Bank Overdraft Fees Lawsuit & Settlements (2024 Update)

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Overdraft fees have long been a costly frustration for banking customers, often leading to significant financial strain for those caught off guard by unexpected charges.

As consumer advocates and legal experts scrutinize these fees, lawsuits have emerged against major banks, alleging unfair practices and deceptive fee structures. If you’ve been affected by excessive overdraft fees, acting quickly to secure your potential compensation is essential.

This article delves into the ongoing legal battles over bank overdraft fees, examining how these lawsuits aim to protect consumers and potentially reshape the banking industry’s approach to fee policies.

What are Excessive Overdraft Fees?

Overdraft fees can be a financial trap, especially when a small purchase triggers a hefty charge.

Here’s how it often works: if a payment or withdrawal exceeds your available balance, the bank covers the transaction but tacks an overdraft fee—usually $30 or more. This fee applies even if the overdrawn amount is just a few dollars.

To see how quickly these fees add up, consider these real-world examples:

Transaction Amount	Bank Overdraft Fee	Total Cost to Customer
$4 (coffee)	$35	$39
$10 (groceries)	$35	$45
$25 (dinner)	$35	$60
$50 (clothes)	$35	$85

For many customers, the situation worsens with daily fees on accounts that remain overdrawn. If an account stays overdrawn for days, even by a few dollars, additional fees can pile up.

For instance, an overdrawn balance of just $5 for three days could lead to three separate overdraft fees on top of the initial charge.

Understanding how overdraft fees work is crucial, as these costs can be a severe financial strain, especially for those managing tight budgets. Awareness of these practices can help consumers take steps to protect themselves and push for fairer banking policies.

What is Overdraft Protection?

Overdraft protection is a service that prevents checks, ATM withdrawals, or debit card purchases from causing an account balance to fall below zero, thus avoiding overdraft fees.

According to a 2023 study by Investopedia, U.S. bank customers paid approximately $15 billion in multiple fees in just one year, underscoring the importance of understanding this service and its implications [1].

This engaging introduction provides a compelling overview of the issues surrounding overdraft fees while highlighting critical statistics and urging consumers to take action.

Bank or Credit Union Overdraft Fees Law

U.S. federal law specifies that a bank cannot charge extended overdraft fees on debit purchases or ATM withdrawals unless the consumer agrees.

A law that took effect in 2010 forbids banks and credit unions from charging unfair overdraft fees on transactions unless the bank customer agrees to “opt-in” to overdraft protection.

However, charges may apply when checks or automatic bill payments overdraw an account, even when the customer declines overdraft protection.

There are still no laws regarding how much money banks charge for multiple overdraft fees, meaning customers who opt into the program can still pay unreasonable fees for overdraft transactions.

Related Article: Credit Union Overdraft Fees Lawsuit

Essential Facts and Figures on Overdraft Fees

Overdraft fees have become a major financial burden for many consumers, drawing increasing scrutiny and leading to substantial settlements against major banks.

Understanding the financial impact of these fees and the outcomes of related lawsuits sheds light on the ongoing challenges and reforms in the banking industry.

Average Overdraft Fee (2023): $26.61
Total Settlements Since 2017: Over $1.1 billion
Largest Settlements to Date:
- Wells Fargo: $203 million
- TD Bank: $70 million
- Bank of America: $30 million

Reordering Transactions

One tactic that banks are accused of using to increase their profits from overdraft fees is reordering transactions on accounts.

That means some banks process the largest transactions first, regardless of the order in which transactions occur on a single day. That can lead to many extra fees for a person to pay.

For example, say a man spends $10, $20, $50, and $100 (in that order) in 4 transactions on 1 day, having $140 in his account.

Either way, the account will likely still go into overdraft. But, if the account is debited in the order the purchases occurred, only the final transaction will result in an overdraft fee of $35.

However, if the transactions are processed from largest to smallest, then only the $100 purchase will be covered, leaving the customer to pay $35 for each of the final three transactions—for a total of $105 in charges.

Authorization Holds

Another practice that banks are alleged to have used to push customers into overdraft is authorization holds.

Authorization occurs between the time a bank card purchase is made and the time the merchant settles the transaction.

Before the merchant settles the transaction, the amount of the purchase is held, but it has not been withdrawn from the buyer’s account yet.

Once the merchant settles the account, which can occur a few days after the purchase, the funds are transferred to the merchant, and the customer no longer has the money in his account.

Are Lawsuits Being Filed?

