Shame on You, Bank of America!

Bank of America (NYSE: BAC  ) is putting $410 million into an escrow account, with at least $287 million of that reserved for B of A customers. The good news: If you paid an overdraft fee to B of A anytime from 2001 onward, part of those millions could be yours. The bad news: You'll be sharing it with lawyers and more than 1 million other B of A customers.

The refund could average more than $200 per affected customer. It could be much more for the frequently overdrawn. B of A should be looking for you to issue a refund, even if you weren't involved in the lawsuit, if it charged you an overdraft fee on a checking or debit-card transaction going back as far as 2001.

Why so generous? It's a settlement. B of A and a number of other banks -- including Citigroup (NYSE: C  ) , JPMorgan Chase (NYSE: JPM  ) , Wells Fargo (NYSE: WFC  ) US Bancorp (NYSE: USB  ) , SunTrust Banks (NYSE: STI  ) , and Huntington Bancshares (Nasdaq: HBAN  ) -- have been accused of systematically recording the largest debit transaction first, then the next largest, and so on. This causes customer balances to fall faster than chronological recording. Why not just record transactions as they happen? Recording the larger transactions first generates more overdraft fees.

Can you believe B of A would go to the trouble of reordering transactions so it could jack up overdraft fees? Yeah, me, too. Seems a bit shameful.

B of A denies the allegations, but said it was "pleased to reach a fair resolution to this matter." Apparently there is enough evidence that transactions were not ordered coincidentally. And if B of A were innocent, you'd think they should be able to prove it by spending a whole lot less than $410 million.

Foolish takeaway
While the settlement is good news for bank customers, it is one more nail in the coffin for bank profits. Dodd-Frank has hit banks in the fees. According to the Federal Deposit Insurance Corp., deposit-account fee income for the industry fell 21% year over year in the fourth quarter. That, and weak loan demand, contributed to a 40% drop in the banking industry's pre-provision earnings in the first quarter.

The $410 million settlement is significant to B of A's bottom line, too. The company's pre-tax earnings (including "unusual items") over the last year are a loss of $2.93 billion. Other banks could find themselves paying up to settle similar allegations. A federal judge has already ruled against Wells Fargo. 

Looks like we could be seeing more of these settlements from banks in the near future.

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Fool contributor Cindy Johnson does not currently own shares of any stock in this story. No way. The Motley Fool owns shares of JPMorgan Chase and Wells Fargo. The Fool owns shares of and has opened a short position on Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On May 26, 2011, at 7:35 PM, netteligent wrote:

    Bank of America and Morgan Stanley units will pay more than $22 million to settle charges of wrongful foreclosures on active-duty members of the U.S. military, the U.S. Justice Department has announced.

    BAC Home Loans Servicing LP, a unit of Bank of America, will pay $20 million to resolve accusations that it foreclosed on some 160 service members’ homes from January 2006 to May 2009. BAC formerly was part of now-defunct Countrywide Financial.

    Saxon Mortgage Services Inc, part of Morgan Stanley, will pay $2.35 million. Saxon improperly foreclosed on 18 service members from January 2006 to June 2009, prosecutors said.

    “The service members Saxon foreclosed on include men and women who have served honorably in Iraq, some of whom were severely injured in the line of duty” the Justice Department said in a news release.

    Prosecutors said the foreclosures were processed without court orders, in violation of the Servicemembers Civil Relief Act. The Justice Department said in most cases, the lenders either knew or should have known of the homeowners’ military status.

    “Countrywide Home Loans failed to protect and respect the rights of our servicemembers, failed to comply with clearly mandated procedures and foreclosed against homeowners who are valiantly serving our nation,” said André Birotte Jr, U.S. Attorney for the Central District of California. “Military families lost their homes when Countrywide violated the law, causing undue stress to wartime personnel who have been protected from such actions since the Civil War.”

  • Report this Comment On May 26, 2011, at 9:33 PM, militauro wrote:

    Wow, this is a huge victory for the 18yr old me. This exact thing happened to me when I was 18 and B of A hit me with a HUGE overdraft bill for using this practice. The worse part is I complained and they were willing to cut me loose as a customer before returning a penny. Never going near them again (happy Charles Schwab customer now).

    P.S. I hope I get the lawsuit e-mail soon, I'm following through with this one for sure.

  • Report this Comment On May 27, 2011, at 4:03 PM, Duke5343 wrote:

    And the Liars i mean Lawyers walk away with MILLIONS

  • Report this Comment On May 27, 2011, at 4:07 PM, 5000monkey wrote:

    How was there ever any question that all banks do this? I thought it was common knowledge. I've been in and out of the banking industry for about 12 years now for 4 different banks. Everyone of them has always done exactly that with the stated purpose of making more in fees.

    Have you guys ever looked at how banks and credit cards calculate daily balances for the purposes of charging interest on credit cards and lines?

    If you want screwy math go look into that.

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