Citizens Bank, a unit of The Royal Bank of Scotland Group plc (RBS), has agreed to disburse $137.5 million to settle the lawsuit filed against it by the customers, as reported by Boston. The company was held responsible for maneuvering the transaction entries in order to procure larger overdraft fees. The settlement has yet to be approved by the U.S. District Judge in Miami.
The Back Story
Previously, Citizens was accused of using software programs that manipulated the overdrafts fees charged on the customers’ debit card and ATM transactions. The lawsuit filed by the customers claimed that the transactions were re-sequenced by the company in such a way that the largest withdrawals were deducted first instead of being cleared in the order in which they were received.
As an aftermath, customers’ balances diminished faster, resulting in a larger number of ‘overdrawn’ transactions, each of which then became chargeable. As a result, the customers were charged more than what was rightfully incurred.
Similar Settlements
Recently, in February, JPMorgan Chase & Co. (JPM) was asked to pay $110 million to clear up the similar lawsuit filed against it. The settlement is still subject to the approval of the District Judge.
Last year, Commerce Bancshares Inc. (CBSH) paid $18.3 million while Bank of America Corporation (BAC) was asked to pay a whopping $410 million to the customers to settle the similar lawsuits.
Moreover, in 2010, Wells Fargo & Co. (WFC) was 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.
Rules Implemented by the Fed
After several banks were caught indulging in unfair practices to expand their income by overcharging overdraft fees, the Federal Reserve introduced certain regulations to provide more protection to the customers against such malpractices.
Recently, the Consumer Financial Protection Bureau disclosed its intention to scrutinize the overdraft fees charged by the banks as well as the protocol of providing details regarding the overdraft programs to the customers.
Earlier, in 2010, the Fed made it mandatory for the banks to timely reveal the charging of overdraft fees to the customers and to get their approval before initiating the overdraft facility on the debit cards. Likewise, the Federal Deposit Insurance Corporation (FDIC) also adopted a stern approach towards the exploitation by banks through re-ordering transactions.
However, in spite of the implementation of such regulations, the banks continued to take undue advantage of the customers as there were no rules associated with the arrangement of the transactions.
Nevertheless, after the intervention of the various regulators, banks will no longer be able to charge such hefty fees without informing the account holders.
Our Viewpoint
The announcement of settling unfair overdraft fees will affect Citizens’ financials, but at the same time it will restore customers’ confidence in the federal laws to some extent.
Though the number of the banks involved in charging unfair overdraft fees has been increasing, the steps taken by the regulators are expected to reduce such unfair practices in the near-term. Moreover, the banks will be dissuaded from such misconduct as a result of rising litigation costs as more customers are now opposing such unjust ways of the banks.
Currently, The Royal Bank of Scotland retains a Zacks #3 Rank, which translates into a short-term Hold rating.
To read this article on Zacks.com click here.
Zacks Investment Research
