Earlier this year, the Federal Trade Commission and attorneys general in 38 states brought a lawsuit against Encore Capital Group Inc., the largest buyer of delinquent consumer debt, for using flawed and fraudulent documents in court as proof of what a borrower owes.

The class-action lawsuit includes 1.4 million borrowers. Believing the lawsuit likely wouldn’t get to trial, U.S. District Judge David A. Katz in Toledo, Ohio, approved Encore’s proposed payment of $5.7 million to settle with regulators.

The judge wrote in his ruling that the agreement is “fair, reasonable, and adequate.” He added that combining the claim is “beneficial to the public interest.”

In June, the regulators opposed Encore’s offer. They claimed the court’s approval would allow debt collection companies to evade state enforcement actions and other federal regulatory rules. Regulators now fear Judge Katz’s ruling will set a precedent for arguing future allegations relating to flawed affidavits and similar allegations has potential to be dismissed.

Encore’s president and chief executive called the ruling “an important step in our process of clearing up the many misconceptions about our affidavit process.”

From January to end of June, Encore has collected $186.6 million through its legal collection. At the same time last year, they collected $125.2 million, seeing a 49% increase in business. However, Encore shares are down 4.9% this year.

The debt crisis in Europe has investors around the world pulling money out and holding it in U.S. banks.

The Federal Reserve reported that banks in the U.S. held $981 billion in cash during the last week of July. That amount is triple what banks held in deposits before the collapse of Lehman Brothers in July 2008, which almost froze bank-to-bank lending.

Banks can’t use more money because lending activity has decreased. Holding onto cash requires them to pay interest to depositors. With fewer opportunities to lend money profitably, it is risky to hold excess deposits.

The largest U.S. banks have seen deposits increased. J.P. Morgan Chase holds $1.05 trillion in deposits, a 13% rise at the end of June from $930 billion at the end of December. Bank of America holds $1.04 trillion in deposits, a 3% increase from $1.01 trillion.

U.S. banks are considering adding on fees to deposit accounts with large balances to keep their returns from eroding, said Brian Smedley, a strategist at Bank of America Merrill Lynch. He believes that more money may be deposited with American banks if investors pull away from European banks amid concerns the debt crisis may spread beyond Greece and Italy.

Taking the first initiative, Bank of New York Mellon, the world’s largest custody bank, announced plans earlier this month to charge institutional clients for high balances above $50 million. The bank said its “taking steps to pass on costs incurred from sudden and significant increases in U.S. dollar deposits.”

The uncertainty of the U.S. debt-ceiling debate and the debt crisis in Europe forces banks in the U.S. to take safer measures. Banks can’t use more money at this time, nor do they need it.

The Federal Reserve Board took action against Wells Fargo & Co., alleging the bank steered thousands of borrowers who potentially qualified for prime mortgages into higher cost subprime loans.

Wells Fargo agreed to pay $85 million in civil damages to customers but neither admitted nor denied wrongdoing. The loans involved were made to borrowers by Wells Fargo Financial, a division of the bank, between January 2004 and September 2008. Wells Fargo Financial was closed down by the bank in the summer of 2010.

There have been complaints against Wells Fargo from housing advocates and civil rights group regarding the bank knowingly pushing borrowers into subprime mortgages when those borrowers qualified for better loans. This fine, which is the largest penalty issued by the Fed in a consumer protection enforcement action, is “a pretty strong statement about the bad practices Wells Fargo has engaged in” said Ira Rheingold, executive director of the National Association of Consumer Advocates.

Wells Fargo chairman and chief executive John Stumpf responded to the Fed’s action in a statement:

“The alleged actions committed by a relatively small group of team members are not what we stand for at Wells Fargo. Fair and responsible lending practices have been at the core of our culture, and they will continue to guide us as we work closely with the Federal Reserve to provide restitution to customers who may have been harmed, and to reinforce our internal controls.”

A Federal Reserve spokeswoman said the action against Wells Fargo was the result of a “multiyear investigation.” No comment was made on whether the Fed will pursue similar probes into other mortgage lenders who may have operated in the same fashion as Wells Fargo during the real estate boom.

