Judge OKs JPM's Overdraft Settlement

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Last week,the U.S. District Judge in Miami preliminarily approved JPMorgan Chase & Co.’s (JPM) $110 million overdraft fees settlement agreement. This settlement will take place between the company and more than one million plaintiffs who accused the bank of charging high overdraft fees.

Earlier, in February, The U.S. District Court of Southern Florida (Miami) had directed JPMorgan to disburse $110 million to resolve a class lawsuit pertaining to the charging of inappropriate overdraft fees to its customers. The court held the company responsible for manipulating transaction entries to generate larger overdraft fees.

With a rise in debit card usage, overdraft fees have become an important revenue driver for banks. These banks found it easier to generate revenues through overdraft fees by allowing customers to overdraw their accounts through debit purchases, ATMs, or any other electronic payment gateways.

Moreover, the banks started reordering transactions from largest to the smallest, causing the balances to deplete faster. This made customers vulnerable to excessive fees.

Nationwide, the customers had opposed to this unfair practice and had filed a class action lawsuit claiming compensation. This approval would resolve the lawsuit filed by millions of customers irked by undue charging of overdraft fees.

From the bank’s point of view, this agreement would bring an end to one of the several lawsuits that it is facing and to an extent repair its dented image.

Similar Settlements by Other Banks

Last year, Commerce Bancshares Inc (CBSH) and Bank of America Corporation (BAC) were ordered to compensate for the damages to the claimants to settle overdraft fees charges.  For this, Commerce Bancshares paid $18.3 million, while BofA shelled out a whopping $410 million to the customers. BofA’s settlement remains the largest till date.

Several other banks, like Citizens Bank, a unit of The Royal Bank of Scotland Group plc (RBS), and The Toronto-Dominion Bank (TD) have agreed to pay out $137.5 million and $62 million, respectively to settle similar lawsuit. Both the settlements are pending for approval of U.S. District Judge in Miami.

The settlements of such claims are bound to affect the company’s financials. As the number of banks involved in malpractices and misconduct has increased, the regulatory authorities have been taking steps to reduce such unwarranted activities. Now, the banks require obtaining prior consent of the customers before charging any overdraft fees.

As the number of banks involved in malpractices and misconduct has increased, the regulatory authorities have taken steps to reduce such unwarranted activities in the future. Now, the banks require obtaining prior consent of the customers before charging any overdraft fees.

Currently, JPMorgan retains its Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain our long-term Neutral recommendation on the stock.

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