A federal judge in Florida has said customers from Union Bank can team up as a class to sue the San-Francisco-based lender over its overdraft fee policy.
U.S. District Judge James Lawrence King on Monday named four individuals as representatives of all Union Bank customers in the U.S. who were assessed an overdraft fee through Aug. 13, 2010. The class is broken down into four groups related to various claims against the bank.
The case is one of about 35 from around the country consolidated in Florida. Major national banks like JPMorgan Chase & Co., and big regional players like Regions Bank, U.S. Bank and BB&T Corp are included in the list.
All told, U.S. banks pulled in overdraft revenue of nearly $40 billion a year before federal regulations kicked in last summer, requiring that customers agree to use overdraft programs and limiting the number of fees that can be charged on any one day.
Bank of America settled a related case in February for $410 million, money that will be divided among 1 million customers who were charged the fees.
The cases all claim that banks slammed consumers with unfair overdraft fees, usually by manipulating the order in which various checks and debit purchases were processed to deplete the money in accounts quicker.
For instance, if a customer had an account with $100 on deposit and used a debit card to pay for a $5 hamburger, a $20 book and then a $100 car repair on the same day, the cases claim that computer software used by the banks would automatically process the $100 car repair first, then the $20, then the $5, no matter what order they occurred in. Using this method, the bank could assess three overdraft fees, which averaged $30 or more, rather than just one. Most banks added checks presented for payment into the mix as well.
"It's the resequencing of the debit card charges in order to maximize the fees that is the heart of the case," said Bruce Rogow, one of the plaintiffs' lead attorneys in the case.
Union Bank declined to comment on the class certification or the suit, citing the ongoing litigation. The bank is owned by Japan-based Mitsubishi UFJ Financial Group Inc.
A judge in California ruled last year in favor of the consumers in a similar case against Wells Fargo & Co. In a harshly worded decision, U.S. District Judge William Alsup accused Wells Fargo of "gouging and profiteering" by adopting the policy. He called the policy a "bone-crushing multiplication of additional overdraft penalties," and ordered Wells Fargo to pay $203 million back to customers.
Rogow said that decision is being appealed.
Resequencing policies began to be adopted around 2000. Analysts at Sandler O'Neill calculated last year that overdrafts represented a median 8 percent of operating revenue in the prior year for 127 banks they examined, and as much as 28 percent for some.
According to the Federal Reserve, by 2008, 75 percent of banks were automatically enrolling customers in overdraft programs.
Banks have argued that customers wanted such policies in place because larger checks and debits are often more important payments, like rent, that were expected to clear even if there wasn't enough money in the account.
Consumer advocates charged that the fees disproportionately hurt the poor. FDIC statistics showed before the new regulations took effect, more than 74 percent of accounts had no overdrafts, while 4 percent of accounts were racking up 20 or more each year. While some consumers were habitual overdrafters, others were simply caught up in policies they were unaware of and that sometimes mushroomed out of control as banks continued to allow debits to go through even though accounts were depleted.
Rogow said the next step in the case is to notify Union Bank customers that they may be eligible to be part of the class, a process that can be expected to take about six months and will likely involve several hundred thousand customers.
Meanwhile, the attorney expects customers from other banks involved in the cases to be certified as classes as well, as the Union Bank decision set a precedent. "The policies are the same for all the banks, so I expect classes to be certified for the other cases," he said. Potentially, millions of consumers stand to get some money back from banks that charged them overdraft fees, he said.