(BAC) Bank of America to Repay Unfair Overdraft Fees

Bank of America Corporation (BAC) has hit the headlines for manipulating overdraft fees. On Monday, the U.S. District Court of Southern District of Florida (Miami) ordered BofA to pay back $410 million to its more than 13 million customers who were charged with inappropriate overdraft fees by the company over the last decade.

The court has held BofA responsible for manipulating transaction entries to generate larger overdraft fees. Transactions were re-sequenced by the bank so that the largest withdrawals were deducted first instead of being cleared in the order in which they were received. As a result, customers’ balances diminished faster, resulting in a larger number of ‘overdrawn’ transactions, each of which then became chargeable.

BofA’s attorney said that those customers who had debit cards between January 2001 and May 2011, will receive a minimum of 9% of the fees they had paid. Further, those who still have an account with BofA will get an automatic credit in their accounts while others will receive their checks via mail.

An attorney for the customers stated that BofA had earned nearly $4.5 billion as overdraft fees and is repaying less than 10%. Furthermore, the attorney for the customers stated that the settlement amount is too low as the customers would receive only a fraction of what actually they had paid as overdraft fees, which was $35 per occurrence. However, a senior U.S. District judge claimed the settlement to be fair and reasonable.

An overdraft occurs when withdrawals from a bank account exceed the available balance. In such cases, banks charge fees for the overdrawn transactions from the account holders. With a rise in debit card usage, overdraft fees have become an important revenue driver for banks.

Furthermore, banks found it easier to generate revenues through overdraft fees by allowing customers to overdraw their accounts through debit purchases, ATMs, or any other electronic payment gateways. However, at times, customers were not intimated of such fee details, and they came to know it only after they had been already charged.

Nevertheless, according to the new regulation passed in 2010, banks will not be able to charge such hefty fees without informing the account holders. In fact, as per the new federal laws, the customer’s permission is required, prior to allowing several overdrafts.

BofA is not the only bank that has been ordered to repay for its unfair overdraft practices. Last year, Wells Fargo & Co. (WFC) had been ordered to repay $203 million by the U.S. District Court of Northern California to recompense customers who had sued the company for charging unfair overdraft fees.

Apart from BofA and Wells Fargo, in October 2011, Zions Bank, a subsidiary of Zions Bancorp. (ZION), was accused of charging improper overdraft fees under policies that were in place between 2005 and 2010.

Though the announcement of settlement of unfair overdraft fees will affect BofA’s financials, it will restore the confidence of the customers in the federal laws to an extent.

Currently, BofA retains a Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we maintain a long-term Neutral recommendation on the stock.

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ZIONS BANCORP (ZION): Free Stock Analysis Report

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