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One of America’s largest banks has been slammed by a federal judge for charging debit card overdraft fees in such a way as to maximize the bank’s profits on customers’ mistakes. The Californian judge ordered Wells Fargo bank to pay two hundred three million dollars in restitution to state debit card customers who were hit with the unfair fees, which came in at thirty-five dollars apiece. U.S. District Judge William Alsup issued a ninety-page decision on the matter yesterday in San Francisco, in which he condemned the bank for having come up with “a bookkeeping device to turn what would ordinarily be one overdraft into as many as ten overdrafts, thereby dramatically multiplying the number of fees the bank can extract from a single mistake.” Alsup called the device “draconian” and stated his finding that the bank had additionally trained tellers and representatives to work with the system to multiply the fees to even greater sizes, in order to keep churning out the “colossal sums per year in additional overdraft fees.” Furthermore, he claimed, the bank has gone to greta lengths to cover up these practices, undoubtedly realizing the catastrophic effect that such a revelation could have on its reputation.

Wells Fargo’s technique was simple and terrible: from the moment the account went in the nagtive, it processed the transactions in order from largest to smallest, thereby guaranteeing that as many overdrafts as possible were accumulated, instead of running the transactions in the order that they came in. This case was very interesting to me because my own bank, Wachovia, is owned by Wells Fargo and I have had the unfortunate luck to see this practice in person. Last year, my insurance company accidentally charged me twice for my car insurance. It was especially inconvenient because it was just before I was due to get my paycheck, and my account was running fairly low. The insurance debit was made on a Monday. Over the weekend, I’d made a number of small transactions using my debit account – dinner with my husband, coffee at Starbucks, a gallon of milk at the grocery store, etc. Wachovia ran my (unfairly charged) insurance payments first, despite the fact that they hadn’t hit the account for anywhere from hours to days before the smaller transactions, and caused five or six tiny purchases to bounce. I was horrified when I looked at my online account and saw the transactions lined up neatly from largest to smallest! I ultimately got the issue of the mistake sorted out and the money pit back in my account, but not until after I’d given Wachovia a piece of my mind.

The Californian case was tried under the header of deceptive practices law. The class of plaintiffs in the case were represented by the firm of Lieff Cabraser Heimann & Bernstein. It’s stated that California collected almost one and a half billion dollars in overdraft fees from Californians alone between 2005 and 2007. Wells Fargo has already stated its intent to appeal the ruling, and that it will continue its practices with regard to charging overdraft fees on customers who have opted into overdraft protection plans under new federal law. The case will set a precedent for separate suits that Wells Fargo faces in other states over the exact same issue. A suit filed in Miami lumps Wells Fargo with thirty of its competitors in the U.S. consumer banking market in accusations of unfair practices when it comes to charging overdrafts. Those banks include Bank of America, Citibank, Chase, Union Bank and U.S. Bank. In 2008 alone, these banks scooped up more than twenty-four billion dollars in fees charged as overdraft “protection.”

Wells Fargo defends its right to continue “high-low” overdraft charges as “consistent with the laws and rules of governing regulatory authorities” and with customers’ wishes, since higher debits are almost always those which customers would want paid first. A higher transaction might well be a utility bill, rent payment, or car repair bill, they argue, and isn’t that deserving of higher priority than your lunch at Red Robin or that cup of coffee? A spokesperson for Wells Fargo, Richele Messick, also claims that the bank’s transaction processing isn’t as cut-and-dried as consumers think. She claims that, at the start of each new business day, banks receive piles of transactions without time stamps, meaning that they are free to order them without regard to chronology.

It’s notable that Judge Alsup’s ruling came within days of the enactment of a federal law requiring banks to stop providing “overdraft protection” to customers unless they deliberately opted into one of these programs. Without participation in a bank overdraft program, customers’ transactions beyond their account spending limits would have to be declined. Banks have been going mental over this change, considering that very few customers have opted in so far (less than one-twelfth, in some cases) and that these lost fees will have a dramatic and quick impact on their bottom line. It’s true that banks can still collect fees on customers not signed up for overdraft protection if they write a check, authorize an electronic debit, or have a recurring payment go through if the amount of any one of those is in excess of the account balance. It’s a know fact, however, that the greatest percentage of overdraft fee revenue comes from debit card usage.

One of Judge Alsup’s accusations against Wells Fargo was that the bank made matters worse by hiding its practices. The banks claims that they issued a disclosure on their fee methods, but the truth, said Alsup, was that this disclosure was “buried 20-or-so pages into a 60-plus-page document of single-spaced, ten-point font text.” He presented Wells Fargo’s internal documents as evidence that the bank was deliberately using these methods to generate more fee revenue. As a Wells Fargo customer, I will be eagerly awaiting the results of next year’s trial. I have long felt that the way big banks handle overdrafts is unfair to customers, and it’s high time that someone struck a blow for the “little guys” among us.