Magazine article American Banker

B of A Benefit Diversion Backed

Magazine article American Banker

B of A Benefit Diversion Backed

Article excerpt

WASHINGTON -- A California appeals court ruled this week that Bank of America Corp. was within its rights in diverting a customer's Social Security deposit to cover overdraft fees.

The unanimous decision was intended to settle a murky area of law surrounding whether a bank can use a customer's government benefits to satisfy a debt to the bank.

Previous court rulings have held that a bank cannot transfer Social Security deposits to a third party, such as a credit card issuer. These rulings stand, but Monday's decision allows banks to continue using government benefits to satisfy a customer's debt within the bank.

The appeals court ruling overturned a lower court decision that Bank of America had acted inappropriately.

The case was closely watched by the industry, which raised concerns that upholding the original decision would interfere with banks' ability to charge overdraft fees.

"It would make it difficult for any California bank to have an overdraft program," said Greg Taylor, an associate general counsel at the American Bankers Association. "The natural result is that banks would bounce checks and there would be more unhappy consumers."

The case dates from 1998 when Bank of America mistakenly credited nearly $1,800 to Paul Miller's checking account. After the bank discovered its error, it withdrew the credit, which put Mr. Miller's account into overdraft. The bank then used Mr. Miller's Social Security payment to pay the overdraft and associated fees.

The trial court gave Mr. …

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