Wells Fargo won a victory in federal court Wednesday for banks in California using a controversial method of charging debit accounts that allows them to generate more consumer overdrafts and lucrative fees.
The U.S. 9th Circuit Court of Appeal unanimously overturned a U.S. District Court decision that upheld a California law prohibiting banks from processing the most expensive debit-card transactions first, rather than by date received. The appellate court said the comparatively lax federal law pre-empted state law, and Wells Fargo didn’t have to pay $203 million in restitution to customers.
The debit card practice has come under heavy criticism and many banks have now abandoned it. By ringing up the largest debits first, an account can cross into negative territory before being hit with a cascade of ever-increasing bank charges as each succeeding small debit is recorded.
While the appellate court said banks had the power to determine how they calculate fees, they don’t have a right to obscure those rules from customers. The court let stand Judge William Alsup’s 2010 ruling that Wells Fargo misled its customers.
Wells Fargo replaced its low-to-high posting practice with high-to-low in April 2001. Increasing overdraft fees “was exactly the reason that the bank made the switch,” according to Judge Alsup.
The switch in 2001 was followed by two other related practices that were “engineered” to amplify the overdraft effect. The bank commingled debit-card purchases with checks and automated clearing house (ACH) transactions (like mortgage payments), and deployed a secret “shadow line” to “authorize debit-card purchases into overdrafts.” Previously, the bank declined debit-card purchases that caused overdrafts.
The case was returned to District Court for reconsideration in light of the bank not telling “customers that frequent use of a debit-card for small-valued purchases could result in an avalanche of overdraft fees for each of those purchases due to the high-to-low posting order.”
A spokesman for Wells Fargo said the bank now posts withdrawals in the order they are made.
–Ken Broder
To Learn More:
Wells Fargo Wins Order Reversing Overdraft Fee Ruling (by Joel Rosenblatt, Bloomberg)
Appeals Court Backs Wells Fargo on Method of Assessing Fees (by Maura Dolan, Los Angeles Times)
How Wells Fargo Used Overdraft Fees to Prey on Customers (by Alain Sherter, CBS MoneyWatch)
Veronica Gutierrez, Erin Walker and William Smith v. Wells Fargo Bank (U.S. District Court for Northern District of California) (pdf)