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How Wells Fargo Used Overdraft Fees to Prey on Customers

In a blistering decision, U.S. district judge William Alsup ruled earlier this week that Wells Fargo (WFC) has been gouging customers for years by deliberately jacking up overdraft fees. If the ruling stands, the California banking giant would have to pay them $203 million, while also facing additional exposure because of similar lawsuits in other states.

The judgment puts the company's management -- and the leadership of other banks accused of deceptive overdraft practices -- on the spot. Does Wells have a genuine "commitment to outstanding sales and service for every customer," as CEO John Stumpf claims in the financial firm's so-called vision and value statement? Or does its commitment lie first and foremost to juicing profits? Does Wells really believe in "building lifelong relationships one customer at a time," or is this just a bunch of crap?

Because this ruling unequivocally suggests the latter. Beginning in 2001, Alsup said, Wells embarked on a concerted strategy to boost fees it collected on debit transactions. The company did this in three ways.

First, Wells posted debit-card purchases to customer accounts in highest-to-lowest order. This maximized the number of overdraft fees, since clearing the largest transactions first increased the chances that customers would overdraw their account. Alsup writes:

Since there is no real benefit to Wells Fargo customers when debit-card transactions are in high-to-low order, the only impact of the bank's posting practices was and remains to multiply the number of overdraft fees assessed on its customers.... This is surely because high-to-low posting is not a customer plus. Rather, it was used and is still being used by Wells Fargo as a snare for the unwary.
Second, Wells started "commingling" debit-card purchases with checks and automated clearing house transactions. Since checks and ACH payments tended to be larger items, they were posted to customer accounts first. That drained a person's balance even faster than if smaller debit purchases had been charged first. The ruling states:
... Wells Fargo executive vice president Ken Zimmerman, who personally took part in the decision-making process for the commingling change, admitted at trial that the bank was well aware that commingling was expected to produce a "significant increase in overdraft income." According to Mr. Zimmerman, the increase in overdraft income was "one of the significant factors in the decision-making" process for the commingling change. Indeed, the trial record shows that it was the only significant factor.

Third, in 2002 Wells implemented a secret program called the "shadow line" (as in line of credit). Previously, the bank had declined debit-card purchases when a customer's account had insufficient funds. But that year the company began authorizing transactions that it knew would cause overdrafts. Alsup writes:
Specifically, this was done without any notification to the customer standing at the checkout stand that the charge would be an overdraft and result in an overdraft fee. Thus, a customer purchasing a two-dollar coffee would unwittingly incur a $30-plus overdraft fee. The amount of the credit ceiling per customer was and still is kept secret (italics mine).
In its defense, Wells argued that its customers preferred transactional practices like high-to-low posting. Oddly, however, the company never promoted the feature. Instead, it buried any reference to its new approach under what Wells's own experts conceded were mountains of impenetrable legalese.

As a result, even customers who meticulously managed their accounts were vulnerable to being hit with overdraft fees, Alsup said. That's because there was no way for them to know that Wells would process transactions expressly to consume their balances and generate such charges.

Not all banks operate this way. As of 2008, only about a quarter of FDIC-supervised banks posted consumer deposit transactions in high-to-low order, according to the banking regulator. But that's enough to be a problem, while banks engage in other dubious overdraft practices. Indeed, a consolidated class-action filed in federal court in Miami makes similar allegations against 30 other lenders, including industry leaders such as Bank of America (BAC), Citigroup (C) and JPMorgan Chase (JPM).

Predictably, given the amount of money on the line, Wells said it will appeal Alsup's ruling. Too bad. Rather than slugging it out in court, the company could admit the error of its ways and try to do right by its customers (please, indulge me). That would be a true show of values and vision.


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