On February 20, 2024, California Attorney General Rob Bonta issued a letter warning California-chartered banks and credit unions with assets under $10 billion that charging surprise overdraft fees and returned deposited item fees is likely an unfair business practice that violates California’s Unfair Competition Law (UCL), Bus. & Prof. Code, § 17200 et seq., and the federal Consumer Financial Protection Act (CFPA), 15 U.S.C., § 5536.
California’s UCL prohibits any unlawful, unfair or fraudulent business act or practice. Under the UCL, a business practice is unfair if “the gravity of the harm” to the consumer outweighs the utility of the business’s conduct. Candelore v. Tinder, Inc. 19 Cal. App. 5th 1138, 1155-1156 (Cal. App. 2018). The CFPA similarly prohibits unfair, deceptive, or abusive acts or practices from institutions offering or providing a consumer financial product or service. 15 U.S.C., § 5536(a). The CFPA provides that an act or practice is unfair if it is “likely to cause substantial injury to consumers which is not reasonably avoidable” and the injury is “not outweighed by countervailing benefits to consumers or to competition.” 15 U.S.C., § 5531(c)(1).
Surprise overdraft fees occur when a consumer conducts a transaction using a check or debit card that exceeds the balance of his or her account. Unlike with a non-sufficient funds fee—where the financial institution will not complete the transaction and instead charges the consumer a fee for trying to exceed the balance on his or her account—with an overdraft fee, the financial institution will complete the transaction, debit whatever funds do exist in the consumer’s account, and also charge the consumer a fee for the overdraft.
A return deposited item fee is charged to a consumer when he or she deposits a check that is then returned because it cannot be processed against the check writer’s account. As Attorney General Bonta’s letter emphasized, checks can be returned for a variety of reasons and circumstances, many of which are beyond the control or knowledge of the depositing consumer.
In the letter, the California Attorney General noted that these fees “cause significant financial harm to California’s most vulnerable consumers” and that it often penalizes economically disadvantaged consumers. Citing the 2023 Consumer Financial Protection Bureau (CFPB) research publication Overdraft and Nonsufficient Fund Fees: Insights from the Making Ends Meet Survey and Consumer Credit Panel, the letter emphasized that economically disadvantaged consumers are more likely to incur these surprise overdraft fees, as well as Black and Hispanic consumers. The letter also stressed that surprise overdraft fees and returned deposited item fees often cannot be reasonably anticipated by the consumer initiating the transaction. Attorney General Bonta ultimately urged the letter’s recipients to “review [their] policies and practices” related to surprise overdraft fees and returned deposited fees.
As the letter noted, “California chartered banks and credit unions [] generated nearly $220 million in revenue from overdraft fees in 2022.” Curbing this practice will have a significant impact on the financial institutions that charge these fees and rely on this revenue. Banks and credit unions doing business in California could see an increase in enforcement actions brought against them if they continue charging these fees. Thus, California-based financial institutions should review their policies and practices around these fees to avoid becoming the target of one such enforcement action.
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