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Can you sue bank for overdraft fees?

Published On: Jul 02 2013 10:35:01 AM CDT
Updated On: Jul 02 2013 10:35:55 AM CDT
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By Lucy Carmel, THELAW.TV

Consumers are disputing methods banks use in ordering transactions and charging overdraft fees. Several class-action lawsuits have resulted in consumers collecting refunds.

In June, plaintiffs received checks in the mail from TD Bank following a settlement closed in March, according to MassLive.com. A federal court in Florida ruled that the bank had authorized customers' purchases that should have been declined due to insufficient funds, and processed the charges in order of highest to lowest to trigger more overdraft fees.

Robert Gilbert of the Miami-based law firm Grossman Roth explains the bank practice through this example: A customer has $100 in a checking account and proceeds to make charges to that account in the amount of $10, then $20, then $50, then $90, with the last charge putting the account holder at a negative $70 balance.

But rather than charging one overdraft fee on only the last transaction, the bank processes the largest purchase first, followed by the $50, then $20, then the $10 transaction, so the bank instead collects three overdraft fees, even though there were sufficient funds in the account when those charges went through.

"This happens repeatedly for the banks' benefit, and to the detriment of the consumer," said Dale Ledbetter, P.A., and president of his namesake law firm in Fort Lauderdale, Fla.

Similar cases have been waged against Wells Fargo, PNC Bank, Bank of America, J.P. Morgan Chase and Citizen's bank.

"There have been numerous class-action cases in the Florida district, and consumers have won all of those cases except one," Ledbetter said.

Banks maintain their motive for timing transactions isn't tied to earning revenue from fees.

"While banks have long justified the reordering of transactions as a way to make sure the most significant bills — like the mortgage and car payments — get paid first, the negative attention has caused some institutions to abandon the practice, or make other overdraft policy changes," said Greg McBride, CFA, and senior financial analyst for Bankrate.com.

Some new bank policies include limiting the number of overdrafts generated in one day, or not charging overdrafts unless the account is overdrawn by a certain threshold.

The Consumer Financial Protection Bureau, or CFPB, is examining consumers' complaints about overdraft fees, but it's not foreseeable that any new bank regulations will pass.

Though consumers' battles with overdrafts make headlines, only a small segment of bank customers actually ever pay these fees. McBride points to a yearlong survey by the Federal Deposit Insurance Corporation (FDIC) that found that 75 percent of account holders never overdrew their accounts within a 12-month period. Eleven percent only did so once. In total, 93 percent of overdraft revenue was generated by just 14 percent of account holders.

"Further reigning in overdraft practices and fees is something that only truly benefits a small segment of account holders that are serial overdrafters, but results in the unintended consequence of fewer free checking accounts, higher fees, and higher balance requirements for everyone else," McBride said.

Class-action lawsuits that challenge the practice of reordering transactions are just one way consumers are waging legal wars against banks on overdraft fees. Compliance with disclosure laws is another angle consumers are using to fight for settlements.

"The rule states that overdraft policies can't be applied unless a depositor opts in, but the opt-in assumes the customer is told what the charges are and how it works," Ledbetter said. "An examination of case after case shows that many times consumers are told about the overdraft protection, but not the costs, the risks and the manipulation of their account."

The good news is, consumers don't need to pursue a class-action lawsuit to tackle the overdraft-fee issue.

"Avoiding overdraft fees is the financial equivalent of being able to walk and chew gum, and most people have figured that out," McBride said. "Good financial habits, not more far-reaching regulation, is the answer to avoiding overdraft fees."
Bank customers can avoid overdraft fees on their own by monitoring their account balances online and via mobile devices, signing up for email and text alerts, and specifically requesting a link between their checking and savings accounts that would cover any shortfall for a nominal fee.