Debit Card Posting Procedure, Resulting in Overdraft Fees, Was an Unfair Business Practice

This posting was written by Jody Coultas, Editor of CCH State Unfair Trade Practices Law.

Wells Fargo Bank’s “high-to-low” resequencing of debit card charges—which resulted in millions of overdraft fees charged to customers—was an unfair and fraudulent business practice that violated the California Unfair Competition Law (UCL), according to the federal district court in San Francisco.

Restitution in a class action, based on the difference between a low-to-high posting system and the result of the high-to-low system used during the relevant period, will total close to $203 million.

Change in Processing Procedures

In April 2001, Well Fargo changed its procedures for processing debit items presented for payment against accounts. In the new posting system, debit card purchases were posted from the highest dollar amount to the lowest, resulting in the most expensive debits being paid first.

The new high-to-low posting order maximized the number of overdraft fees imposed, while the previous system maximized the number of debit items covered.

In 2001, Wells Fargo also began commingling debit card purchases, checks, and Automated Clearing House transactions and posting the entire group from highest-to-lowest dollar amount. Finally, the bank implemented a secret “shadow line” program, in which the bank authorized transactions into overdrafts, but did so with no warning that an overdraft was in progress.

A class of Wells Fargo account holders filed the UCL charges, arguing that the overdraft policy and bookkeeping was unfair and fraudulent.

Federal Preemption

The court rejected Wells Fargo’s argument that the National Bank Act (NBA) preempted the UCL claims. The NBA vests national banks with authority to exercise all powers necessary to carry on the business of banking and preempts state laws that impair a bank’s exercise of federal powers.

However, there was a material difference between the bank’s authority to establish overdraft fees and the method of calculating each fee versus the bank’s practices aimed at multiplying the number of overdrafts during the posting process. Thus, the UCL claim was not preempted. The account holders’ UCL claim essentially challenged the bookkeeping practices of the bank rather than its power to calculate fees.

Standing to Represent Class

The class representatives had standing to bring the UCL claims based on the payment of hundreds of dollars in overdraft fees, according to the court. To have standing to represent a class in a UCL action, the class representatives needed to show that the bank’s overdraft policies and deceptive acts were an immediate cause of an ascertainable injury.

The class representatives presented evidence of reliance on the bank’s deceptive omissions and marketing materials that an overdraft would not go through and of actual losses of money as a result of the unfair and deceptive business practices.

Based on the evidence of Wells Fargo’s “profiteering,” the court found that the overdraft policies and bookkeeping violated the UCL, which prohibits unlawful, unfair, and fraudulent acts. To state a UCL cause of action under the unfair prong, the account holders had to show that the policy was tethered to a legislatively declared policy of restraining a bank’s discretion in arranging transactions or show an actual or threatened impact on competition.

Based on California’s declared policy of restraining a bank’s discretion in arranging transactions and the conclusion that the policy was adopted solely to maximize profits, the policy violated the UCL. Internal memos and e-mails showed that the bank’s sole motive was to maximize the number of overdraft fees from certain customers.

Secrecy, Misleading Information

Keeping the overdraft bookkeeping procedures secret and presenting customers with misleading information were fraudulent business practices under the UCL, according to the court.

To state a UCL cause of action under the fraudulent prong, the account holders had to show that members of the public were likely to be deceived by the allegedly fraudulent actions at issue. Well Fargo’s failure to inform customers of its policies and misleading propaganda likely led to class members to expect that the actual posting order of their debit-card purchases would mirror the order in which they were transacted.

Allowing purchases to go through even though the funds were not available also led customers to believe that they had sufficient funds to cover the purchases, the court found.

The August 10 decision in Gutierrez v. Wells Fargo Bank, N.A. appears here. It will be published at CCH State Unfair Trade Practices Law ¶32,117.