Bank of America Reaches Settlement in Checking Account Overdraft Fees

On Monday Nov. 7, 2011, a week after Bank of America called off its decidedly unpopular plan to institute $5 monthly debit card fees, the company again made news when Senior U.S. District Judge James Lawrence King approved a $410 million settlement in a class-action lawsuit brought against BofA over unfair overdraft policies alleged to cost 13.2 million current and former customers roughly $4.5 billion over the course of the past decade.

According to the lawsuit, Bank of America processed debit card transactions in an illogical manner in order to maximize the overcharge fees it could charge. More specifically, instead of processing transactions in the order they occurred, BofA is alleged to have put the largest transactions first so as to exhaust as much of their customers’ available funds as possible and thereby allow subsequent transactions to count as distinct overdrafts, each of which would trigger a $35 overdraft fee. Despite the settlement, Bank of America denies any impropriety in its debit card transaction processing policies.

While Aaron Podhurst, one of lead attorneys for the customers, called the settlement one of the largest in history and Bloomberg News quoted Judge King as saying that “this a marvelous result for the members of the class,” the settlement has received its fair share of scrutiny, primarily from BofA customers displeased at only recouping a fraction of the unfair overdraft fees they were charged. According to attorneys involved in the case, BofA customers will be compensated for as much as 45 percent of past overdraft fees and as little as nine percent. Forty-six customers have yet objected to the settlement and 350 have opted out of receiving compensation so as to retain their rights to pursue future legal action against the Charlotte, N.C.-based bank.

The attorneys' fees agreed upon as part of the settlement have also been widely criticized. Though the estimated $123 million that they are set to receive is in accordance with the benchmark commonly associated with class-action settlements and was signed off on by Judge King, opponents ranging from attorneys for customers displeased with the settlement to personal finance industry experts object based on the sheer amount of money involved.

“The settlement is undoubtedly a win for consumers, but this victory is certainly dampened by the cut the customers’ attorneys are taking,” said Odysseas Papadimitriou, CEO of WalletHub. “Sure, they got a good deal for their clients, but taking 30% of it for themselves is excessive. After all, customers are just getting a cents-on-the-dollar refund.”

According to a study on attorney’s fees from the NYU Center for Law and Business, attorneys receive an average of 12% in published cases where clients recoup over $190 million.

Bank of America has already deposited the $410 million into an escrow account, and customers still with the bank will receive refunds in the form of statement credits. Identifiable former BofA customers will be mailed checks. For the former BofA customers for whom records are missing (around 14%), a commensurate proportion of the total settlement will be donated to nonprofit literacy programs.

Though the suit covers Bank of America debit card transactions made between January 2001 and May 2011, the lion’s share of the disputed overdraft fees obviously came before the Credit Card Act took effect in February 2010, requiring that consumers “opt-in” for the ability to overdraw their accounts.