NationsBank spanked, pays $9 million
to settle suit over check-cashing policies
By Pat Curry • Bankrate.com

About 1.4 million current and former checking account customers of NationsBank may be eligible for a refund of up to $50 for bounced check and overdraft charges under a tentative lawsuit settlement.

In June of this year, NationsBank agreed to settle a 2-year-old class action suit relating to its "biggest-first" check-processing policy, which results in a larger number of bounced check fees for the bank. The bank notified its customers of the deal in letters sent out last month.

Without admitting liability -- or changing its policy -- NationsBank agreed to pay $9 million. It will set aside $5 million for refunds and pay $2 million in claims administration fees and another $2 million in attorneys' fees.

Final court approval of the settlement is scheduled for late January, says Steven Katz, an Illinois attorney representing the class. Unless the judge in the case rejects the proposed settlement, about 1.4 million customers are eligible to file a claim to recover up to $50.

The suit arose over an increasingly common banking practice -- processing the biggest checks first. Legally, banks can process checks in any order they want -- first in, first out; check number sequence; smallest to largest, or, like NationsBank, largest to smallest.

"Biggest-first" means that if more than one check arrives at the bank for processing on the same day, the check for the largest amount is processed first.

One bad check, three bank charges

Here's an example: A customer has $1,000 in his checking account. Check numbers 101 through 104 come in for processing for $60, $10, $30 and $950, in that order. If the checks are processed by the check number or in ascending order (smallest to largest), the first three checks will clear and the fourth will bounce, meaning the customer will be charged one fee for nonsufficient funds. NationsBank charged $29 for each bounced check.

If the checks are processed largest to smallest, however, the $950 check will clear first, and the checks for $60, $30 and $10 will bounce, resulting in $87 in fees.

Bank of America, which took over NationsBank in a 1998 merger, continues to process checks from highest to lowest amount because, Bank of America spokesman Gordon Turner says, "Our experience and what our customers have told us is that they prefer for us to place priority on their largest checks. Most of those are typically for a mortgage, car payments, IRS payments, insurance premiums. Those are the kinds of checks that should you have insufficient funds, they create the most problems. Those are the creditors who report on a regular basis to the credit bureaus. Bouncing a check at the grocery store may cost you a fee, but it has less impact on your credit record."

The suit alleged that NationsBank didn't tell its customers about the policy and that the practice led to extra charges for insufficient funds and bounced checks. That, the suit claimed, violated the federal Truth in Savings Act, the Illinois Consumer Fraud Act and similar laws in other states. As part of the settlement, Bank of America has notified all its customers of its policy, Turner confirmed, and now includes it in information to new customers.

Turner said he did not know how much money the bank makes a year from bounced check fees. A June 1998 report by the Consumer Federation of America estimated that banks in the United States generate more than $5.2 billion a year in bounced check revenue.

$9 million beats nothing
While the amount of bounced-check fees collected totaled at least $40 million, one $29 bounced check charge for each member of the class, Katz says the suit was settled for $9 million because he knew there was a good chance of losing if they went to court.

"Banks have won these cases," he says. "As we looked at it, it was going to be an uphill battle. We thought it was a good settlement."

While the settlement allows for payment of up to $50 per eligible claim, that doesn't mean that everyone who fills out a form will get a refund. And not everyone who is eligible will file a claim.

"We think we have enough money, but it's very difficult to predict claims," Katz says. "It's not a science, it's an art."

Although Katz says he is pleased that the suit is producing some refunds for customers, the real victory was that now customers know about the policy.

"It was like pulling teeth to get them to change the disclosure," he says.

"That was our biggest goal. If you look at the pleadings, they denied that it was legally required to disclose. We said, 'Yes, you do.' That's the dispute and that's what we settled. We considered the refunds to be icing on the cake."

Pat Curry is a freelance writer based in Georgia

-- Posted: Nov. 10, 1999