Many experts in the mortgage industry, including lawyers who represent banks and mortgage companies, expect financial regulators to go after lenders for abusive or unfair lending practices. The Justice Department and the Securities and Exchange Commission is conducting a probe into bank practices during the financial crisis. The Federal Trade Commission said it is assisting borrowers in other incidents to get their refund from lenders who were ordered to pay restitution.

Just before the financial crisis, Capital One Financial Corp. transformed itself from a credit card lender to a bank. This year, second-quarter earnings is up 50% from the same time a year ago, as the bank revised loan-loss provisions and saw continued decline of net charge offs.

Capital One reported its stock was up $1.97 a share to a profit of $911 million from $1.33 a share or $608 million last year. Earnings from continuing operations and total revenue also rose. Revenue, this time last year, was $3.9 billion and has since risen to $3.99 billion.

The bank’s announcement beat analysts’ estimates. Analysts surveyed by Thomas Reuter’s forecasted earnings of $1.71 a share on revenue of $4.02 billion. The company’s ability to reduce charge-offs loans it no longer expects to collect and writes off, declined to 2.9%. For the first time since 2007, the charge off ratio is below 3% of total loans.

Capital One is in the market for acquiring credit card portfolios to lift revenue. The company has put in a bid for HSBC Holdings PLC’s credit card portfolio. People close to the matter expects HSBC to sell to Capital One.

After defeat in the Senate over a bill that would have essentially eliminated profits earned from “swipe” fees, the nation’s largest banks received a softer blow than previously anticipated when the Federal Reserve increased the cap amount for which banks charge merchants on debit-card transactions. Also, the effective date for the new cap rule was pushed back further.

In December, the Fed proposed a new rule that caps swipe fees at 12 cents. That limit was substantially down from the current 44 cents rate. Banks furiously opposed the measure. They lobbied lawmakers to raise the cap amount and fought to delay the rule from taking effect on July 21, which was the original date set for the rule to go into effect.

Last month, the Senate defeated a bill that would have delayed the new rule from taking effect for another year. However, the Fed intervened to raise the cap amount and delayed the rule from taking effect until Oct 1 of this year.

The new rate set by the Fed is 21 cents. That is double of the original cap amount proposed last December and half of the current rate. Banks can also charge merchants an additional 0.05% of a debit transaction’s value to cover fraud related costs. Some banks will qualify to charge an extra penny to cover the costs of investments in fraud prevention measures.

For example, on a $100 debit-card payment, a bank will receive 21 cents for the base fee, an additional 1 cent for fraud prevention measures if they qualify, and 5 cents for fraud losses. That transaction totals 27 cents that a bank can collect from the merchant.

Even with the more generous cap, the Fed estimates that large banks will see their fee revenue decline by more than 40%. Oliver Wyman, a consulting firm, says the new rule will decrease the banking industry’s annual debt card revenue roughly in half to about $10 billion.

Large banks across America agree that the new rule is better than what was originally proposed. Some banks argue the new fee cap should be higher because the rate is still below their costs of doing business.

J.P. Morgan Chase & Co., the nation’s second largest bank by assets, has dismissed more than a thousand debt collection lawsuits against borrowers across the U.S. over credit card loans that went bad.

The bank began quietly dismissing lawsuits in state courts in April. Lawsuits were dropped in California, Florida, Illinois, New Jersey, and New York. Credit card customers in those five states owed J.P. Morgan $45.9 billion on outstanding credit cards (current and delinquent accounts) as of March 31. The bank has a total of more than $100 billion in credit card account assets. They did not disclose the value of the lawsuits that were dropped or release specifics on the exact number of cases dismissed.

In-house lawyers for the bank asked judges in state courts to withdraw pending cases without prejudice. Thomas Donnelly, a state court judge in Chicago, said he wasn’t given an explanation by the bank’s lawyers but did dismiss the cases without prejudice. Without prejudice means that the bank can later refile their lawsuits if they choose to proceed again in the future.

Mitch Grant, who is a lawyer contracted to handle debt collection cases for J.P. Morgan in Palm Beach County, FL., said he was told by the banks in-house lawyers that suits in Florida were dropped. The paperwork to verify the validity of the credit card debt contained “irregularities.” J.P. Morgan and other credit card lenders have been criticized by judges all over the country for producing sloppy or even fraudulent documentation of debts.

