Case Concludes Bank Intentionally Cleared Checks and Debit Cards to Generate Largest Overdraft Revenue

A class action lawsuit (3:07-cv-05923-WHA) that was previously filed against Wells Fargo has come to a conclusion that the bank was intentionally clearing transactions in order to create the largest amount of overdraft revenue. In fact 40% of its overdraft revenue was generated from only 4% of its customers.

This is a tactic that a banker shared with me over fifteen years ago and banks have used more commonly since around 2001 in order bounce as many transactions and make as possible in bounced check and overdraft fees.

I realize banks are a business but since they are responsible for safeguarding our money shouldn’t they have a fiduciary duty to do no harm when possible? Instead it appears the policy, at least at Wells Fargo, was to clear the biggest transactions first to drain the account and then let all the others behind bounce and go into overdraft and generate penalty fees as well. The scheme became even more devious when debit card transactions were shuffled into the clearing order and generated even more overdraft charges.

The full opinion on this case is 90 pages long, and can be found here. I’ve published what I felt were the most important points from it, below.


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I now turn to the findings from Judge Alsup.

Overdraft fees are the second-largest source of revenue for Wells Fargo’s consumer deposits group, the division of the bank dedicated to providing customers with checking accounts, savings accounts, and debit cards. The revenue generated from these fees has been massive. In California alone, Wells Fargo assessed over $1.4 billion in overdraft penalties between 2005 and 2007. Only spread income — money the bank generated using deposited funds — produced more revenue.

This action does not challenge the amount of a single overdraft fee (currently $35). That is accepted as a given. Rather, the essence of this case is that Wells Fargo has devised 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. The draconian impact of this bookkeeping device has then been exacerbated through closely allied practices specifically “engineered” — as the bank put it — to multiply the adverse impact of this bookkeeping device. These neat tricks generated colossal sums per year in additional overdraft fees, just as the internal bank memos had predicted. The bank went to considerable effort to hide these manipulations while constructing a facade of phony disclosure. This order holds that these manipulations were and continue to be unfair and deceptive in violation of Section 17200 of the California Business and Professions Code.

Findings of Fact

The core of this controversy is a bookkeeping device adopted by the bank called “high-to-low resequencing” that transforms one overdraft into as many as ten overdrafts — ten being the voluntary limit the bank imposed on what could otherwise be an almost limitless prospect. The bank instituted this device for California accounts in April 2001 and then soon magnified its impact through closely allied practices. What now follows is an explanation of the bookkeeping device and how it changed overdrafting at Wells Fargo.


“Posting” is the procedure followed by all banks to process debit items presented for payment against accounts. During the wee hours after midnight, the posting process takes all debit items presented for payment during the preceding business day and subtracts them from the account balance. These items will typically be debit-card transactions and checks (plus a few other occasional items described below). If the account balance is sufficient to cover all such debit items, there will be no overdrafts regardless of the bookkeeping method used. If, however, the account balance is insufficient to cover all such debit items, then the account will be overdrawn. When an account is overdrawn, the posting sequence can have a dramatic effect on the number of overdrafts incurred by the account (even though the total overdraw will be exactly the same). In turn, the number of overdrafts drives the number of overdraft fees.

Prior to April 2001, Wells Fargo used a low-to-high posting order, as did most banks (then and now). Low-to-high posting meant that the bank posted settlement items from lowest-to-highest dollar amount. Low-to-high posting paid as many items as the account balance could possibly cover and thus minimized the number of overdrafts. This was because the smallest purchases were always deducted from the customer’s checking account first and the balance was used up as slowly as possible.

This changed in April 2001. Then, Wells Fargo did an about-face in California and began posting debit-card purchases in highest-to-lowest order. The reversal of the bank’s previous low-to-high posting order had the immediate effect of maximizing the number of overdraft fees imposed on customers. This was exactly the reason that the bank made the switch.

To illustrate, assume that a customer has $100 in his account and uses his debit card to buy ten small items totaling $99 followed by one large item for $100, all of which are presented to the bank for payment on the same business day. Using a low-to-high posting order, there would be only be one overdraft — the one triggered by the $100 purchase. Using high-to-low resequencing, however, there would be ten overdrafts — because the largest $100 item would be posted first and thus would use up the balance as quickly as possible.


