In the latest of bad and embarrassing news for the big banks, Wells Fargo & Co. (WFC) has been ordered to pay more than $200 million for manipulating and multiplying overdraft fees.
Both Forbes and CNNMoney are reporting that U.S. District Court Judge William Alsup of Northern California, in his 90-page ruling Tuesday, said Wells Fargo used “a bookkeeping device” that turned one instance of overdrawing an account into as many as 10, allowing the bank to multiply the number of fees it could collect from a single mistake.
The ruling comes amid several federal decisions that have put overdrafts – a huge source of revenue for most banks – into harsh focus. Wells Fargo, like many other banks, routinely processes a customer’s largest purchases first, rather than running each transaction in the order in which it occurred. By doing so, it unfairly created situations in which a customer could be charged up to 10 overdraft fees of $35 for going over the limit by only a few dollars, Judge William Alsup ruled.
The ruling is a fraction of the $1.8 billion in overdraft fees that the bank collected in California from 2005 to 2007, according to the court. Overall, the banking industry makes up to $38 billion a year in overdraft fees, according to the Federal Reserve.
“Internal bank memos and emails leave no doubt that, overdraft revenue being a big profit center, the bank’s dominant, indeed sole, motive was to maximize the number of overdrafts and squeeze as much as possible out of [customers],” Alsup wrote.
The ruling concluded a two-week bench trial that ended May 7.
In a statement, a spokeswoman Richele Messick said that, “We are disappointed with the judge’s ruling” and noted that the bank planned to file an appeal. “We believe that Wells Fargo method of processing transactions has been appropriate and consistent with customer’s interests and the laws and rules of governing regulatory authorities,” she noted. The bank is not planning on changing the way that it processes transactions.
Paul Miller, analyst for FBR Capital Markets, said that Wells Fargo’s handling of the overdraft fees was “always a questionable practice” that has been “going on for years.”
But he said that in the future, bank fees are going to become “more up front than back door,” especially in the wake of financial reform.
“I think with financial reform in general, a lot of these practices are going to change anyway,” he said. “The government is going to take a really hard look at this stuff.”
