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The proposal, which would only apply to banks supervised by the agency, said institutions should give customers the chance to opt out of overdraft programs for their checking accounts and any automated clearing house transfers, as well as monitor overdraft usage to avoid unfair consumer fees.
August 11
The ramifications of a federal court's order for Wells Fargo & Co. to repay $203 million in overdraft fees extend far beyond the price tag one company has to pay for its California operations.
The ruling bolsters similar class actions around the country involving the alleged manipulation of the order of customers' payments — including a consolidated 32-case action in pending in Miami. Though Gutierrez v. Wells Fargo was decided under California consumer protection laws, plaintiff and industry attorneys say most jurisdictions have similar statutes.
"I don't think there's anything unique about Wells Fargo," said Richard Heimann of Lieff Cabraser Heimann & Bernstein, a litigation firm that assisted the plaintiffs. Similar processing methods are common among large banks, Heimann said, "and most states have consumer protection statutes of one kind or another."
Under the ruling Tuesday in U.S District Court in Northern California, Wells would have to significantly alter its payment processing in California, a further hit to its overdraft fee income that comes just a week before Federal Reserve regulations prohibiting fees without customers opting in to overdraft protection; the regulation does not address the order in which payments should be processed.
Wells plans to appeal the court's ruling.
Bobby Gilbert of Alters Law Firm, the plaintiff's firm in charge of the 32-case multidistrict litigation in Miami, said that the material unearthed during discovery in the California case will be directly applicable to the litigation against Wells and other banks in Florida.
"It's a very devastating ruling for Wells Fargo and it exposes an ugly practice that unfortunately has gone on for too long," Gilbert said.
Others were more circumspect. Because the case turned on state law, said Roberta Torian, a banking industry attorney at Reed Smith, its impact on the Florida litigation would be limited. Attorneys in the case may "cite it for instruction, but not for precedent," she said.
Though the case would have more weight in class actions against other banks operating in California, she said, other banks using the same high-to-low sequencing as Wells might fare better even in California if they can demonstrate that they did not choose to do so in order to take advantage of customers.
"If I were representing a bank sued on this today, I would say wait and see what happens on appeal," Torian said.
The trial did not go smoothly for Wells. According to company e-mails and internal memos cited in Judge William Alsup's ruling, Wells quietly changed its debit processing order from low to high — the most favorable for the customer — to the reverse in 2001. At the time, Ken Zimmerman, an executive vice president in Wells' consumer banking group, opposed the switch because it would harm bank customers. But Zimmerman was overruled, and Wells subsequently used a computer system called "HOGAN" to extract the largest quantity of overdraft fees possible.
"Given the harsh impact of the bank's high-to-low practices, the bank was obligated to plainly warn depositors beforehand. Instead, the bank went to lengths to hide these practices while promulgating a facade of phony disclosure," Alsup wrote in Tuesday's ruling. The bank never explicitly described how it sequenced payments to customers, and what little disclosure there was, was buried in a scores of pages in 10-point font.
Wells' claim that high-to-low payment processing was helpful to customers was entirely fatuous, he wrote, and made up as a rationalization.
Along with ceasing high-to-low sequencing, Alsup ordered that Wells also must repay each customer who was wrongfully charged excessive overdraft fees. To do so, the bank would have to reprocess years of customer transactions in chronological order.
Richele Messick, a spokeswoman for Wells, said that the bank intended to see out its appeal before considering any such plan.
"It's too soon to discuss when or if those fee reimbursements are going to be made," she said.
Exactly how much ceasing high-to-low sequencing in California would cost Wells going forward was not addressed in the case. But among the judge's ruling is a suggestion of how significant it has been in the past. Between 2005 and 2007, data Wells provided to the court shows, the company's California overdraft earnings of $1.4 billion were surpassed only by spread income. As the $203 million restitution fee would appear to show, sequencing and related processes appear to have accounted for a significant percentage of that income.
Mary Beth Sullivan, an analyst for banking consulting firm Capital Performance Group, said that the decision could influence how other banks implement overdraft protection programs. But while it may mean "added pressure on banks to reconsider that posting sequencing process," she said, "many banks are in the process of changing their policies anyways in light of the regulation."