The switch in April 2001 to high-to-low posting in California was followed by two closely allied practices, both intentionally “engineered” — to use the bank’s own term at the time — to amplify the overdraft-multiplying effect of high-to-low ordering: (1) a switch to commingling of debit-card purchases with checks and automated clearing house (“ACH”) transactions in December 2001, and (2) the deployment of a secret “shadow line” in May 2002 to authorize debit-card purchases into overdrafts. (ACH transactions typically include mortgage payments, car payments, or other monthly payments (e.g., recurring bills) that a Wells Fargo customer can authorize in advance.)

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Regarding commingling, before December 2001, all debit-card purchases were posted prior to checks, and all checks were posted prior to ACH transactions. While transactions for each transaction type were already being resequenced in high-to-low order (since April 2001), the different transaction types were posted separately.

In December 2001, however, Wells Fargo began commingling debit-card purchases, checks, and ACH transactions together and posting the entire group from highest-to-lowest dollar amount. This amplified the overdraft-multiplying effect of high-to-low posting. Checks and ACH transactions — which tended to be the larger items — now consumed the account balance even faster than if all debit-card transactions had been deducted first (debit-card purchases typically being smaller).

For the commingling change, the “before and after” looked like this (high-to-low posting having already been instituted in April 2001):


The last step in the three-step plan was executed in May 2002. Wells Fargo implemented a practice involving a secret bank program called “the shadow line.” Before, the bank declined debit-card purchases when the account’s available balance was insufficient to cover the purchase amount. After, the bank authorized transactions into overdrafts, but did so with no warning that an overdraft was in progress. Specifically, this was done without any notification to the customer standing at the checkout stand that the charge would be an overdraft and result in an overdraft fee. Thus, a customer purchasing a two-dollar coffee would unwittingly incur a $30-plus overdraft fee. (This very scenario happened to plaintiff Walker.) Internally, Wells Fargo called this its “shadow line,” as in shadow “line of credit.” The amount of the credit ceiling per customer was and still is kept secret. Again, customers were not even alerted when shadow-line extensions were made to them — until it was too late and many overdraft fees were racked up. In this program, the bank correctly expected that it would make more money in overdraft fees than it would ever lose due to “uncollectibles” (i.e., overdrafts that were never paid back).


The trial record is most telling about the true reasons Wells Fargo adopted high-to-low bookkeeping and the two allied practices — commingling and the shadow line — described herein. Internal bank memos and emails leave no doubt that, overdraft revenue being a big profit center, the bank’s dominant, indeed sole, motive was to maximize the number of overdrafts and squeeze as much as possible out of what it called its “ODRI customers” (overdraft/returned item) and particularly out of the four percent of ODRI customers it recognized supplied a whopping 40 percent of its total overdraft and returned-item revenue. This internal history — which is laid bare in the bank’s internal memos — is so at odds with the bank’s theme of “open and honest” communication and that “overdrafts must be discouraged” that the details will be spread herein.

Internal bank memos were presented at trial pertaining to a bank-wide strategic plan called “Balance Sheet Engineering” — or “BSE” for short. The documents and testimony surrounding the BSE plan provided clear evidence that the challenged practices were implemented for no other purpose than to increase overdrafts and overdraft fee revenue.

Both the commingling of debit-card transactions with checks and ACH transactions and the extension of the shadow line to debit-card purchases were part of Wells Fargo’s BSE plan. The commingling change was deemed “BSE Phase 1” while the extension of the shadow line to point-of-sale (POS) debit-card purchases was deemed “BSE Phase 2a”.

The internal BSE memos show that both the commingling change and the adoption of the shadow-line program were intended to capitalize on the overdraft-multiplying effect of high-to-low ordering, which had been recently implemented in California in April 2001, a few months before.

The commingling change was implemented in December 2001. Prior to this date, the bank posted all debit-card transactions from highest-to-lowest dollar amount, then all checks from highest-to-lowest dollar amount, and then all ACH transactions from highest-to-lowest dollar amount. In other words, the different transaction types were posted separately. In December 2001, however, the bank began commingling debit-card transactions with checks and ACH transactions and posting the entire group from highest-to-lowest dollar amount. Since checks and ACH transactions tended to be the larger items, commingling assured that balances would be consumed more rapidly so as to increase the number of overdrafts under a high-to-low ordering. This was the meaning of the $40 million revenue boost predicted by the memo.

