Consumer bank account transaction resequencing multiplies overdraft fees

February 28, 2013 (Press-News.org) Consumer bank account transaction resequencing multiplies overdraft fees

Article provided by Bohrer Law Firm, L.L.C.
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The order in which a bank posts a customer's daily transactions to his or her account can make a huge difference financially when not enough money has been deposited to cover them all. The transactions can be reordered to either maximize fees for the bank or minimize the financial blow of those charges to the consumer, or they can be processed in the chronological order they were made.

Pro-bank posting practices

So-called "high-to-low posting" is the bank practice of reordering an account's daily transactions so that the highest debit to the account is paid first, dropping the balance significantly, followed by paying out in descending order the smaller transactions. This can throw a real financial punch at the average consumer because the account is so depleted by the first, largest withdrawal, that more subsequent smaller transactions bounce for insufficient funds, zeroing out the account sooner and multiplying individual overdraft fees (at, for example, $35 a pop).

If the opposite practice were followed, overdraft fees would be minimized. The largest transaction -- for an average person often a mortgage, rent, student loan or car payment -- if last, might be the only transaction to put the account into the red, incurring just one overdraft fee.

Gutierrez v. Wells Fargo Bank, NA

On December 26, 2012, the U.S. Court of Appeals for the 9th Circuit, sitting in California, made an important ruling in the appeal of a class action case against Wells Fargo Bank for high-to-low posting. The court looks at the legal concept of the pre-emption of federal laws over conflicting state laws. Broadly, in such a situation, the federal law generally pre-empts, or trumps, the state law.

The interaction of applicable federal and state banking laws that could potentially impact bank overdraft sequencing practices is very complex. The Gutierrez court holds that, because of federal pre-emption, state laws could not significantly overrule federal banking laws that allow national banks to decide their posting practices.

However, the court does say that state laws of "general application" can control federally chartered bank practices as long as the impact does not "prevent" or "significantly interfere" with banking power granted by federal law. In Gutierrez, the court remanded the case back to the trial court because state consumer protection law that forbids commercial misrepresentation to the public is a general state law not pre-empted by federal banking laws. The court notes that Wells Fargo had communicated to customers that withdrawals would post in chronological order, rather than be reordered as was its true practice.

Whether damages are due to class members because of this bank misrepresentation about its posting practices is to be determined by the trial court after remand.

Will the laws change?

In response to public outcry, legislation will probably be developed to target directly bank transaction reordering schemes. For example, a federal bill introduced in 2012 (the Overdraft Protection Act of 2012) that would have prohibited resequencing of banking transactions never made it out of committee.

States are undoubtedly examining their own laws in light of this issue. For example, a bill to prevent banks from reordering bank transactions to maximize overdraft fees was introduced in January 2013 in the Connecticut State Senate. How state laws affect bank posting practices will also be complicated by whether the financial institution is chartered under state or federal law, and by questions of federal pre-emption.

Undoubtedly, these legal questions will have to be addressed on a state-by-state and case-by-case basis and will probably often end up in litigation because the questions of law are so important, yet so complicated.

Seek legal counsel

Anyone negatively impacted by bank posting practices should discuss their possible legal remedies with an experienced consumer protection attorney. The laws vary from state to state, as does federal and state court interpretation of those laws, so a knowledgeable lawyer's involvement is important to help discern each account holder's unique situation and legal rights.