Earlier this week, Bank of America’s (NYSE:BAC) $410 million settlement for all lawsuits related to excess debit card overdraft fees was cleared by U.S. District Judge James Lawrence King.  According to the bank’s annual report, it had reached the settlement with the lead plaintiffs in the class action suit against it as early as January this year, and was waiting for the court to ratify the deal. Competitors JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) also face similar lawsuits concerning overdraft fees. Bank of America was let off the hook relatively easy, considering the fact that the case alleged that the 13.2 million customers affected by the bank’s improper overdraft fees ended up paying nearly $4.5 billion over a ten-year period.
We currently have a price estimate of just about $11 for Bank of America’s stock, which is about 50% ahead of the market price. We are reviewing our estimates in light of the recent lawsuits against the bank and the weakness in global economic conditions.
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In the lawsuits, it was alleged that the troubled bank “improperly and unfairly increased the number of overdraft fees” it charged on customers holding deposit accounts with the bank from January 2001 to May 2011. The bank reportedly rearranged debit card transactions to process the largest transactions first, so more overdraft fees could be incurred – a larger transaction would put a customer’s account below zero faster, so overdraft fees would be charged on a greater number of transactions. The bank also did not notify customers using a debit card at a merchant outlet that the particular transaction would entail an overdraft.
The settlement will see customers receive up to 45 cents for every dollar they claim – with the bank paying an average of $27 per customer. The settlement would be accounted for by the bank in its results for Q4 2011 – which should reduce operating margins for its cards business for the year from our current estimate of about 2%.Notes:
- BofA Wins Approval for $410 Million Overdraft Fee Settlement, Bloomberg Businessweek, Nov 9 2011 [↩]