Bank of America settles overdraft suit; consumers to get refunds

$410 million settlement over practice that maximized fees

By Martin Merzer

If this doesn't qualify as good news, we don't know what does: Free money soon may be coming your way.

If you used a bank debit card and got hammered with multiple overdraft fees at pretty much any point during the last decade, there is a good chance that you will wake up one of these days and find that -- abracadabra -- your account is larger than you thought it was.

This is particularly true for Bank of America customers, due to the recent settlement of a major class action lawsuit, but as many as 10 million Americans -- customers of up to 30 other banks -- eventually may share in the bounty.

The first of what could be 30 or more bottom lines: Bank of America has agreed to pay its customers (and their lawyers) $410 million to settle a case that claims that the bank posted debit card transactions in order from highest amount to lowest, a way guaranteed to sock customers with more overdraft fees.

Notices to customers arriving this week
The settlement, signed in May, is now being shared with Bank of America customers through mailed notices arriving this week and a website that explain the details and offers customers the ability to opt out of the deal.

As a matter of record, Bank of America says it did nothing wrong. Attorneys for Bank of America's customers have a different view.

"Everybody has basically conceded that the purpose of this system was to maximize the overdraft charges paid by customers," said Bruce Rogow of Fort Lauderdale, Fla., one of several attorneys who represents bank customers in the case. "This shows that Bank of America recognized the possibility of losing this case and chose to settle and pay substantial damages rather than waste time litigating a case they could not win."

A representative for Bank of America did not immediately respond to requests for comment. In the settlement, Bank of America says it "disputes the claims alleged in the action and does not by this agreement or otherwise admit any liability or wrongdoing of any kind."

30 other banks sued
The case and nearly identical lawsuits filed around the country against about 30 other banks, large and small, have been consolidated in U.S. District Court in Miami. Rogow said he expects additional settlements of these lawsuits, but more on that later.

First, here is what this is all about:

If you had a debit card from, say, Bank of America, and had insufficient funds in the linked checking account to cover a purchase you made with that card, the bank often would silently loan you the money by paying the bill for you and then charging you $35 for each of these "overdrafts." Thus far, no real problem. You messed up, and it cost you $35. And that's that.

Except ... it wasn't, especially if you made this error repeatedly. The class action lawsuits charge that Bank of America and the other banks "re-sequenced" the posting of these transactions to your account in a way that piled on these overdraft fees.

Say, for instance, that you had $100 in your checking account and you used your check debit card to buy, in this sequence, $20 worth of cosmetics at the pharmacy, $30 worth of gasoline at the service station, $50 worth of groceries at the supermarket and $110 worth of steak at that great restaurant down the street. Well, you had enough money in the checking account to cover those first three purchases, but not enough for the fourth, so -- if the charges were posted in a sequence favorable to you -- you would get hit for a $35 overdraft charge for those steaks.

Sequencing matters
But what would happen if the bank posted those charges in this sequence: $110 steaks, $50 groceries, $30 gasoline, $20 cosmetics. Uh-oh. Now, you're over your $100 checking account balance limit on all four transactions and you owe the bank four overdraft fees -- $140 instead of $35.

That is exactly what happened to millions of Bank of America and other debit card holders, according to the lawsuits.

"This is all about the re-sequencing of those transactions," Rogow said. "When you do it high to low, you take the biggest overdraft first, which then puts you over, and then the ones that were not overdrafts to start with end up getting lined up behind that big one and you get hit for every one of them."

This is no small thing. As many as 45 billion debit card transactions were recorded last year, making debit cards more popular than credit cards.

For years, banks reaped a bountiful harvest of overdraft fees connected to many of those transactions, but banks now are prohibited by new federal rules from automatically providing overdraft protection to debit cards. If you want it, you now have to ask for it -- or at least specifically agree to accept a bank's offer of overdraft protection.

But that was not the case during most of the years covered by the lawsuits and the settlement with Bank of America.

Under the settlement:

• You are a member of the affected class of customers if you had a Bank of America consumer checking or savings account tied to a Bank of America debit card between Jan. 1, 2001, and May 24, 2011, and if you were charged two or more overdraft fees on any given day under the bank's highest-to-lowest posting practice. You don't have to do anything to participate in this settlement -- it's all automatic.
• The size of each payment will be determined by the number of people who end up in the settlement class and the amount of overdraft fees each member paid. Of course, the plaintiffs' lawyers are going to siphon off their share, possibly as much as 30 percent of the total, and the costs of administering the settlement also will drain the pool of cash.
• In addition, because some affected customers cannot be identified from the bank's records, between 5 percent and 14 percent of the settlement fund will be divided among nonprofit organizations.
• If the court grants final approval to the settlement, every affected customer will see a credit posted to their checking account, if it still exists, or will receive a check. This will occur within 30 days of a final approval hearing, currently scheduled for 9:30 a.m. on Nov. 7, 2011, in the Miami courtroom of Senior Circuit Judge James Lawrence King.

More information about the case, settlement, the procedure and the process for opting out of the settlement are available at the informational website set up for the Bank of America settlement.

Negotiations with other banks cited in the lawsuits are or have been under way, Rogow said. One set of talks with JPMorgan Chase & Co. recently broke down, according to published reports, but Rogow suggested that more settlements will be forthcoming.

That means that debit card customers other than those of Bank of America should be seeing some cash come their way.

Meanwhile, here's some advice from Rogow.

"You're really better off without overdraft protection on these debit card accounts," he said. "You're better off having that charge rejected by the bank than dealing with overdraft fees of any sort."

See related: Debit card overdraft protection: when to avoid it, when to opt in, Video: Should you enroll in debit card overdraft protection?

Published: July 13, 2011

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