Wells Fargo & Co. and First Interstate Bank of California have decided to pay $55 million to settle a lawsuit alleging that they participated in a conspiracy to fix the interest rates on millions of credit cards they issued.
While denying the charges, the two banks said they settled the class-action suit to avoid the risk of a court loss that could have resulted in extremely heavy financial penalties.
The settlement will be submitted Monday to a San Francisco Superior Court judge, who must approve the agreement before it can become final. The other defendant in the case, Bank of America, has decided to contest the charges at a trial that could begin later this month.
The allegations were made in a 1986 case filed in San Francisco on behalf of about 4 million consumers who held credit cards issued by the three banks between 1982 and 1986. The suit alleges that the banks conspired to charge MasterCard holders similar, artificially high interest rates.
The settlement comes amid a controversy over bank credit card interest rates, which generally have not declined much compared to drops in other forms of financing in recent months. Some members of Congress have criticized the banking industry's practices.
Indeed, the controversy was a factor in Wells Fargo's decision to settle the lawsuit, said Barbara Brady-Smith, executive vice president of the bank.
"Given the current political climate--with the recent uninformed and unresearched proposal in the U.S. Senate to cap interest rates--we had to question whether we could get a fair trial," Brady-Smith said.
Her comments prompted a bristling response from Lawrence J. Appel, lead lawyer for the plaintiffs.
"The settlement is fair. A judge and jury would have been fair," Appel said.
Wells Fargo also weighed the prospect that it might be forced to pay a huge award if it lost at trial, Brady-Smith said. The bank, she said, would have had to pay at least $150 million if a jury concluded there was a conspiracy to keep interest rates artificially high by just 1%.
Instead, Wells Fargo will pay $37.5 million to those issued credit cards between Oct. 28, 1982, and last Dec. 31 and an additional $6 million in plaintiff attorney fees.
Fiirst Interstate will pay $11.6 million to those issued cards between October, 1982, and October, 1986.
Brady-Smith said she expected cardholders to receive about $12 each under the settlement.
As for Bank of America, "We decided to proceed with a trial because we're innocent," said Peter Magnani, a bank spokesman.