Chase to settle overdraft lawsuit

This guest post comes from Willy Staley at MyBankTracker.

JPMorgan Chase wants to pay just $110 million to settle a class-action lawsuit related to allegedly unfair overdraft practices that earned the bank $500 million a year. American Banker reports the bank has filed a tentative agreement in the overdraft lawsuit with the U.S. District Court for the Southern District of Florida.

In late 2009, Miami-based law firm Alters, Boldt, Brown, Rash & Culmo filed a lawsuit on behalf of a large plaintiff class against 38 different banks alleging abusive practices in how banks calculate overdraft fees. Central to the complaint is the argument that banks process transactions in a sequence designed to maximize overdraft fees, rather than to reflect the actual chronology of debits and deposits.

American Banker reports that Chase earned $500 million a year by ordering debit charges from highest to lowest dollar amount. Because of this practice, some customers who had accidentally overdrawn their account would be charged repeatedly for overdraft instead of just once. (Chase, like many other banks, discontinued the practice in March due to consumer backlash.) Post continues below.

For example: Someone who has $550 in their checking account does $50 worth of grocery shopping and then spends $13 at a bar, $25 at a restaurant, and $5 at the pharmacy before cutting a $500 check for rent will be charged three overdraft fees once the bank re-orders the charges high to low. Instead of just bouncing her rent check, our imaginary bank customer will see her rent check clear -- and this is the heart of banks' argument in defense of the practice -- but she'll be charged $30 (the national average overdraft charge) three times for the smaller charges.

As we reported late last year, the Pew Charitable Trusts have been outspoken about their distaste for the practice, which banks claim they offer as a service to their customers, for whom larger purchases are likely more important than smaller ones. Consumers advocates and consumers tend to disagree.

Chase overdraft lawsuit

Chase's settlement is pending Judge Lawrence King's approval, reported American Banker. Last November, King approved Bank of America's $410 million settlement in the same class-action suit. Chase's settlement offer is substantially smaller, although American Banker notes that "one factor that likely worked in Chase's favor was a mandatory arbitration clause in its consumer contracts."

As per Regulation E of the Dodd Frank Act of 2010, banks must now allow customers to opt in to overdraft protection, instead of automatically enrolling them in the program. As a result, banks have raised their overdraft fees to compensate for lost revenue.

More on MyBankTracker and MSN Money:

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• Today's lowest mortgage rates
• Look out for higher overdraft fees
• Should you opt in for overdraft protection?