Bank overdraft fee lawsuits have been filed and/or settled in district court against banks, including:

Wells Fargo
Bank of America
M&T Bank
HSBC
UMB Bank
Wachovia
And more

Overdraft Fee Class Action Settlements & Statistics

According to Reuters, in June 2019 – TD Bank paid $70 million to settle lawsuits for charging excessive fees [2].
As claimed by Reuters, in April 2019 – Navy Federal Credit Union paid nearly $25 million to settle a lawsuit for charging excessive overdraft fees [3].
November 2017 – Bank of America paid $67 million to settle a class action lawsuit accusing it of charging overdraft fees to customers who overdrew their bank accounts.
According to Jonathan Stempel’s research from 2013, in May 2013 – A California judge ordered Wells Fargo to pay $203 million to settle a class action filed against the bank for illegally processing debit card transactions to charge higher bank fees [4].

Among the eight larger individual banks, compared to the pre-pandemic 2019 baseline, there was a divergence of experiences in other listed fee revenue. However, there is no clear correlation between decreases in overdraft/NSF and increases in other listed fee revenue.

Across the first three quarters of 2022, combined overdraft/NSF revenue was $5.8 billion, compared to $8.6 billion across the first three quarters of 2019—a decrease of 33%. For the third quarter of 2022 alone, reported overdraft/NSF revenue was $1.8 billion, compared to $3.1 billion in the same quarter in 2019—a decrease of 43%. Stated the Consumer Financial Protection Bureau.

Of the three banks with the most significant declines in overdraft/NSF fee revenue since 2019, Bank of America’s other listed fee revenue dropped 7.9%, while PNC’s increased 26.4% and U.S. Bank’s decreased 1.5%.

In terms of dollar amounts, the declines in overdraft/NSF fee revenue across all eight banks for the first nine months of 2022 ($2.2 billion) far exceeded the net increase in listed fee revenue ($61 million).

Banks with $10 million to $50 million and banks with $50 million to $200 million in 2021 overdraft/NSF revenue on average reported less revenue from other listed fees than before the pandemic; in contrast, banks with $2 million to $10 million in 2021 overdraft/NSF revenue saw increases averaging 12.1%.

According to a 2023 study by the Consumer Financial Protection Bureau, across all reporting banks, other listed fee revenue decreased by $11 million from 2019 to 2022, even as overdraft/NSF fee revenue decreased by $2.8 billion [5].

Lawsuit Allegations

Bank overdraft lawsuits allege that banks charge excessive fees when customers overdraw their accounts.

Plaintiffs allege that banks and credit unions use deceptive overdraft practices to force their customers’ accounts into overdraft, including misrepresenting account balances and reordering debits and credits to accounts.

How Can Overdraft Fees Be Avoided?

Fortunately, most overdraft fees can be avoided with a few proactive steps. This guide offers practical tips on managing your accounts to help you avoid excessive fees from banks and credit unions, as noted by the American Bankers Association [6].

1. Use Direct Deposit for Your Paycheck

Set Up Direct Deposit: Contact your employer’s HR department to provide them with your bank account information.
Choose the Right Account: Ensure the account you select is one where you want your paycheck deposited.
Verify Deposits: Check your account balance after payday to confirm the deposit has been made.

Savings Example: By using direct deposit, you can immediately ensure your funds are available, reducing the risk of overdrawing your account. For instance, if your paycheck is $1,500 and you typically spend $1,200, directly depositing the funds helps you avoid unnecessary fees.

2. Keep Track of Your Balances and Transactions

Use Banking Apps: Download your bank’s mobile app or use online banking.
Set Up Alerts: Enable notifications for low balances or transactions.
Regularly Review Statements: Check your account weekly to monitor spending.

Savings Example: By keeping a close eye on your balance, you can prevent overdrawing. If you notice a pending transaction leaving you with only $10 in your account, you can adjust your spending accordingly.

3. Maintain a “Cushion” in Your Checking Account

Determine Your Cushion Amount: Decide on an amount (e.g., $100) you will not touch unless necessary.
Adjust Your Budget: Factor this cushion into your monthly budget to ensure it remains untouched.
Regularly Deposit Extra Funds: Add small amounts to maintain this cushion whenever possible.

Savings Example: Keeping a cushion of $100 can save you from a $35 overdraft fee if an unexpected charge occurs. This simple buffer can significantly reduce the likelihood of incurring fees.

4. Link Your Checking Account to a Savings Account or Line of Credit

Contact Your Bank: Inquire about linking your checking account to a savings account or line of credit for overdraft protection.
Understand Fees: Ask if there are transfer fees associated with this service.
Monitor Transfers: Regularly check that transfers occur as expected when needed.

Savings Example: If you link a savings account with $200, and a $50 transaction causes an overdraft, the bank can transfer funds from savings instead of charging an overdraft fee. This could save you up to $35.