A widespread problem in credit card collection suits and foreclosure practices is “robo-signing.” Robo-signing occurs when employees of a company sign documents without reviewing them. Sometimes an employee signs hundreds of documents in a day. It has led to faulty paperwork and wrongful foreclosures.

Deficiencies in credit card collection suits are far worse than foreclosure cases say Judge Philip Strainer of Richmond County, NY. Other judges agree. Last year, Judge Strainer dismissed 150 debt collection lawsuits filed by J.P. Morgan, citing that paperwork submitted by the bank “appeared to be signed in large numbers by only a few individuals.”

J.P. Morgan has not confirmed or denied dropping lawsuits in large numbers. Paul Hardwick, spokesman for the bank, said the bank considers “our collections strategy to be proprietary.” Lawyers representing debtors who were taken to court by J.P. Morgan has never seen a bank dropped that many lawsuits at once.

According to industry estimates, roughly 94% of debt collection lawsuits result in default judgments against borrowers. Some judges who rule on those lawsuits said the average amount sought is roughly $1000.

Many banks use outside law firms to sue borrowers. J.P. Morgan uses a team of in-house lawyers to pursue defaulted borrowers in majority of their debt collection lawsuits. Those lawyers are scattered all over the U.S. Some of those lawyers were told by company officials that all company collection offices will be shut down by the start of 2012.

In a rare instance, Wall Street lost a battle to Main Street on Capitol Hill over the “swipe” fee debate that would have delayed a bill that caps the fee retailers pay to banks for debit card transactions for at least one more year.

Congress enacted a law last year to reduce that fee to 12 cents from an average of 44 cents in the current system. Retailers and consumers are required to pay each time a debit card is used for purchases. The law is a part of the Dodd-Frank financial overhaul. It was drafted by the Federal Reserve Board and was scheduled to go into effect in July 2011.

Banks will lose billions in profit from debit card processing revenue. Wall Street furiously objected the new rule from the start. Banks fought by lobbying lawmakers to reconsider the cap and made public their aggressive ad campaigns to illustrate their objections. They gained the support of more than half of the senate but fell six votes short of getting the required 60 votes to delay the rule from becoming effective for one more year.

Sen. Jon Test (D-Mont.) sided with Wall Street and led the effort on Capitol Hill. He was strongly supported by Sen. Bob Corker (R-Tenn.). In spite of smaller institutions (banks with under $10 billion in assets) being exempt from the fee cap, both senators said that capping the swipe fees could mean banks in rural communities could go out of business.

The Consumer Federation of America opposes the current swipe fee system, calling it “uncompetitive, non-transparent, and harmful to consumers.” Sen. Dick Durbin (D-Ill.), who led the fight for consumers and retailers, said, “It’s an outrage to make consumers in America pay this [fee]. They pay it every time they use their debit cards, and the merchants and retailers who collect have no voice.”

Retailers and supporters of the fee cap cheered on their victory. The law will remain on schedule and go into effect next month.

The nation’s five largest banks have been warned by state attorneys general that they face a potential liability of $17 billion in civil lawsuits if a settlement over improper foreclosure practices isn’t reached. Some officials are pushing to increase the cost for wrong-doing to more than $20 billion.

An investigation launched by state attorneys general from all 50 states and the District of Columbia was announced last fall. They met with representative from those banks last month individually to highlight the potential penalties from the lawsuits that allege unfair and deceptive practices and are urging banks to settle allegations.

Banks responded by proposing a $5 billion settlement with state and federal regulators. The settlement would compensate borrowers who were wronged and ousted from their homes, and also help other borrowers with transition assistance. Regulators have dismissed the settlement proposal as insufficient.

The $17 billion or $20 billion figure doesn’t cover other potential claims from the Justice Department and Department of Housing and Urban Development. According to people close to the matter, the U.S. Trustee Program, a unit of the Justice Department that oversees bankruptcy cases, is asking banks to pay $500 million to $1 billion in penalties to resolve their claims. Officials at the U.S. Trustee Program is suing banks over the authenticity of foreclosure documents in several cases.

Regulators also claim that mortgage lenders were understaffed and could not provide assistance to millions of borrowers that fell behind on their mortgages. Banks argue the number of home-owners who were wrongfully foreclosed on was few, if any, and if so, resulted largely from technical errors.

