Just as the holiday bills are about to come due, a federal appeals court Wednesday ruled that banks may post checking account withdrawals in a manner that allows them to garner higher overdraft fees.
A three-judge panel of the U.S. 9th Circuit Court of Appeals unanimously overturned a District Court injunction that prohibited Wells Fargo from charging Californians overdraft fees based on posting the most expensive debit-card transactions first.
The 9th Circuit, ruling that a California consumer law was preempted by a federal banking law, also overturned an order that required Wells Fargo to pay its California customers $203 million in restitution.
"Federal bank regulations specifically delegate to banks the methods of calculating fees," the court said.
Wells Fargo did not emerge unscathed — the appeals court let stand a 2010 finding by U.S. District Judge William Alsup that the bank misled customers about its posting practices, in violation of California law.
The panel said the bank told customers that debit card purchases were deducted immediately from the user's checking account, while in fact the bank posted the withdrawals from highest to lowest, a method that maximizes overdraft fees.
"The district court concluded that Wells Fargo 'did not tell customers that frequent use of a debit-card for small-valued purchases could result in an avalanche of overdraft fees for each of those purchases due to the high-to-low posting order,' " wrote Judge M. Margaret McKeown, appointed by President Clinton. Judges Sidney R. Thomas and William A. Fletcher, also Clinton appointees, joined the ruling.
The case will return to district court, which may order Wells Fargo to pay customers restitution for having misled customers on posting practices.
A spokesman for Wells Fargo said the bank now posts withdrawals in the order they are made.
"We are pleased with the decision that largely reaffirms Wells Fargo's position and vacates the monetary award against us," a spokesman said, reading a prepared statement. "We look forward to resolving the remaining issues and will continue to serve the financial needs of our customers."
A lawyer for the California banking customers who sued Wells Fargo in a class action could not be reached for comment.