5. Opt Out of Overdraft Protection

Review Your Bank Policy: Check if you are enrolled in overdraft protection services.
Contact Customer Service: Call or visit your bank to request opting out of overdraft protection.
Confirm Changes in Writing: Ensure you receive confirmation that your request has been processed.

Savings Example: By opting out, any transaction that exceeds your balance will simply be declined rather than incurring an overdraft fee. This could save you hundreds annually if you frequently overdraw.

6. Request a Small Line of Credit

Visit Your Bank or Credit Union: Speak with a representative about applying for a small line of credit.
Understand Terms and Fees: Read the fine print regarding interest rates and repayment terms.
Set Up Automatic Payments: If approved, consider setting up automatic payments to ensure timely repayment.

Savings Example: A small line of credit can help cover occasional shortfalls without incurring high fees. For example, if you use a $500 line of credit once for a $30 purchase, the interest may be less than an overdraft fee.

7. Set Up Automatic Notifications

Log Into Your Banking App or Website: Navigate to the alerts section.
Select Notification Preferences: Choose alerts for low balances, large transactions, or daily summaries.
Customize Alert Thresholds: Set specific amounts that trigger notifications (e.g., when the balance drops below $100).

Savings Example: Receiving alerts when your balance drops below $100 allows you to adjust spending before incurring fees. If alerted about a low balance before making a purchase, you can avoid a potential $35 fee.

8. Change Banks if Necessary

Research Alternatives: Look for banks or credit unions that offer no overdraft fee accounts.
Open a New Account Online or In-Person: Follow the bank’s opening procedure.
Transfer Funds and Close Old Accounts Carefully: Move all funds from the old account and monitor for any outstanding transactions before closing.

Savings Example: Switching to a bank that doesn’t charge overdraft fees can save you significant amounts over time—potentially hundreds of dollars each year, depending on how often you incur these fees.

By following these actionable steps and utilizing available resources, consumers can effectively manage their accounts and avoid excessive overdraft fees, leading to better financial health and peace of mind.

What Damages Could I Be Awarded?

If our lawyers determine that you have a legitimate claim against a bank or credit union for charging excessive overdraft fees, you may be eligible to receive compensation for:

Costs incurred
Refund of overdraft protection services
Damages related to Consumer Protection Act violations
Attorney fees
And more

Can I File a Class Action?

Although Schmidt & Clark, LLP, is a nationally recognized class action firm, we have decided against class action lawsuits when it comes to bank overdraft fee cases. Our lawyers feel that if there is a successful resolution to these cases, individual suits, not class actions will be the best way to get maximum payouts to our clients.

If you’ve been charged excessive fees for insufficient funds by a bank or credit union, we want to work with you personally to obtain the maximum compensation possible for your damages. Contact us today to learn more about your legal rights.

FAQs

What are the common allegations in overdraft fee lawsuits?

Common allegations include deceptive practices, misrepresenting account balances, reordering transactions to maximize fees, and failing to provide clear disclosures about overdraft policies.

What have been the outcomes of these lawsuits?

Many banks and credit unions have been ordered to pay hundreds of millions of dollars in settlements to resolve allegations of excessive overdraft fees.

What compensation can I seek in an overdraft fee lawsuit?

Compensation can include reimbursement of overdraft fees, damages for financial harm, and possibly punitive damages if the bank’s conduct was particularly egregious.

How do I file a lawsuit for excessive overdraft fees?

Contact a lawyer specializing in consumer protection or financial litigation to discuss your case, gather evidence, and file a lawsuit on your behalf.

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Have you or a loved one been billed unreasonably high overdraft fees or banks and credit unions charged insufficient funds?

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The Finance and Insurance Litigation Group at Schmidt & Clark, LLP law firm is an experienced team of trial lawyers that focus on the representation of plaintiffs in Bank overdraft fees lawsuits. We are handling individual litigation nationwide and currently accepting new cases in all 50 states.

References:

https://www.investopedia.com/terms/o/overdraft-protection.asp
https://www.reuters.com/article/tdbank-overdrafts-settlement/td-bank-agrees-to-settle-overdraft-fee-lawsuits-for-70-million-idUSL2N23L1J6
https://www.reuters.com/article/navyfed-overdrafts/navy-federal-credit-union-must-face-overdraft-fee-lawsuit-ruling-idUSL1N1RQ24R
https://www.reuters.com/article/us-wellsfargo-overdraft-decision-idUSBRE94E14320130515
https://www.consumerfinance.gov/data-research/research-reports/banks-overdraft-nsf-fee-revenue-declines-significantly-compared-to-pre-pandemic-levels/
https://www.aba.com/advocacy/community-programs/consumer-resources/manage-your-money/8-ways-avoid-overdraft-fees

Bank Overdraft Fees Lawsuit & Settlements 2024 Update