A San Francisco judge's pwerful ruling ordering Wells Fargo to pay its customers $203 million for manipulating debit transactions to maximize overdraft fees might be just the tip of the iceberg for the bank.
U.S. District Judge William Alsup's 90-page opinion Tuesday described Wells Fargo's motive as profiteering and said the San Francisco-based bank's goal was to "maximize the number of overdrafts and squeeze as much as possible" out of customers. Are we talking banks or loan sharks here? This is customer service at it's worst.
But the hefty tab represents only what Wells owes its California customers. That figure is far smaller than the potential bill from a separate suit in which Wells' clients in other states have accused the bank of the same unfair practices.
That case, consolidated in federal court in Miami, includes similar claims against 30 other lending institutions, including Bank of America, Citibank, Chase, Union Bank and U.S. Bank. Oh my, is another bailout on the way?
The crux of the claims is that the banks processed debit transactions from the largest to the smallest, instead of the order in which they occurred, depleting accounts faster and boosting the number of overdrafts, which cost as much as $35 per transaction. Let's see, $35 X 10,000 transactions adds up to a neat $350,000.
Billions in overdraft fees
Wells Fargo garnered more than $1.4 billion in overdraft fees just in California from 2005 to 2007, according to court documents. Nationwide, banks and credit unions collected almost $24 billion in overdraft fees in 2008, according to the Center for Responsible Lending. Where would banks be without those fees.
Wells Fargo, which continues to follow the "high-low" practice that it has had in place since 1998, said it would appeal Alsup's decision. Wells representatives declined to forecast what the ruling might mean in the Florida matter, other than to say that the California order was not in line with the facts and that the bank's transactions have been "consistent with the laws and rules of governing regulatory authorities."
Richard Heimann, lead attorney for the Wells Fargo customers in California, also is representing plaintiffs in the class-action lawsuit in Florida. Heimann said Alsup's order could affect the outcome of that case, even though the judge there is not legally bound to follow it.
"The decision may very well be influential because it was based on a well-regarded justice's review of a full evidentiary record," Heimann said. "There's no doubt that the defendants' lawyers had been waiting to see the outcome of (the California) case and will be concerned about what it will portend for the case in Florida."
Heimann noted that representatives from several banks named in the Florida suit sat in on the California court proceedings. The Florida action is not scheduled to go to trial until the fall of 2011, but its timeline is not affected by Wells Fargo's appeal of Alsup's decision.
As part of his ruling Tuesday, Alsup also found that Wells' improper debit processing was exacerbated by the murky manner in which it explained the practice to customers.
"In shaping the reasonable expectations of its customers, the bank should have prominently disclosed its high-to-low scheme," Alsup wrote. The bank's 'disclosures' on posting order, however, were buried 20-or-so pages into a 60-plus-page document of single-spaced, ten-point font text." He proceeded to say that Wells' internal documents showed that the bank's practices were intentional and meant to generate profit.
Alsup's decision comes just as new federal regulations are set to kick in. They will require banks to obtain customers' permission to provide overdraft protection.
Historically, most banks have automatically provided the service, unless customers opt out. Now, customers who do not agree to the service - and its fees - won't be able to make purchases if they do not have sufficient funds.