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According to Reuters, U.S. Bancorp (USB - Analyst Report) announced the settlement of a lawsuit, which was filed by its customers, by paying $55 million. The lawsuit accused this Wall Street giant for manipulating overdraft fee related activities.

The lawsuit, pending before the U.S. District Judge James Lawrence King in Miami, is part of a litigation comprising 35 different banks.

The Allegation

US Bancorp was accused of manipulating transaction entries to generate hefty overdraft fees. Transactions were re-sequenced by the bank so that the largest withdrawals were deducted first instead of being cleared in the order in which these were received.

As a result, customers’ balances diminished faster, resulting in a larger number of overdrawn transactions, each of which then became chargeable.

Notably, an overdraft occurs when withdrawals from a bank account exceed the available balance. In such cases, banks charge fees for the overdrawn transactions from the account holders. With the regulatory restriction on debit card usage fee, overdraft fees have become an important revenue driver for banks.

Previously, in case of insufficient funds, checks were returned and the account holders had to bear a charge. However, banks found it easier to generate revenues through overdraft fees by allowing customers to overdraw their accounts by debit purchases, ATMs, or through any other electronic payment gateways.

However, in many cases, customers were unaware of the details of such fees and things came to light only after they were charged. This was one of the major complaints made by customers against banks since the onset of the recent financial crisis.

Nevertheless, according to the new regulation passed in 2010, banks will not be able to charge such hefty fees without informing the account holders. In fact, as per the new federal laws, the customer’s permission is required, before allowing any overdrafts.

Conclusion

The overdraft lawsuit settlement will help reduce US Bancorp’s litigation overhang to some extent. However, it will also drain out the company’s funds besides denting its image.

Yet, US Bancorp is not the only institution to settle such a lawsuit. In fact, several banks have been sued on similar grounds. Last week, PNC Bank, a unit of PNC Financial Services Group Inc. (PNC - Analyst Report) also agreed to pay $90 million for similar allegation. Notably, in the past one year, Bank of America Corp. (BAC - Analyst Report) and JPMorgan Chase & Co. (JPM - Analyst Report) have agreed to pay millions to settle such claims.

Among other large financial institutions under the purview of such charges that have not yet come up with the settlement include Citigroup Inc. (C - Analyst Report) and Capital One Financial Corp. (COF - Analyst Report).

US Bancorp retains a Zacks #3 Rank, which translates into a short-term Hold recommendation. Considering its fundamentals, we also maintain a ‘Neutral’ recommendation on the stock.
 

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