TCF Bank, the Twin Cities' third-largest bank, is facing a lawsuit about how it handles debit card transactions.
The lawsuit accuses TCF of processing transactions in a way that maximizes the fees consumers have to pay. Instead of clearing transactions in chronological order, the bank allegedly groups them together and processes them by amount, from the highest to lowest, which can result in many unexpected overdraft charges for customers.
Kim Pellet, 30, of Savage, figures she's paid over $1,000 in overdraft fees to TCF in the past six years or so. That just didn't make sense to her.
She often asked TCF to explain the overdrafts, but she found the answers bewildering.
Eventually, a bank employee told how it happened. The employee said TCF processes transactions not in the order they occur made but by their amount.
Critics say that by processing the biggest-dollar transactions first, the bank drains a customer's account faster.
As a result, depositors end up overdrawing their accounts more. People like Pellet find it harder to keep track of how much money they have -- and end up paying more overdraft fees.
"What they're doing is the equivalent of thievery," Pellet said. "I think they need to be more honest about how they're going to handle their customers' money."
Pellet said she never expected her bank would process her debit transactions in anything but the order in which they were made.
"I was shocked," she said. "I didn't even realize this was a practice that occurred in the banking industry."
Pellet is suing TCF in Hennepin County District Court, hoping to recover what she says were unjust and unwarranted overdraft fees.
TCF said it had no comment at this time, but it said it will respond soon in court.
Fees are very important to TCF. The bank took in about $80 million in overdraft and other account fees in a three-month period earlier this year.
Pellet's lawyer, Marshall Tanick, said he hopes to turn the lawsuit into a class action representing all TCF customers. And Tanick said similar lawsuits could be coming against other banks operating in the Twin Cities.
Tanick notes there's been a surge in lawsuits about the practice of processing transactions from the highest to lowest amount.
"There's been national litigation involving about three-dozen different banks. And recently in California, there was a $200 million judgment entered by a judge against Wells Fargo for precisely this same kind of practice," Tanick said.
In his ruling, U.S. District Judge William Alsup blasted Wells Fargo. He wrote that high-to-low posting was used and is still being used by Wells Fargo as a "snare for the unwary."
He added, "The only motives behind the challenged practices were gouging and profiteering."
A Wells Fargo spokeswoman says the bank is appealing the court ruling.
Different banks process transactions in different ways. Some do them by amount. Some, by date. Some, by type of transaction.
"Well, the FDIC did a survey and most banks actually pay the smallest transaction first," said Tess Rice, general counsel for the Minnesota Bankers Association. "It's a little bit over a half. And there's about a quarter of banks that do the largest payments first."
With recent changes in banking rules, customers are exposed to overdraft fees for debit and ATM transactions only if they sign up for overdraft protection. Otherwise, if a customer doesn't have enough money in his or her account, a transaction is declined.
In the past, banks automatically enrolled customers in overdraft plans. Now, banks have to get customers to sign up for them.
As of mid-July, TCF said about 50 percent of its customers had chosen overdraft protection.
Kathleen Day, a spokeswoman for the Center for Responsible Lending, a nonprofit, nonpartisan research and policy organization, said the government should require banks to process transactions in the order in which they occur. They should tell consumers about less-expensive ways to cover overdrafts, she said.
"Banks typically have lower-cost alternatives tied to your saving account or a revolving line of credit that is much cheaper than this flat-fee overdraft protection that most banks have been offering," Day said. "They just don't tell consumers about it."
A recent study by federal regulators found about five percent of consumers account for nearly 70 percent of overdraft charges. They tend to be the poor, elderly and students.
Nationwide, overdraft protection fees have averaged about $34 per incident. The fees are worth tens of billions of dollars to banks every year. But if more lawsuits prevail, the fees that make consumers smart will start stinging the banks that have been profiting from them.