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Wells Fargo to Pay $200M in Overdraft Fee Case

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By Jason Beahm on August 12, 2010 9:58 AM

Question: What happens when a bank uses slight of hand to routinely turn single overdrafts into multiple overdrafts, exponentially increasing fees?

Answer: A $203 million judgment for restitution.

Wells Fargo had a nefarious habit of manipulating overdraft fees by using a "bookkeeping device" that would turn one instance of overdrawing into many more, up to 10. This in part allowed the bank to collect $1.8 billion in overdraft fees from 2005 to 2007. "The revenue generated from these fees has been massive," wrote U.S. District Court Judge William Alsup of Northern California. Further, Alsup said that the bank made considerable efforts to hide the manipulations while at the same time, they constructed a complex facade of phony disclosure. 

Wells Fargo, through a spokeswoman, said that the company believed the ruling was not in line with the facts and was disappointed with the ruling. The bank plans to appeal.

Overdraft fees have existed for decades. Banks charge them when an account holder writes a check (or uses their debit card) for an amount beyond what they currently have in the their account. Such a check is called an overdraft. When an account holder overdrafts, the bank typically covers the funds, or refuses, in what is called a "bounced check." Where it gets complicated is when banks find ways to increase the number of overdrafts in order to increase their fees, as the court found Wells Fargo did in this case.

CNN reports that Paul Miller, analyst for FBR Capital Markets, said he believed that the way that Wells Fargo handled overdrafts has "always a questionable practice ... I think with financial reform in general, a lot of these practices are going to change anyway .... The government is going to take a really hard look at this stuff."

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