Calif. ruling on overdraft fees could spark lawsuits in Minn.by Elizabeth Dunbar, Minnesota Public Radio
St. Paul, Minn. — If you've ever been slapped with an overdraft fee, a California judge's ruling this week ordering Wells Fargo to return more than $200 million in those fees to customers might have caught your eye.
The ruling in the California lawsuit -- which challenged the bank's practice of processing checks and debits according to dollar amount from highest to lowest instead of in the order received -- only applies to California.
Another similar class-action suit against multiple banks in Florida is also pending, but consumer protection attorneys in Minnesota aren't rushing to file lawsuits on overdraft fees in Minnesota -- at least not yet.
"I think what will happen is people will simply hold their powder while the appeals process runs its course," said Ron Elwood, the staff attorney for the Legal Services Advocacy Project in Minnesota.
But the practice of processing transactions from highest to lowest, which allows banks to maximize the number of overdraft fees charged to a customer, has been controversial for years. It's a common practice in Minnesota, and banks claim it's better for customers because important checks like a mortgage or car payment are less likely to bounce.
In the California case, Judge William Alsup blasted that argument, as well as Wells Fargo's citation of a company survey indicating customers prefer to have their larger checks paid first.
"This survey proved to be an utter phantom. Despite calls for its production, it was never produced at trial and neither [Wells Fargo Executive Vice-President Ken] Zimmerman nor [his boss, Les] Biller (nor any other bank witness) knew where a copy of it could be found."
Consumer advocates in Minnesota have tried to change the high-to-low practice through legislation, but federal law governs most banks, and nothing in current law says the banks can't do it.
Wells Fargo will appeal the federal judge's decision in California, so the final word could come from a federal appeals court. If it's upheld, then Elwood and other attorneys said they expect to see more court challenges around the country.
The other thing that could happen is banks might choose to let more checks bounce rather than covering the charges and assessing an overdraft fee -- just so they can avoid negative publicity, said Joe Witt, president and CEO of the Minnesota Bankers Association.
"Because of this and other laws that have been put in place recently, I think customers are going to see a lot fewer overdrafts that are paid and probably a lot more returned checks and returned items," Witt said. "Of course that's not good for consumers either."
Witt noted that rejected payments could include things like someone's health insurance premium, causing a person's insurance to lapse, or a mortgage payment that leads to hefty late fees.
But consumer advocates say the processing checks and debits in the order they're received is what customers expect will happen.
"It's one of those consumer issues where if you just randomly pick 10 people from Minnesota, put them around a cafe table and said here's what happens, they'd all just say 'oh that's ridiculous,'" said Prentiss Cox, a law professor at the University of Minnesota who has testified before the Legislature in favor of changing the practice. "They should do it so the most number of checks clear, not the least number of checks."
Cox noted that for debit card transactions, customers can now opt out of overdraft protection so that those transactions are denied if there are insufficient funds in their accounts. But even if they do opt out, customers will continue to see overdraft fees for checks unless the law changes or a court decision changes the practice.
The federal Financial Reform Act could also open up additional opportunities for litigation, said Richard Fuller, a Minneapolis attorney who specializes in class action consumer protection lawsuits.
The law, which hasn't yet taken effect, will allow the courts to hear more cases dealing with state laws on deceptive practices without automatically being preempted by federal laws regulating banks, he said.
"It may be possible that cases like that could be successful in Minnesota," Fuller said, adding that it will also depend on the Eighth Circuit Court of Appeals, which he said is seen as more conservative. "If enough other circuits come down with decisions, I suspect that the Eighth Circuit might follow suit. They don't like to disagree with each other."
At least one Minnesota attorney who has received calls from concerned bank customers over the years was already looking at the possibilities.
"It's something to be studied," said Amir Vafaei, whose consumer protection firm has offices in Minnesota and California. "We're trying to figure out what angles we can use to bring a lawsuit in Minnesota."