On Tuesday, JPMorgan Chase & Co. (JPM - Free Report) agreed to settle a credit card lawsuit by paying $100 million in damages. This class-action lawsuit was filed by the cardholders, irked by the company’s decision to increase minimum monthly payment on balances in late 2008 and 2009. The allegation was that the bank improperly increased their minimum payments in order to generate higher fee revenue.
The Story Behind
JPMorgan was accused of alluring cardholders to transfer their outstanding balances with credit cards of other companies to JPMorgan card accounts. Moreover, the company assured the cardholders that their debts would be consolidated as fixed interest loans until the balances were paid off. As a result, thousands of cardholders transferred their balances to their JPMorgan accounts.
Consequently, when thousands of cardholders transferred their balances to their JPMorgan accounts, the bank hiked the minimum monthly payment rate to 5% from a mere 2%, thereby forcing the cardholders to either maintain higher balances or pay higher monthly payment fees. This manipulation resulted in additional fee income for JPMorgan at the cost of the cardholders.
The irate consumers moved to court, demanding compensation for the extra fees charged by the bank. The settlement, agreed to be paid to the plaintiffs, will help them recover a good portion of their losses.
Other Lawsuits Against JPMorgan
Earlier this month, credit card giants MasterCard Inc. (MA - Free Report) and Visa Inc. (V - Free Report) agreed to pay about $6.0 billion to the retailers to resolve an antitrust litigation, which involves JPMorgan along with thirteen other banks. The settlement is estimated to be worth $7.25 billion, by far the largest in the history of antitrust settlements.
JPMorgan is also under the scrutiny of various regulatory authorities for alleged manipulation of the benchmark interest rate -- London InterBank Offered Rate or the LIBOR and The Euro Interbank Offered Rate or EURIBOR -- for financial gains.
Earlier this year, the company had settled a $110 million overdraft fees lawsuit. This settlement will take place between the company and more than one million plaintiffs who accused the bank of charging high overdraft fees.
Similar Lawsuits against Other Banks
Like JPMorgan, Bank of America Corporation (BAC - Free Report) is also embroiled in legal hassles ranging from misleading investors about the takeover of Merrill Lynch & Co. to charging higher overdraft fees. Other banks, like Citigroup Inc. (C - Free Report) , HSBC Holdings Plc and The Goldman Sachs Group Inc. (GS - Free Report) are facing deluge of lawsuits involving misrepresentation of documents related to mortgage-backed securities and other losses.
With the settlement of this lawsuit, JPMorgan is trying to keep intact its goodwill. An action like this will likely work in the company’s favor since, this will enhance its image to a great extent. However, it cannot be ignored that the compensation to be paid to the plaintiffs is a small amount of the profits already generated by the bank during that period.
Currently, JPMorgan retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we maintain a long-term Neutral recommendation on the stock.