Profiteering on Bounced Checks

It started in such a small way in 1978. Paul Perdue wrote a check out to his electric company in San Francisco. Unbeknownst to him, another check made out to him that he had deposited in his own account to provide funds for paying the utility bill had bounced. So in turn his check bounced. Crocker Bank charged him $6 for processing a returned check.
Paul Perdue was a law student at the Hastings School of Law. He thought the bank’s charge was excessive and told his teacher, Gary Near, about his experience. Gary Near is an intrepid lawyer who is known around the Bay Area as a marathon runner and the attorney who beat the Bank of America in a multimillion dollar case involving unclaimed deposits. He saw Perdue’s complaint as a perfect case for invoking a legal doctrine known as unconscionability. Forty-nine states have this doctrine in their uniform commercial codes. It means that the courts will not uphold charges that are gouging, even if the customer had notice of the charge as on a bank fee schedule.

A $6 bounced check charge in 1978 was more than six times the bank’s processing cost, according to various studies and an internal document from another large California bank. Crocker now charges $10, as do many other California banks. In some east coast cities, a bounced check can cost the check writer $18, $25, even up to $30. What’s more, some banks are charging the victim of a bad check — the person to whom the check is made out — anywhere from $2 to $101 Clearly, the banks, like the old comic book character, Plastic Man, are in an accelerating mode of over-reaching.

Lawyer Near took Perdue’s case to court, in the form of a consumer class action on behalf of all similarly aggrieved customers of Crocker. He lost. The lower court dismissed the case outright on the bank’s argument that it was Perdue’s fault.

The case was appealed to the Supreme Court of California. In a unanimous, 50-page decision on July 19, the Court ordered the trial court to allow Perdue the opportunity to show at trial that the $6 charge was so excessive that it violated the uncon­scionability provision of the state’s commercial code.

The high California Court rejected the assumption that bounced checks are always the check writer’s fault. “Overdrafts are not necessarily the result of carelessness of the depositor,” said the judicial opinion, adding that it could be delays from a bank’s crediting an account or other reasons outside the cus­tomer’s control.

Bank policies on check holds, which determine how long one has to wait after depositing a check in order to use the money, can affect the frequency of bounced checks. A nationwide survey by the U.S. Public Interest Research Group found that 75 percent of 669 institutions surveyed hold out-of-state checks for six business days or more, while 20 percent hold these checks more than two weeks!

In a Washington, D.C. area survey, 25 percent of local banks place holds even on U.S. Government checks for as long as three weeks.

The Federal Reserve Board estimates that 99 percent of all deposited checks are collected by banks within one or two business days. It is bad enough that banks are making big money off these check floats — the Bank of America estimated earnings of $3.35 million each day while losing only $3 million a year from bad check losses. But it really is gross to earn a second windfall by charging so much for the resulting bounced checks.

Last year, all California banks collected a total of $200 million in bounced check charges. Big money!

Near has other similar cases filed against Wells Fargo and the Bank of America. He thinks consumers and lawyers should take a close look at unconscionable bounced check charges in their states. He believes banks are taking advantage of people who find themselves not reacting due to “a climate of vulner­ability.” They are reluctant to challenge the bank because they want “that loan” someday, that bank credit rating, or a good credit history with their bank. Or they swallow the bank’s argument that the fee card put the customer on notice and acceptance. Other consumers blame themselves for being careless, but even when this is true, a rip-oft charge cannot be justified.

Once again, while industry-indentured legislators fiddle, a single consumer and a single lawyer, with the patience of a long-distance runner, sought justice in the courts and sent a message to thousands of banks around the country.