Legal Briefing: After Wells Fargo, Will Banks Have to Refund Overdraft Fees?

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Wells Fargo Must Refund Overdraft Fees to Customers; Other Banks May Be Next

Wells Fargo (WFC) has been sued for processing checking-account transactions from largest to smallest rather than in the order received, which is guaranteed to make the most charges bounce and thus enable the bank to slap customers with the most overdraft fees possible. In a separate lawsuit, many other banks have also been brought to court over this issue. The Wells Fargo case ended yesterday (until the bank's planned appeal is filed) with the San Francisco judge ordering the bank to make restitution -- some $203 million -- to the California customers it charged this way.

Despite internal bank documents cited by the judge that showed San Francisco-based Wells Fargo following a deliberate business strategy to maximize overdraft revenue by processing transactions this way, the bank alleged the practice was good for consumers. The bank claimed -- with a straight face -- that bouncing as many transactions as possible was done with customers' interests in mind because processing the biggest charge first meant that charge, a mortgage payment perhaps, had the best chance of going through.

Who could take such an argument seriously? Not the judge, who called the benefit of the processing policy "utterly speculative.... Its bone-crushing multiplication of additional overdraft penalties, however, is categorically assured."

The judge wasn't fooled, but the bank's regulator was, notes consumer protection and advocacy group U.S. PIRG's Ed Mierzwinski. The Office of the Comptroller of the Currency specifically authorized banks to process transactions this way. The "Get Out of Jail Free" letter the OCC issued, as Mierzwinski calls it, came in 2002 after the lawsuits challenging the practice were filed.

Actually, the letter cites other rationales in addition to the "our customers want it" one, without attempting to resolve the logical contradictions they posed. For example, the banks claimed they needed the additional revenue from processing transactions this way -- but also said doing it would deter customers from making overdrafts, resulting in reduced losses from overdrafts and reduced overdraft fees. So which is? Increased or decreased revenue from fees? I'll bet you know.

The $203 million restitution represents only what Wells owes its California customers. There's potentially a bigger bill from a separate suit in which Wells' clients in other states have accused the bank of the same practices, reports the San Francisco Chronicle. That case, consolidated in federal court in Florida, includes similar claims against 30 other banks, including Bank of America (BAC), Citibank (C), Chase (JPM), Union Bank and U.S. Bank. Wells Fargo earned more than $1.4 billion in overdraft fees in California alone from 2005 to 2007, according to court documents.

Because the California decision is based on state law, it's not particularly persuasive legally on other pending cases. However, it's still a great win for plaintiffs and may suggest how judges are likely to view the basic facts.

And in the Business of Law

Brinks Hofer just laid off 18 employees: Seven attorneys, one patent agent and 10 staff. The layoffs were mostly from the Chicago office, notes Above the Law.

Attorney Kenneth Engerrand apparently coached a witness by tapping her foot under the table during her deposition. An astute paralegal snapped a photo of his foot in action, and now the paralegal's firm is seeking sanctions against Mr. Engerrand. The photo and motions are at Above the Law.

Was your Florida home foreclosed on, or is it in the foreclosure process? If so, was/is the bank represented by the law offices of Marshall C. Watson in Fort Lauderdale, Shapiro & Fishman, or David J. Stern's firm in Plantation? If so, you may be in luck: Florida Attorney General Bill McCollum is investigating those firms for possibly creating fake documents to enable thousands foreclosures, reports ABA Journal. Fake documents should invalidate whatever has happened to your property so far.

The ABA Journal also has another story of a lawyer behaving horribly: Lynn McNeese Swank of Georgia forged a judge's signature four times, on four orders terminating parental rights, so kids could be adopted. Found out, she lied under oath, accusing her ex-husband of doing it, but he had an alibi.
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