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Susquehanna Bancshares, Inc. (SUSQ - Snapshot Report) announced the settlement of a lawsuit, which was filed by two of its New Jersey customers, by paying $3.7 million. The lawsuit accused the bank of manipulating overdraft fee related activities. However, the settlement was officially agreed upon in December, but disclosed by the bank on Wednesday.

The lawsuit is pending before the U.S. District Court Judge, Lawrence King of the Southern District of Florida for final approval. Other cases related to the consolidated multidistrict litigation remain pending, including cases against Wells Fargo & Company (WFC - Analyst Report) and M&T Bank Corporation (MTB - Analyst Report).

The Allegation

Susquehanna 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 that customers filed against banks since the onset of the 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 new federal laws, the customer’s permission is mandatory before allowing any overdrafts.

Conclusion

The overdraft lawsuit settlement will help reduce Susquehanna’s litigation overhang to some extent. The bank anticipates the aggregate settlement amount not to adversely affect the results of operation, financial position, or cash flows. However, it will drain the company’s funds besides denting its image.

Susquehanna is not the only institution to settle such a lawsuit. In fact, several banks have been sued on similar grounds, the largest being Bank of America Corp. (BAC - Analyst Report), which made a settlement worth $410 million.

Susquehanna currently retains a Zacks Rank #3 (Hold).

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