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JPMorgan to pay back fees?

By Claes Bell, CFA · Bankrate.com
Tuesday, February 7, 2012
Posted: 2 pm ET

JPMorgan Chase became the latest bank to settle a nationwide suit concerning the infamous "courtesy" overdraft fees. From Jonathan Stempel of Reuters:

JPMorgan Chase & Co has agreed to pay $110 million to settle consumer litigation accusing it of charging excessive overdraft fees.

The largest U.S. bank by assets joined Bank of America Corp and several smaller lenders in settling their portion of the nationwide litigation over the fees, which are typically assessed when customers overdraw their checking accounts.

Consumers had accused more than 30 lenders of routinely processing transactions from largest to smallest rather than in chronological order. This can cause overdraft fees, typically $25 to $35, to pile up because account balances fall faster when larger transactions are processed first.

If you're wondering why the order in which banks processed overdrafts is such a big deal, let's look at an example. Say you had $200 in your account, but you forgot about a $100 check you wrote to pay your utility bill. That check then cleared, unexpectedly reducing your balance to $100.

Not realizing your mistake, you went about your business as if you had $200 in your account, using your debit card to make purchases of $5 for a cup of coffee at Starbucks, $10 for lunch, $15 for drinks after work, and $100 at the grocery store. If those transactions were processed in chronological order, you'd overdraw exactly once at the grocery store, and you'd owe the shortfall plus one overdraft fee of, say, $30.

$200 original balance

- $100 utility check (balance: $100)

- $5 cup of coffee (balance: $95)

- $10 lunch (balance: $85)

- $15 drinks (balance: $70)

- $100 groceries (balance: -$30)

- $30 overdraft fee

Final balance: -$60

That $30 overdraft fee is annoying, to be sure, but look what happens when you change the order of processing from chronological to largest to smallest, as the banks allegedly did:

$200 original balance

- $100 utility check (balance: $100)

- $100 groceries (balance: $0)

- $15 drinks (balance: -$15)

- $5 cup of coffee (balance: -$20)

- $10 lunch (balance: -$30)

- $90 for three overdrafts

Final balance: -$120

As you can see, the hole dug by the debit card user in this particular case is made twice as deep just by changing the order of processing. That $5 cup of coffee at Starbucks becomes a $35 cup of coffee, which became a sort of poster child for consumer advocates.

Thankfully, avoiding that $35 cup of coffee is easier these days; all you have to do is refuse to opt in to courtesy overdraft when your bank tries to enroll you. As Stempel notes, the Federal Reserve eventually required banks, under Regulation E of the Electronic Fund Transfers Act, to seek customers' OK before enrolling them in courtesy overdraft, but not before customers paid billions of extra dollars in fees. I think the memory of those fees still smarts for a lot of bank customers, and that's contributed both to the current consumer anger toward banks and the popularity of alternatives like prepaid cards.

This settlement probably won't do much to salve that anger. Though it sounds large, that $110 million represents a small fraction of what overdraft fees cost JPMorgan Chase checking account holders. According to JPMorgan Chase's annual report from 2010, the year Reg E was changed, the bank had 27.3 million open checking accounts. Assuming all accountholders had at least one overdraft over the 10-year period the case covers, that works out to about $4 per account.

The good news is, if you're entitled to receive a sliver of the settlement pie, you probably won't have to take any action to get it. Those covered under the earlier Bank of America settlement are given this instruction on the settlement's website.

Current and former holders of Bank of America consumer checking and/or savings accounts may be eligible for a payment or account credit from the Settlement Fund. You are a member of the Settlement Class if you:

  • Had a Bank of America consumer checking and/or savings account that you could access with a Bank of America debit card, anytime between Jan. 1, 2001, and May 24, 2011, and
  • Were charged one or more overdraft fees as a result of Bank of America's practice of posting debit card transactions from highest to lowest dollar amount.

If you are included in the Settlement Class and entitled to receive a cash benefit, you do not need to do anything to get a payment or account credit. If the Court approves the Settlement and it becomes final and effective, you will automatically receive a payment or account credit.

What do you think? Should banks have to pay back overdraft fees obtained from reordering transactions?

Follow me on Twitter: @ClaesBell

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4 Comments
shamana1
March 07, 2012 at 8:18 pm

i was od by the debit card when i made a 20 dollar charge and instead of rejecting it they OD'd my acct and now they want 700.00 from me and i did pay a 50.00 fee. overlap deposit so how do i get a settlement package?

Meagan
February 08, 2012 at 9:44 am

I think that JP Chase should def have to pay back a portion of the overdraft fees they charged because their practice was predatory. Of course in a perfect world, no one would ever overdraft their bank accounts, but most people make mistakes from time to time. When a customer makes a mistake the bank is entitled to charge a fee, but Chase was intentionally changing the order of debits to most increase the chance of mistakes and thereby increase their fees. Perhaps when there is no more free checking (as this blogger and many others think is coming in the near future), there won't be a need for banks to use predatory practices in their fee collection. Until then, the banks are going to continue to be slapped with class action law suits when they step over the line.

Cole
February 07, 2012 at 5:53 pm

The opportaive phrase in your example is "you forgot." But then, personal responsibity for our checking account balances died at the same time as the check register. Does anyone under the age of 40 even know what the words "balance the checkbook" mean?