Citizens Bank to pay $137.5m to settle overdraft suit

Citizens Bank customers hit with questionable overdraft fees could receive refunds under a settlement announced Wednesday in which the bank agreed to pay $137.5 million to settle charges it manipulated customers’ debit card and ATM transactions

The bank was accused of processing the transactions in a way that made overdrafts more likely, boosting the income it collected from customers forced to pay overdraft fees.

Citizens did not admit wrongdoing in the case, which is being heard in federal court in Miami. The court must still approve the settlement.

Details of how customer refunds would be distributed will be determined after the settlement is approved.


In a statement, the bank’s spokesman, Jim Hughes, said, “We are pleased to have this matter behind us. As our industry evolves, we continue to provide our customers with choices to help them manage their accounts and their finances.’’

Overdraft fees, which disproportionately affect lower-income customers with low balances, became one of the biggest sources of revenue for banks over the years, boosting the bottom lines with little added cost. But fees become increasingly controversial, especially after the recession hit and some people were slapped with $35 fees for buying a $2 cup of coffee.

Citizens, a unit of the Royal Bank of Scotland Group, is one of more than 30 banks sued in nationwide litigation against banks for allegedly overcharging customers in order to boost revenues. So far, 12 banks across the country have settled for approximately $750 million.

Citizens, based in Providence, is the second largest retail bank in Massachusetts, with 258 branches and 765 ATMs in the state. The state’s largest bank, Bank of America of Charlotte, N.C., last year agreed to pay $410 million to settle similar charges.

In February, J.P. Morgan Chase of New York agreed to pay $110 million to settle.

The lawsuit alleged that Citizens used software programs designed to extract the most fees possible from customers. Like other banks involved in the class-action, Citizens allegedly reordered customers’ debit card and ATM transactions, posting the highest amounts first, rather than in the order they occurred — causing overdraft fees to rack up more quickly than they should have.


Citizens was charging anywhere from $35-$39 for overdrafts, according to the plaintiff lawyers. Citizens has not ended the practice, but said it is reviewing it.

The Federal Reserve adopted new consumer protection rules in 2010 to require banks to better disclose to customers when they would incur overdraft fees and get their consent for overdraft protection on debit cards.

Previously, many banks automatically signed up customers for overdraft protection, meaning the banks would cover debit card payments with insufficient funds, then charge customers.

Some banks no longer offer the service and just decline cards when accounts lack sufficient funds. The Federal Reserve rule did not, however, bar banks from reordering transactions from highest to lowest., which consumer advocates say banks did to maximize overdraft charges.

“We think it’s a bogus practice if it causes overdrafts,’’ said Linda Sherry of Consumer Action, a consumer advocacy group in Washington, D.C.

But, Sherry added, the class-action lawsuits have encouraged many banks to abandon the practice and instead process payments in the order they were made because the litigation is so costly.

“Actions like this do set some precedent,’’ she said. “It sends a huge message to the industry.’’

Other regulators have also stepped in to discourage the practice. In 2010, the Federal Deposit Insurance Corp. advised banks to avoid re-ordering transactions to maximize overdraft fees. And the Consumer Financial Protection Bureau said last week that it planned to investigate overdraft fees, including how banks explain overdraft programs to consumers.

Some consumer watchdogs continue to push for regulators to further crack down on overdraft fees, such as extending the consent requirements for overdraft protection to checks and forcing banks to better explain the potential cost of signing up for overdraft protection.


“The banks go out of their way to make it sound like a wonderful thing, but it’s not,’’ Sherry said.

Robert C. Gilbert, an attorney managing all the plaintiffs’ cases in Miami, said he expects the settlement with Citizens to be presented to the court for approval later this year.

This is an outstanding recovery for Citizens’ customers who were affected by this practice,’’ Gilbert said,
in a statement. “We are extremely pleased to have achieved this result.’’

Gilbert said he expects the settlement with Citizens to be presented to the court for approval later this year.

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