Americans spend more money in bank overdraft fees than they do on clothes, eggs, books, newspapers and magazines combined! Banks make more than $14 billion – yes $14 billion – annually on overdraft fees. About one-third of that amount came from re-sequencing transactions from high to low so banks could make even more money.
Financial institutions charge fees when a customer’s checking account doesn’t have enough money for a purchase but the bank pays the transaction anyway. The bank knows the customer doesn’t have enough money at the point of purchase but pays the transaction anyway. Essentially, the bank “covers” the purchase then charges the customer an overdraft fee, typically $35.00. The practice is particularly egregious on debit card transactions for these customers who do not know they have overdraft protection.
To make matters worse, in the early 2000’s the banks sought to increase their take in overdraft fees by re-sequencing transactions from high to low – particularly on debit card transactions. By way of example, you start the day with $100.00 in your bank account. You then spend $10.00 for breakfast; $20.00 at the pharmacy; and, then $105.00 on clothing. The banks re-sequence the transactions from high to low without your knowledge so the $105.00 transaction is posted first creating not 1, but 3 overdraft charges. Banks have made upwards of $4 billion a year by this process.
Lawsuits were filed against most of the big banks dating back to 2009 and many banks settled these cases for a total of more than $1 billion combined. Wells Fargo, on the other hand, refused. Its tactic, so far successful has been to try to force its customers into a private forced arbitration proceeding that would result in no accountability, while keeping the truth hidden from public view. In August, the 11th Circuit Court of Appeals is set to hear an appeal from Wells Fargo after a court previously denied the bank’s attempts to compel arbitration.
Ultimately, this case will have serious ramifications for consumers who rightfully demand their day in court after being taken advantage of by a big business like Wells Fargo. If it approves Wells Fargo’s forced arbitration proceeding, other large businesses will be encouraged to attempt this.
Overdraft fees are an enormous drain on checking account customers, particularly poor and working-class families. The Consumer Financial Protection Bureau found that nearly three-fourths of overdraft and related fees are paid by only 8 percent of account holders, who incur 10 or more fees a year. The Center for Responsible Lending found that 2 million Americans incur 20 or more fees per year – exceeding $700 annually. Further, these funds are often not spread evenly throughout the year but come in unpredictable, sporadic episodes. A single negative balance episode can trigger hundreds of dollars in fees in just a few days and drive a bank customer much deeper in the hole.
At the same time, the use of forced arbitration clauses by big banks continues to grow with devastating consequences for consumers. Forced arbitration prevents consumers from banding together (in proceedings such as class actions) to take on big institutions like Wells Fargo. The bank knows a consumer is unlikely to pursue an arbitration proceeding over tens or even hundreds of dollars, especially when the arbitration process itself is so stacked against the customer. So without class actions, the bank has far less fear of being held accountable.
Many banks that settled overdraft posting order cases have since added or bolstered their forced arbitration clauses. Meanwhile, Wells Fargo’s income from overdraft fees rose 7.5 percent last year, prompting a group of U.S. senators to question the surge in overdraft income. Clearly, big banks are all too willing to return to underhanded practices the minute the spotlight is off them.
Fortunately, the Consumer Financial Protection Bureau, after years of study, has issued a rule that will ban banks from using forced arbitration clauses. The rule will not apply to pending cases like the overdraft litigation against Wells Fargo, but if this CFPB rule is not reversed by Congress or the Trump Administration, it will level the playing field for the future and serve as a healthy deterrent for banks thinking about taking advantage of their customers.
The 11th Circuit has the opportunity to prevent Wells Fargo from opting out of legal accountability. And the CFPB rule will ensure that no bank may do so in the future.
The class action lawyers at Golomb Legal ae part of a team of lawyers that have led this very successful litigation and continue to fight for consumers who have been victims of re-sequencing so banks can gouge larger fees. If you believe you have been the victim of re-sequencing your banking transactions, please give us a call at 1-800-355-3300 or 1-215-985-9177 or fill out our confidential Contact Form.