The Lawsuit Over Wells Fargo's Predatory Lending Heads To Appeals Court On Thursday

Scandals continue to buffet Wells Fargo & Co WFC with each new accusation of misconduct, whether it’s predatory lending, what board members knew about fake customer savings accounts or the bank forcing unwanted auto insurance on its customers who took out car loans.

But lesser-known legal problems have been stalking Wells Fargo since 2008, when it was among the major U.S. banks to be slapped with a nationwide class-action lawsuit for allegedly deceptive overdraft policies. For years, Wells Fargo and other banks reordered customer transactions from highest-to-lowest payments to maximize the overdraft fees they could collect.

Wells Fargo was hardly alone in this overdraft money-making scheme, but it’s the only bank that refused to settle or ask for arbitration when it was offered. Instead, after waiving its right to arbitration, the bank chose to litigate and – when that didn’t work-- to force its customers into arbitration.

A related class-action lawsuit in California involving overdraft fees was settled in 2016, with Wells Fargo ordered to repay $203 million to customers. A federal judge reaffirmed his ruling that Wells Fargo had misled customers to think the transactions were paid chronologically when they were actually paid in a high to low order solely to yield more overdraft fees.

The average award payout for the more than one million members of the California class action suit was $162, with a few members on the high end receiving several thousand dollars, according to Michael Sobol, one of the attorneys representing the plaintiffs.

But the nationwide class action suit, originally filed in Miami, is still dragging on after multiple appeals by Wells Fargo. It’s slated to be heard starting August 24 in the 11th Circuit Court in Atlanta.

A $39 cup of coffee

Here’s how the contested overdraft policy worked: A customer who had, say, $74 in the bank might use a debit card for a $3 coffee, a $7 lunch and then pay a $75 Internet bill. By reordering the transactions, Wells Fargo would deduct the $75 first, which would throw the account into overdraft, then debit the $7 lunch, followed by the $3 coffee, then charge overdraft fees on all three. The fees could reach as high as $37 each – meaning that cup of coffee ultimately cost $39. Just by juggling the transaction order, Wells Fargo would make an extra $74 or so in overdraft charges.

Add a few more small debits here and there, and bank customers could easily owe more than $200 in overdraft fees overnight – charges that would grow daily if they didn’t realize the problem or couldn’t pay them off immediately.

Because of the high-to-low reordering of transactions, many customers who previously would have paid only one overdraft fee for a large purchase that pulled them into the red had to pay overdraft fees for lots of small purchases.

According to the Federal Deposit Insurance Corporation, with even one $27 overdraft fee (the survey median), a customer that repaid a $20 overdraft in two weeks would be hit with an APR (interest rate plus fees) of 3,520 percent.

“There’s no question that the high-to-low overdraft fees were set up solely to make more money for the bank, but they were a terrible deal for the consumer,” says Rosemary Shahan, president of Consumers for Auto Reliability and Safety (CARS) and a longtime activist for consumer rights.
 

Bank’s push for forced arbitration

In October 2016, a U.S. District judge in Miami rejected Well Fargo’s motion to compel arbitration, but the bank hopes to convince the 11th Circuit of its argument. This March attorneys for the plaintiffs filed a briefing paper (in advance of oral arguments) saying that the bank had missed every case deadline to agree to arbitration and that it is too late to ask for it now.

“Wells Fargo continues to believe that arbitration is a fair, efficient and effective way for a customer to pursue a legal claim and resolve a legal dispute,” the bank wrote in response to a question about the case. “For many years, high-to-low posting order was standard in the banking industry.”

Wells Fargo adds that in 2010, it eliminated high-to-low posting order for debit card transactions and “moved to chronological posting order for those items,” adding that it also moved to chronological posting order for checks and ACH transactions in 2014.

