Banks can hide how they calculate overdraft fees, says court
December 26, 2012
• Are overdraft fees subject to state regulation?
• “The revenue from overdraft fees is massive”
Federal law allows national banks to hide how they manipulate overdrafts to maximize the penalties they assess their customers, the 9th U.S. Circuit Court of Appeals says. Thus a state law prohibiting the practices has no sway.
The ruling comes in a lawsuit filed by customers of Wells Fargo Bank against their bank over a bookkeeping device known as “high-to-low” posting.
The Court of Appeals, which reverses part of a lower court ruling in the case, notes that these bookkeeping devices are more than some arcane mumbo-jumbo since they have the potential to multiply overdraft fees, turning a single overdraft into many such overdrafts.
“The revenue from overdraft fees is massive. Between 2005 and 2007, Wells Fargo Bank assessed over $1.4 billion in overdraft fees,” the ruling says.
Veronica Gutierrez and Erin Walker sued Wells Fargo under California state law for engaging in unfair business practices by imposing overdraft fees based on the high-to-low posting order and for engaging in fraudulent business practices by misleading clients as to the actual posting order used by the bank.
The district court found that this bookkeeping device was to maximize the number of overdrafts and squeeze as much as possible out of a bank’s customers who incurred an overdraft fee. The lower court had also found that Wells Fargo deliberately obfuscated the process to keep customers in the dark about the highly profitable practice.
While they got the district court on their side, with it issuing a permanent injunction against “high-to-low” posting and ordering $203 million in restitution, the bank customers found their victory short-lived as Wells Fargo quickly appealed.
“The question we consider here is the extent to which overdraft fees imposed by a national bank are subject to state regulation,” says the Court of Appeals decision.
The appellate court’s ruling may not cause the eggnog to be quaffed at Wells Fargo, but at least the antacids will be put away.
“We conclude that federal law preempts state regulation of the posting order as well as any obligation to make specific, affirmative disclosures to bank customers,” says the opinion, written by Judge Margaret McKeown. “Federal law does not, however, preempt California consumer law with respect to fraudulent or misleading representations concerning posting. As a consequence, we affirm in part, reverse in part, and remand for further proceedings.”