargo customer covered by the class action lawsuit, they will receive a refund to their accounts. Naturally, Wells Fargo is likely to appeal the case, but the decision bodes well for consumers that have been bitten by the unscrupulous practices of their banks. Not all banks use the practice of high to low sorting, and in fact only 25% of all banks utilize it. However, many large banks with millions of customers do utilize the practice.
If the details of the order highlight anything, it is the lengths that some executives went to amid declining profits to boost the bottom line. In Wells Fargo's case, they clearly gouged a certain group of customers last to achieve increasing profits.
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