The discussion between regulators and bank representatives last month intensified the pressure to resolve the lawsuits. It was the first effort to formally quantify potential liability. Both sides are still far apart on a resolution, especially the penalty figure. Further, attorneys general in New York and California have announced wide-ranging mortgage investigations.

The battle to prevent lawmakers from enforcing a bill that is a part of the Dodd-Frank financial overhaul law to reduce swipe fees is escalating as banks argue that they are already responsible for absorbing the cost of fraudulent transactions and the problem won’t go away in the future. Banks and credit unions joined to use a recent debit-card scam at Michaels Stores Inc. to illustrate their argument that fees retailer pay to them for processing a debit-card transaction, also known as interchange fee, should not be capped at 12 cents from the current 44 cents.

Michaels, an Irving, Texas chain of arts-and-crafts stores, had a data breach in May where theives collected customer debit-card information by altering devices used to swipe their cards. It resulted in theives duplicating customer debit-cards and gaining access to personal-identification-numbers. Theives were able to withdraw money from customer bank accounts.

Michaels said it found equipment at 80 stores in 20 states compromised and that fewer than 100 customers reported fraudulent transactions. Other customers are taking an extra precaution to avoid becoming victims of fraud by requesting a reissuance of a new debit card.

Banks maintain they get stuck dealing with fraud issues and not retailers. An executive at a big bank said about the situation at Michaels just “illustrates the point that customers who have their account information breached can get money back from the banks because of the way the debit card product works today.”

The Federal Reserve conducted a survey on debit card transactions and found that roughly $15.7 billion in interchange fee revenue was collected in 2009. The Fed estimated the industry wide losses to all parties involved in debit card transactions were about $1.4 billion that year.

The interchange fee regulation that banks heavily oppose is scheduled to take effect in July. The Dodd-Frank financial overhaul law was enacted last year but not all rules were immediately effective.

The Senate is pressured by bank lobbyists to delay the date for when the new rule becomes effective. Retailers are encouraging lawmakers to move forward with the schedule. Senator Richard Durbin (D. Ill.), the No 2 Democrat who authored the provision, is supported by retailers and he fiercly resists the effort of banks to delay the bill. Bank lobbyists are hoping the delay-bill written by Sen. Jon Tester (D. Mont.) is close to having enough votes (needs over 60 votes) to delay the bill from taking effect for another 1 to 2 years.

June is the last month for banks and retailer to make their case to lawmakers in Washington D.C. Global Debt Systems is monitoring the issue and will provide more information as it becomes available.

Checking account holders will be feeling the squeeze again as big banks raise another fee in banking services. Account holders who withdraw money at another bank’s Automatic Teller Machines (ATM) will pay up to $5 and even higher at machines owned by non-bank companies. In addition, customers will be charged by their bank too for using another bank’s ATM, known as a surcharge fee.

The standard charge for using another bank’s ATM is $3 in the banking industry. The average surcharge fee in 2010 was $2.33, up 89 cents in 1998, according to Bankrate.com.

In the last 18 months, banks have been creating new fees and raising certain fees they already charge to recover lost revenue from the Dodd-Frank financial overhaul law. The Dodd-Frank law reduces billions of profits gained from overdraft charges and interchange fees (a fee banks collect from merchants for processing debt card transactions). Banks are now prohibited from charging consumers more than 5 overdrafts in one day. Also, starting in July, the interchange fee will be capped at 12 – 17 cents – a big reduction from the current 44 cents charge per debit card transaction.

According to consulting firm Oliver Wyman, ATMs generated $7.1 billion in fees last year. Roughly $3 billion of that was earned through banks charging their customers for using another institution’s ATM (the surcharge fee). Federal lawmakers proposed a bill to cap ATM fees at 50 cents last year, but the proposed bill died quickly and never made it to the floor for a vote.

The American Bankers Association says there are more than 425,000 ATMs in the nation. About 66% of the ATMs are located at a bank branch. Most machines are owned by non-financial companies but those companies generally have a contract with banks to remove fees for customers who withdraw money at their bank’s network of ATMs. The cost of withdrawing money from a ATM owned by a non-financial company is higher and extremely higher when located at an entertainment venue such as a casino, cruise ship, etc.

The ABA claims that banks spend $12,000 to $15,000 a year to maintain each ATM they operate. As the cost for maintains is rising, the banking industry feels justified in raising ATM fees also.