Fifth Third Sued for Overdraft Fees

A class action lawsuit filed in the Northern District of Georgia asserts that Fifth Third Bancorp has manipulated the transactions for its customers in order to provoke overdraft fees.  The suit, Willard v. Fifth Third Financial Group, is being pursued by Tycko & Zavareei.

A lawsuit asserts that Fifth Third manipulates accounts to trigger excessive overdraft fees.

Just a refresher, but it is worth mentioning that Fifth Third has a fairly checkered record. It has been the subject of several successful lawsuits and government convictions. John Ashcroft, hardly a progressive, argued and won a fair lending violation against a subsidiary (Old Kent Financial) of Fifth Third in 2004. That suit, United States of America vs. Old Kent Financial and Old Kent Bank, asserted that Old Kent violated the Equal Credit Opportunity Act and the Fair Housing Act.  Although it would be fair to argue that Fifth Third should not pay the sins for an acquired bank, it was Old Kent that was managed by the current Fifth Third CEO Kevin Kabat. Those violations didn’t smear the career of Kabat. They appear to have made no blemish at all in the eyes of the FITB Board of Directors.

Fifth Third was also a party to a large identity theft operation that compromised the privacy of 45.1 million credit card accounts at T.J. Maxx.  At the time of the incident, Fifth Third would not even admit that they had a business relationship with TJX.

Overdrafts

This suit is worth watching because the overdraft policies, with one exception, aren’t that much worse at Fifth Third than at any other large bank.

Fifth Third’s particular sin is to charge overdraft fees on overdraft fees. Their policy is that an account that has a negative balance (due to an overdraft) can be charged an additional fee for each successive period that it remains below zero. Those fees are triggered for each additional day that the account is overdrawn.

The other sins are hardly unusual.  The suit alleges that Fifth Third manipulates the order of transactions in order to create more overdrafts.  That is called high-low check sequencing, and it pretty much standard operating procedure at Bank of America, Wells Fargo, BB&T, and a host of other national banks.

The logic of check sequencing is that banks are doing a service to their customers by paying checks not in the order that they come in, but in the order of their size. The largest checks are paid first. The pool of transactions is drawn from all of the withdrawals that come in during one 24-hour period. In the era of electronic banking, this is somewhat anachronistic.  Transactions are placed in real time.  The banks make this a possibility by waiting until the end of the day.  Moreover, they put deposits in line after withdrawals. It gets worse, though. If you use your debit card to make a purchase at a time when your account is overdrawn, Fifth Third approves the transaction and charges you the new overdraft fee, rather than issue a rejection.

It is hard to not come to the conclusion that deposit services are designed to make more overdrafts. Do the math, and you will see that paying the largest check first will always produce the most overdrafts.

I have been a part of direct conversations with deposit services managers. Their argument is always the same.  Larger checks have a greater likelihood of representing a mortgage payment. Since mortgage payments make a substantial impact upon credit scores, they argue that this is a service to consumers. That may be true.  However, banks make no effort to confirm that a payment represents a mortgage payment. It would be possible to confirm this situation through a consumer inquiry.  After all, mortgage payments don’t change for years.  That is not done. I guess it is pretty obvious that if there are two payments, one to Ethan Allen furniture and one to Wells Fargo Home Mortgage, that the latter is a mortgage payment and the former is not. That is not the kind of service that banks are offering.

Public Policy

There is a larger public policy dilemma as well. Right now, we have a payments system that is largely funded by overdraft fees.  Those fees are disproportionately drawn from low-wealth consumers.  High wealth consumers avoid these fees not just because they have more in their accounts, but also because banks are often willing to void these fees as a courtesy for high-dollar customers.

Consumers are upset about these issues. Class action lawsuits by class actions law firms seem to be the way that these kind of problems are remedied.  To an extent, that is a shame.  It mixes the interests of consumers with the somewhat tarnished reputation that the class-action lawsuit industry has earned. It doesn’t have to be this way. A different path, and to my mind a more appropriate one, would be for the regulators of our national banks (the OCC!) to step in and make rules that protect the interests of regular people.  Should we hold our breath?

About Class Action Lawsuits

It is hard to know if anything will come from this lawsuit.  Plenty of class-action suits are brought by opportunistic firms on grounds that are far from meritorius.  Pacific Capital, a favorite bank for this blog, was hit with several lawsuits in fall 2009 after its shares dropped.  Fifth Third’s shares are actually up this year, so this might not be a case of sharks circling when they smell “blood in the water.” At the same time, if one shark smells blood in the water, then it won’t be the only shark.  I see that Tycko and Zavareei have a number of class actions in play, including two for faulty microwave ovens and one against ClearWire. I had Clearwire. Clearwire deserves attention.