Banking customers might expect to be nickel-and-dimed by overdraft fees and other charges built into their accounts. But it's unlikely they would imagine the carefully crafted profiteering plan a federal judge detailed in a recent court ruling ordering Wells Fargo to pay California account-holders $203 million.
U.S. District Judge William Alsup concluded last week that Wells Fargo's internal e-mails, memos and other evidence proved the bank made deliberate decisions to redesign overdraft protection - once promoted as a customer courtesy extended in limited circumstances - as a debt trap intended to ensnare as many clients as possible, and to boost the fees to historic highs.
"These neat tricks generated colossal sums per year in additional overdraft fees, just as the internal bank memos predicted," Alsup wrote in the order. "The bank went to considerable effort to hide these manipulations while constructing a facade of phony disclosure."
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Wells Fargo, which is based in San Francisco, has said it will appeal Alsup's decision and added that it was "not in line with the facts."
The crux of the class-action suit against Wells Fargo was the lender's reordering of debit transactions so the largest debts were paid first, depleting accounts faster so customers had more overdrafts, which at Wells Fargo cost as much as $35 per transaction.
This occurred, Alsup's ruling stated, despite bank customers' online service displaying pending debit-card purchases in chronological order.
Wells Fargo lawyers said in court, and company representatives have maintained after the trial, that the bank switched to the high-to-low ordering about 10 years ago because its customers desired and benefited from the practice. It gives priority to larger, and therefore likely more important, transactions, they said.
The ruling comes as another, much larger, class action is pending in federal court in Miami, which has consolidated lawsuits against 30 or so other lenders from around the nation, including Bank of America, Union Bank and US Bank, and claims from Wells Fargo customers outside California.
The case tried in San Francisco involved a class of plaintiffs who were customers of Wells Fargo between Nov. 15, 2004, and June 30, 2008.
It coincides with new federal rules, which took effect Sunday, that prevent banks from charging overdraft fees on debit transactions without a customer opting in to the service ahead of time. Customers who do not opt in will have transactions denied if account balances are too low, unless their bank decides to honor them without charging a fee.
Fees increasingly have become a central part of big banks' business model.
According to the Center for Responsible Lending, overdraft fees cost customers $10 billion in 2004, $17.5 billion in 2006, and $23.7 billion in 2008. Wells Fargo garnered $1.4 billion in overdraft fees in California alone from 2005 to 2007, according to court documents.
The overdraft fees were second only to spread income - money the bank generated using deposited funds - in terms of bank revenue.
The high-to-low practice now is common at many big U.S. banks.
But Alsup found that the bank intentionally enhanced the chances of overdrafts through additional policy changes, including the commingling of debit transactions, checks and recurring bill payments.