Consumer advocates say arbitration almost always puts consumers at a disadvantage. One reason is that few people are likely to take off work to arbitrate the relatively small amounts they’re owed. This essentially means Wells Fargo would not have to compensate those customers who don’t bother to show up for arbitration if the court ruling favors the bank.

“All the laws we’ve fought to get on the books to protect people don’t mean a thing if banks can force you into arbitration,” Shahan says. “If this (Wells Fargo case) goes to arbitration, most consumers would get hardly anything.”

A recent study from the Consumer Financial Protection Bureau (CFPB) backs up Shahan’s claim. Its research shows that “most customers simply give up when forced to arbitrate, especially for small-dollar claims, considering the time and expense,” says Ira Rheingold in a piece for the MorningConsult.com.

“In the handful of arbitration claims filed in 2010 and 2011, only 9 percent of consumers with affirmative claims obtained relief, recovering only 12 cents of every dollar claimed,” Rheingold continues. “In contrast, 93 percent of companies won their claims in arbitration, recovering an average of 98 cents on the dollar.”

Even if they prevail, consumers can still be stuck with half the cost of the arbitration service.

This summer the CFPB issued a rule that would ban banks and other companies from using forced arbitration clauses in their contracts. The rule comes too late to affect the pending Wells Fargo litigation, but could protect consumers from bank arbitration in the future – if the rule survives the attempts of Republican leaders in Congress to overturn it.

Meanwhile, a court victory for Wells Fargo would mean less compensation for its low-income customers, who make up the bulk of consumers who get hit with overdraft fees.

Excessive overdraft fees are not simply an inconvenience, according critics, but part of a policy that caused financial chaos and hardship to those on a tight budget who could least afford it.

“A [$6.95] charge put us into a negative balance, for which our bank charged us a $37.50 overdraft fee. This was at a time when we’re digging quarters out of the couch to keep gas in the car,” one California tenant wrote her landlord to plead for leniency during the time of reordering transactions from high to low. “As you can imagine, the fees snowballed, and the next thing we knew, we owed the bank almost $200! Then the bank closed the account and my husband’s direct deposit paycheck was rejected…The employer has finally agreed to overnight the check, which is good because we are now in an out-of-gas situation…”
 

Ongoing congressional scrutiny

While the Wells Fargo appeal plays out in Atlanta, problems with overdraft fees persist. Wells Fargo’s business practices have, in fact, attracted the ongoing scrutiny of the United States Senate.

U.S. Sen. Mark R. Warner (D-VA), a member of the Senate Banking Committee, earlier this year asked Wells Fargo’s chief executive “to explain whether the bank’s recent surge in income from overdraft charges had any connection to the scandal over its fraudulent sales practices,” according to a recent news release from his office.

In a letter to Wells Fargo CEO Timothy Sloan, members of the banking committee expressed concern with news reports that the bank’s income from overdraft charges grew by 7.5 percent between July and September 2016. The committee noted the increase was five times faster than the rate of Wells Fargo’s main U.S. competitors – including JPMorgan Chase, Bank of America, TD Bank, and US Bank – which had an average increase of 1.3 percent during the same period.

"Even if these overdraft revenue increases are not directly related to the fraudulent account openings, we are concerned that they may reflect similar troubling consumer sales practices,” the senators wrote Sloan. “It would be particularly distressing if Wells Fargo were pursuing an increase in revenue from overdraft fees to compensate for the bank losing customers as a result of the fake accounts scandal.”

On Aug. 16, US Sen. Elizabeth Warren (D-Mass.) called for the Federal Reserve to remove Wells Fargo board of directors’ members who served between May 2011 and July 2015. The senator's request came amid new evidence that the bank failed to refund money owed to car loan customers, that it overcharged small businesses for credit card transactions, and that it billed certain mortgage customers for unexpected optional services.

"Between 2011 and 2015, Wells Fargo seems to have had an almost limitless capacity to cheat its customers and shirk its regulatory responsibilities,” she said. “Yet a dozen Board members from that period continue to serve today."