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What Lessons Can Be Learned from the Wells Fargo $203M Lawsuit

WP 08.30.2010

By: Mark Groves, Director Consulting Analytics

On August 10, 2010, a large “ripple” emanating from San Francisco was felt throughout the banking world. The “ripple” was caused by the Federal District Court’s finding that Wells Fargo’s method of posting debit card transactions from high to low is unfair and deceptive under California Law. The court also required restitution of approximately $203 million. Wells Fargo is intending to appeal.

The Case Against Wells Fargo

When a landmark decision such as this appears, I find it useful to see what we can learn from it and avoid putting ourselves in the same position. To do that, we should look at what the judge said in his interpretation of California law.

As part of the ruling, the judge said, "...reinstate a low to high posting method or use a chronological posting method (or some combination of the two methods) for the posting of debit card transactions" (emphasis added).

The lawsuit only dealt with debit card transactions even though the California version of the Uniform Commercial Code (UCC), as is discussed below, implies it could apply to a wider transaction set. Wells Fargo argued that California’s implementation of UCC section § 4-303(b) authorized banks to post transactions, including debit card transactions, in any order they wished. That argument backfired, however, when it came to light that an official comment had been added to California’s version of the UCC in 1992, which further defined how the section should be interpreted:

"The only restraint on the discretion given to the payor bank under subsection (b) is that the bank act in good faith. For example, the bank could not properly follow an established practice of maximizing the number of returned checks for the sole purpose of increasing the amount of returned check fees charged to the customer." (emphasis added).

While the example in the comment referred to checks, the judge clearly saw this as applying to other transactions as well.

Another aspect of the Wells Fargo defense was that the National Bank Act supersedes state law; however, this was also dismissed as the court held that the plaintiff’s claims only had an incidental effect on the bank’s ability to engage in the "business of banking".

A lot of the issues discussed focused on the inadequacy of disclosures from Wells Fargo:

  1. Disclosure of posting order was vague and nonspecific, buried on page 27 of a 60- page document, which was written in single- spaced, 10 point type.
  2. Consumers would have struggled to understand how items were posted because:

    a. Internet banking listed “pending” (authorized but not yet settled) debit card transactions in chronological order, with no indication that they would not settle and post that way.

    b. Statements were segmented by consumer transaction activity types – a section for each (deposits, checks, electronic debits etc)

    c. Marketing information that consistently promoted debit card transactions as immediately and/or automatically coming out of the consumer’s checking account, suggesting at a minimum that they would be processed chronologically.

    d. A full disclosure of the posting order was only given to customers once they had complained.

    e. The fee schedule stated the NSF/OD fee but didn't disclose the posting order nor its potential effect if an account became overdrawn.

The Lessons Learned?

What should we learn from this ruling? First, it is important to point out that this is a lower court’s interpretation of the applicability of California law to California consumers. While the case will be argued to have at least persuasive applicability to a broader range of plaintiffs and defendants, the class is limited, and Wells Fargo has indicated its intention to appeal. In short, the dust has not yet settled on the issue of posting order.

Second, to be sure you thoroughly understand what your state requires, review your state’s version of the UCC section § 4-303(b) and related official comments to see how they may impact your posting order. And finally, if this case teaches anything it’s that you need to have clear and understandable disclosures that leave no room for misinterpretation. To avoid misunderstandings, here are some items you can review:

  • Ensure your posting order disclosure is “clear” (a “reasonable” font size and uses precise language – not “the bank may do”), easily accessible (not on page 27 of a 60-page document), and states what the posting order is. Consider whether using an expanded disclosure that details the effect that posting order may have in terms of generating NSF/OD items is appropriate or not.
  • Consider stating the posting order on the fee schedule.
  • Consider updating the new account opening process to make sure posting order and debit card usage is explained in detail.
  • Consider adding an explanation on your internet banking site that indicates that any pending POS/ATM items that are displayed are unlikely to post to the account in the order they are displayed, and explain what that means to the consumer.
  • Consider using a statement format that displays transactions in the way they were posted, along with a running balance.
  • Verify that marketing material for debit cards indicates that transactions do not post in the order they are conducted and that the money does not come directly out of your account, rather it is “held” until settlement.

While few financial institutions are cheering the judge’s ruling in this case, this does provide impetus to review your disclosure process to make sure that your customers are fully informed of what you are doing and, therefore, can make informed decisions.