Sunday, February 8, 2009

Bank of America Settles Closson Class Action Over Illegal Non-Sufficient Fund and Overdraft Fees

Bank of America, the largest bank in the United States, has agreed to settle a Nationwide Class Action related to its overdraft and non-sufficient fund fee practices. For class members in this settlement, the time period has begun running to accept or decline the offer, which will then to to the assigned judge for approval.

The legality of nationwide banking practice regarding overdraft and non-sufficient fund fees has been challenged for nearly twenty years, with little success. Banks nationwide, while encouraging frequent debit card use for small items, use a non-common sense accounting method to maximize overdraft fees. The banks -- in contrast to the generally accepted first-in-first-out accounting method -- re-calculate account balances each night by sorting the transactions from highest to lowest. That way, if you overdraw your account, the smaller transactions will be processed after the overdraft, thereby generating more fees for the bank. Some banks also approve debit transactions even when you already have a negative balance. The banks call this a "courtesy overdraft," even though no-one in their right mind would pay their bank $35 for the "courtesy" of lending them $4 for a cup of coffee.

The list of banks includes, I believe, Citigroup, Chase, Wachovia, Wells Fargo, HSBC, U.S. Bank, SunTrust, Washington Mutual (WAMU), Liberty Bank, and Capital One. [contact your banks for information regarding their curent practices].

The U.S. banking industry earns approximately $10 Billion per year from this practice, and Bank of America has nearly 10% of the total U.S. market share for consumer accounts.

The banking industry is subsidized by the U.S. Government. Over the last year, Bank of America has received $45 Billion in bailout money from U.S. tax payers, and is slated to receive a substantial amount more. We, as citizens, should have a say in the practices that affect us, and this practice should be illegal.

The amount, $35,000,000.00, will be divided amongst an unknown number of class members, with each class member receiving a maximum of $78 (there is no minimum).

The settlement will render pending motion practice moot, meaning that the court will not reach a decision regarding whether Bank of America's practices were illegal. As discussed in my prior posts, the bank has a strong possibiltiy of winning this case because, through political maneuvering, U.S. banks pushed through federal legislation in the 1980's and early 1990s that, in essence, allows banks to charge whatever fees they want and makes them immune from state usury laws. The argument for plaintiffs, however, is that the issue is not whether these fees are interest (thus triggering the usery laws) but, rather, whether the banks are engaging in a fraudulent or deceptive practice; i.e. it is not the return the banks receive on these overdrafts per se but, rather, the deceptive manner in which the fees are generated that makes them illegal.

Whether to accept a settlement is an individual decision to be determined by each client, and the Court will decide whether to approve the settlement, in part, based on the response from the class members. Nothing on this blog, of course, should be relied upon as legal advise.

I have four concerns. First, this is an opt-in settlement, meaning that you will only be included if you submit a claim form. The settlement, however, is on behalf of all Bank of America customers who have been affected by this practice, nationwide, between the years 2000 and 2007. It has an opt-out exclusion provision, so if you do nothing, you still lose your rights (but get nothing). Thus, if approved, this settlement may be the last word in this litigation. I do not know what notice was sent to current bank of America customers, but in my opinion notice should be given, at bank of America's expense, to everyone whom their files suggest are class members; second, the process should be equally easy for claim acceptance and/or objection.

Second, there is no guaranteed minimum. This unfair practice has likely hurt millions of people over the years. If everyone who has been hurt by this practice actually submits a claim, the amount each class member receives could be reduced to pennies. The settlement could have included a minimum payment, and if the number of claimants grows to the point where the pro-rata share is less than that amount (at $35, this would be 685,000 people), then Bank of America could either increase the settlement to cover the minimum amount or the settlement would be void. The judge has the right to do this by refusing to approve the settlement after the opt-in period, but there is no guarantee that the judge would halt the settlement under those circumstances.

Third, the settlement does not require Bank of America to stop its unfair practices. Thus, Bank of America will continue to reap billions of dollars in profit from those who can least afford it, and the settlement will pay for itself within a few weeks. There is the possibility that the practice will be outlawed. In fact, the Federal Government is considering that right now. This practice, however, is so immoral that a voluntary change in practice should be insisted upon. It may seem like small amounts, but this practice can be truly devistating. In one of my prior posts on this topic, a commenter wrote that they had been charged $240 in overdraft fees in a single day due to the bank re-sequencing their transactions. If, hypothetically, that person were making minimum wage, the bank would have taken their entire weekly paycheck.

Fourth, under the agreement, any remainder from the settlement fund will go to as-yet unnamed charities, so long as those charities do not engage in political activity against the banking industry. This is fairly standard, and it makes sense that Bank of America would insist that the funds not be used to lobby against them. But it irks me nonetheless. Bank of America spends approximately $3 - 4 million per year on lobbyists, while the entire consumer rights lobby is a small fraction of that. (So small that I cannot find statistics on it). This practice would never have been permitted at all if it had not been for a concerted effort by the banking lobby in the 1980s and early 1990s. I think a better solution would be to give the money, in increments of $10 or so, to Bank of America's account holders with the lowest average daily balances.

Despite these concerns, the settlement may still be a good idea for many, if not most, people have been aggrieved by these practices because the challenges to these practices have not faired well in the courts in the past, for many people they may have only lost a small amount, and this may be your only opportunity to receive something back. If you decide not to accept the settlement because you think it is unfair, you should nonetheless submit an objection.

If you do decide to accept the settlement, you should be aware that you still have a right to object. You can accept the settlement by filling out the form, here, and you can object by writing the Court and counsel, here.

It is my understanding that most banks engage in similar practices, and I am interested to know how much interest there is in additional litigation. If there is a large interest in pursuing this issue against other banks, I would consider pitching the idea to my firm. If you are someone who has been aggrieved by this practice, send me an e-mail. Comments, of course, are also welcome.

If you would like more information, please see my other related posts:

* June 27, 2008, "
Week In Review," (the Federal Reserve is now considering a rule to curb abusive overdraft fees by banks).

* May 7, 2008, "Debit Cards and Overdraft Protection: The US Allows Banks To Steal 10 Billion Dollars Per Year From The Poor."

* August 31, 2007, "The UK Takes Steps to Curb Illegal Overdraft Fees, But US Efforts Have Not Been So Well Received."

Also, consider the following outside sources:

* Settlement Administrator's Website,

* The Washington Post, Bailout recipients also major lobbyistsashington Post Article, (1/23/2009)

* USA Today, FDIC: Bank overdraft fees hit young, low-income customers, (12/3/2008)(Overdraft fees are boosting banks' profits at the expense of consumers, especially young and low-income people, finds a new Federal Deposit Insurance Corp. study.")

* USA Today, Good news in the works on overdraft charges, 6/3/08.

* USA Today, Banks' check-clearing policies could leave you with overdrafts, (11/19/2006)

* USA Today, Banks' check-clearing policies could leave you with overdrafts ; USA Today 11/20/06

* Wikipedia, Overdraft

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