Consistent with the $40 million projection in the February 2002 document, Wells Fargo Executive Vice-President Ken Zimmerman, who personally took part in the decision-making process for the commingling change, admitted at trial that the bank was well aware that commingling was expected to produce a “significant increase in overdraft income” (Tr. 1422). According to Mr. Zimmerman, the increase in overdraft income was “one of the significant factors in the decision-making” process for the commingling change. Indeed, the trial record shows that it was the only significant factor.

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The undeniable connection between commingling and high-to-low resequencing was also clearly evidenced by internal bank memos. In the February 2002 BSE memo, the bank explained that the December 2001 commingling change was designed “to more-closely mirror true High-to-Low sort order” (TX 36). This is significant because Wells Fargo knew — and its own expert witness, Professor Christopher James, confirmed at trial — that high-to-low posting would “mechanically . . . lead to more overdrafts” than other posting order (Tr. 613, 1863–64). It is a mathematical certainty. Indeed, Mr. Zimmerman, who was personally involved in the bank’s decision, admitted that he recommended against a high-to-low posting order due to the adverse impact it would have on customers (id. at 113, 160–61, 340). His objection was overruled. Thus, the additional revenue expected from commingling was premised upon the adverse impact of high-to-low posting.


Given the harsh impact of the bank’s high-to-low practices, the bank was obligated to plainly warn depositors beforehand. Instead, the bank went to lengths to hide these practices while promulgating a facade of phony disclosure. The bank’s own marketing materials were deceptive in leading customers to expect purchases to be debited in the order made (rather than to be resequenced in high-to-low order). This order finds that these misleading materials and inadequate disclosures were likely to deceive reasonable depositors, as now covered in detail.

Wells Fargo Acted in Bad Faith When it Posted Debit-Card Transactions
in High-to-Low Order.

This order agrees that Wells Fargo constructed a trap — a trap that would escalate a single overdraft into as many as ten through the gimmick of processing in descending order. It then exploited that trap with a vengeance, racking up hundreds of millions off the backs of the working poor, students, and others without the luxury of ample account balances.

Based on the legal standards above, this order concludes that the revenue initiatives implemented by Wells Fargo in 2001 and 2002 — all of which ran rampant during the class period and indeed through at least the end of trial — violated the “unfair” restriction of Section 17200. The trial record and findings herein show that these initiatives had an immediate, intended, and material impact on increasing the number of overdraft fees that Wells Fargo could assess customers. All three initiatives were motivated by avarice at the depositor’s expense. No credible evidence — indeed, no written evidence — points to any other rationale.

To recap these facts, the first initiative was the high-to-low switch. Before, Wells Fargo used low-to-high posting, which minimized overdrafts. The switch to high-to-low posting maximized overdrafts. This was mathematically guaranteed. No notice was given that the switch had occurred.

None of the bank’s proffered justifications are credible. First, as found above, the bank did not act out of solicitude for customers and any supposed belief that customers would prefer high-to-low posting. That is a post-hoc rationalization. Among other reasons, the vast majority of debit-card purchases are “must pay” transactions. As such, posting order would make no difference to the customer — the bank is required to honor a debit-card purchase whether it posts first, last, or somewhere in between. Second, as found above, the bank did not base its decision on the factors set forth in 12 C.F.R. 7.4002. Wells Fargo considered nothing other than increasing overdraft revenue when deciding to post debit-card transaction in high-to-low order.

The initiatives challenged herein required nine to twelve months of planning and implementation. Many emails and reports would have been generated over this extended time period. The trial record, however, is devoid of written documents showing that Wells Fargo implemented the high-to-low change for any purpose other than profiteering. While Wells Fargo asserted that it did not have document retention policies at the time for these types of documents, its retention policies were never offered at trial despite an express invitation to present them. And, if Wells Fargo had truly believed that its initiatives were subject to federal oversight under 12 C.F.R. 7.4002 and other federal regulations, it would normally have prepared and retained written records to show compliance. The absence of any such records speaks volumes.

In sum, Wells Fargo’s decision to post debit-card transactions in high-to-low order was made for the sole purpose of maximizing the number of overdrafts assessed on its customers, exactly what Section 4303 and Perdue bar. Accordingly, the decision was not made in good faith. – Source

Steve Rhode

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