Another Bank Settles Up for Bad Behavior

The furor over banks leveraging new fees for basic banking services in the wake of Dodd-Frank reforms erupted into a class action lawsuit brought by customers alleging funny business in how the fees were assessed. Over the past few months, several banks have agreed to pay millions of dollars to settle the litigation.

US Bancorp (NYSE: USB  ) is the latest in a parade of banks agreeing to settle rather than go to court. The settlement of $55 million comes hot on the heels of another involving PNC Financial, which has consented to pay $90 million to settle charges related to overzealous application of overdraft fees on debit cards linked to customers' checking accounts. In May, Toronto-Dominion Bank agreed to pay $62 million, and this past February, JPMorgan Chase (NYSE: JPM  ) settled for $110 million. So far, the biggest chunk is being paid out by Bank of America (NYSE: BAC  ) , which agreed to shell out $410 million early last year for the same offense.

Hefty fees were levied fraudulently
The heart of the matter entails fees of between $25 and $35 assessed by banks in response to overdrafts in customers' checking accounts caused when they used their debit cards. The issue wasn't so much the fees, but the method that customers claimed the banks used to levy them: The banks would process the transactions according to size, applying the largest first, instead of processing them in chronological order. This technique caused overdrafts that would not have occurred otherwise, according to the lawsuit.

Of course, the banks admit no wrongdoing, and they are part of a passel of 35 institutions named in the lawsuit, which encompasses 15 lawsuits that were consolidated three years ago. Of those 35, US Bancorp is the 14th to settle; other large institutions, such as Citigroup (NYSE: C  ) , Capital One Financial, and Wells Fargo (NYSE: WFC  ) , haven't done so. Wells Fargo is currently appealing a prior $203 million award in California.

Fool's take
While it is not surprising that none of the banks have officially admitted blame regarding the system used to process card transactions, some have made changes and public comments that infer that they know exactly what they were doing. Right around the time of its settlement, Bank of America stopped the service altogether, opting to disallow overdrafts at all, and CEO Brian Moynihan commented to The Wall Street Journal that the practice wasn't "the right way to treat" customers.

Two months after B of A's change of heart, Citibank announced that it would begin processing checks from smallest to largest, instead of the other way around. JPMorgan just recently decided to do away with overdraft fees on any transaction under $5.

Though banks have rationalized the practice at the crux of the lawsuit, saying that larger checks are usually for more important bills such as mortgages and therefore should be processed first, the reality is that customers were incurring large fees for each check that overdrew the account. It was the dodgy way the banks conducted themselves that irked customers, not the actual fee.

Why do banks continue to engage in underhanded business practices when they anger customers and incur legal bills and huge settlement costs? No one seems to dispute that banks have a right to institute fees -- they just need to be transparent about the process. Surely, banks could be doing better things with their money, like padding their capital reserves and paying dividends to investors.

Maybe someday.

Feeling like it's time to take a break from the financial sector until they get their house in order? Let our investment analysts clue you in to the three American companies set to dominate the world, which are making a huge splash in emerging markets. Want more? Click here for this special report -- it's free, but only for a limited time.

Fool contributor Amanda Alix owns no shares in the companies mentioned above. The Motley Fool owns shares of JPMorgan Chase, PNC Financial Services, Bank of America, and Citigroup. The Fool owns shares of and has created a covered strangle position in Wells Fargo. Motley Fool newsletter services have recommended buying shares of Wells Fargo. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 19, 2012, at 4:20 PM, MHedgeFundTrader wrote:

    Buried in the recently passed Dodd-Frank financial reform bill are massive financial rewards for turning in your boss. The SEC is hoping that multimillion dollar rewards amounting to 10%-30% of sanction amounts will drive a stampede of whistleblowers to their doors with evidence of malfeasance and fraud by their employers.

    If such rules were in place at the time of the settlement with Goldman Sachs (GS), the bonus, in theory, could have been worth up to $500 million. Wall Street firms are bracing themselves for an onslaught of claims, legitimate and otherwise, by droves of hungry gold diggers looking for an early retirement.

    Don’t count on this as a get rich quick scheme. Government hurdles to meet the requirement of a true stoolie can be daunting. The standard of evidence demanded is high, and must be matched with the violation of specific federal laws. Idle chit chat at the water cooler won’t do. Litigation can stretch out over five years, involve substantial legal costs, and often lead to a non-financial settlement with no reward.

    Having “rat” on your resume doesn’t exactly look good either. Just ask Sherron Watkins, the in house CPA who turned in energy giant Enron’s Ken Lay, Andy Fastow, and Jeffrey Skilling just before it crashed in flames. Nearly a decade later, Sherron earns a modest living on the lecture circuit warning of the risks of false accounting, and whistleblowing.

    The Mad Hedge Fund Trader

  • Report this Comment On July 19, 2012, at 4:20 PM, MHedgeFundTrader wrote:

    Buried in the recently passed Dodd-Frank financial reform bill are massive financial rewards for turning in your boss. The SEC is hoping that multimillion dollar rewards amounting to 10%-30% of sanction amounts will drive a stampede of whistleblowers to their doors with evidence of malfeasance and fraud by their employers.

    If such rules were in place at the time of the settlement with Goldman Sachs (GS), the bonus, in theory, could have been worth up to $500 million. Wall Street firms are bracing themselves for an onslaught of claims, legitimate and otherwise, by droves of hungry gold diggers looking for an early retirement.

    Don’t count on this as a get rich quick scheme. Government hurdles to meet the requirement of a true stoolie can be daunting. The standard of evidence demanded is high, and must be matched with the violation of specific federal laws. Idle chit chat at the water cooler won’t do. Litigation can stretch out over five years, involve substantial legal costs, and often lead to a non-financial settlement with no reward.

    Having “rat” on your resume doesn’t exactly look good either. Just ask Sherron Watkins, the in house CPA who turned in energy giant Enron’s Ken Lay, Andy Fastow, and Jeffrey Skilling just before it crashed in flames. Nearly a decade later, Sherron earns a modest living on the lecture circuit warning of the risks of false accounting, and whistleblowing.

    The Mad Hedge Fund Trader

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1932211, ~/Articles/ArticleHandler.aspx, 12/17/2014 11:17:07 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement