OAKLAND, Calif.–California Attorney General Rob Bonta has issued letters to credit unions and banks in the state under $10 billion in assets that overdraft and returned deposited item fees may violate California’s Unfair Competition Law (UCL) and the federal Consumer Financial Protection Act (CFPA).
In conjunction with sending the letters, Bonta said some financial institutions charge up to $36 or more for each overdraft, and that California consumers paid an estimated $200 million in overdraft fees in 2022, with the financial burden disproportionately falling on low-income consumers and consumers of color.
‘Stripping Away Money’
“Overdraft and returned check fees needlessly strip away money better spent elsewhere and penalize poor consumers. All too often, consumers don’t have a chance to avoid these surprise fees,” said Bonta in a statement. “The CFPB has already put a stop to the worst practices by the biggest banks and credit unions. Now it is time for everyone else to follow suit: I urge all of California’s banking institutions to comply with federal and state law by eliminating these unfair fees.”
The attorney general said consumers from poor households are more likely to incur overdraft fees, as are Black and Hispanic consumers, citing CFPB findings that people who pay more than 10 overdraft fees per year end up paying nearly three-quarters of all overdraft fees.
“These fees can lead to substantial financial losses for families and turn setbacks into crises. Meanwhile, financial institutions nationwide generated over $7.7 billion in revenue from overdraft fees and non-sufficient funds fees in 2022,” the AG stated.
‘Gravity of the Harm’
In the letter, Bonta noted that under the UCL, an act is unfair if “the gravity of the harm to the alleged victim” outweighs “the utility of the defendant’s conduct.”
He further noted the CFPA defines an unfair act as one that “causes or is likely to cause substantial injury to consumers which is not reasonable avoidable by consumers” and is not outweighed by benefits to consumers or competition. In many cases, overdraft fees cannot be reasonably anticipated by consumers due to the complexity of how transactions are processed by financial institutions and the time lag between when transactions are authorized and when they are ultimately settled.
“This technical process makes it difficult for the average consumer to make an informed decision on whether to use overdraft protection or another form of payment for their purchase,” according to the attorney general’s office.
The letter also warns about the use of returned deposited item fees, saying the consumer that deposits the check typically has no knowledge of or control over the circumstances that cause the check to be returned, and yet the consumer incurs fees.
‘Substantial Harm’
“Charging such fees causes substantial harm because a consumer cannot reasonably avoid the injury in most instances,” Bonta said. “The individual consumer does not receive any extra service or benefit for the fee—they are simply penalized for unknowingly attempting to deposit a bad check. The practice of charging surprise fees that cannot be reasonably anticipated by a consumer likely is an unfair business practice that violates the UCL and CFPA.
“The financial harm imposed on consumers by surprise fees is not outweighed by any utility or benefit to consumers or competition,” the AG continued. “This ‘back-end’ pricing actually obscures the true cost of banking while making it more difficult for consumers to compare financial products and services.”
A copy of the letter can be found here.
Bill Also Introduced
As CUToday.info reported here, a bill has been introduced in the California Senate that targets overdraft and non-sufficient funds (NSF) fees at state-chartered credit unions.
According to the California and Nevada leagues, under Senate Bill 1075, which has been introduced in the California State Senate by Sen. Steven Bradford (D-Gardena), a state-chartered credit union must:
- Provide a member at least five business days before requiring payment of an overdraft fee or NSF fee to give the member an opportunity to repay the amount that triggered the fee
- Not charge more than three overdraft fees or NSF fees per month
- Disclose these requirements to members by January 31, 2025, and annually thereafter