A judge recently granted class-action status to a group of consumers who filed a lawsuit against Union Bank, claiming the San Francisco-based institution manipulated the order of transactions in order to maximize overdraft fees. Consumer advocates say that if the consumers prevail, it will send a strong message to other banks that they can’t get away with rigging the system in their favor.
The lawsuit charges that Union Bank processed each day’s transactions by amount, largest to smallest, rather than chronologically. Here’s how this hurt customers: If I had $75 in my account and spent $10 buying lunch, then bought $100 worth of groceries in the evening, I would expect to overdraw only once — after grocery shopping, when the $100 I spent was more than the $65 left in my account. But Union Bank ordered those charges from large to small, which means I would actually overdraw twice — once when the grocery transaction was processed, then again when my lunch purchase was processed.
Union Bank wasn’t alone in this practice, which made customers see red. No wonder: Overdraft fees can top $35, and a plaintiff’s attorney says Union Bank earned $18 million annually from this practice. Banks have tended to justify their transaction-shuffling by saying they assumed customers wanted the bigger transactions processed first, since those charges were more likely to be something like a mortgage or car payment. Of course, this argument doesn’t really make sense if you stop to consider that a large payment would still get processed — you’d just get hit with an overdraft fee. The only difference is that you’d only be charged the fee once, as opposed to multiple times.
In the wake of consumer outrage about overdraft fees, the Federal Reserve stepped in with some new rules that kicked in last year, prohibiting banks from automatically enrolling customers in overdraft “protection” programs that allow them to overdraw their account at an ATM or when making a debit purchase, then charge them a fee. Consumer advocates at the time charged that the new rules didn’t go far enough, and some banks have aggressively marketed their overdraft protection programs to induce customers to opt-in.
Rebecca Borne, senior policy counsel at the Center for Responsible Lending, says lawsuits like the Union Bank one can ultimately benefit all consumers. ”These cases are important because when courts find that banks engage in these practices for the sole purpose of gouging their customers, it can lead to changes in practices,” she says. Borne adds that the prospect of a hefty settlement or bad press can lead some banks to preemptively adopt more customer-friendly practices.
“Most overdraft fees are generated from small debit card transactions,” Borne says. A growing number of judges seem to agree with the idea that these small transactions shouldn’t lead to multiple $35 fees for consumers. Bank of America agreed to pay a $410 million settlement and Wells Fargo was ordered by a judge to pay $203 million for overdraft misdeeds. Borne says that some banks have voluntarily begun altering their overdraft practices, a shift that’s probably due to lawsuits like the one now proceeding against Union Bank.