On February 22, 2024, California Attorney General Rob Bonta issued letters (the “AG Letter”) to California’s 197 state-chartered banks and credit unions warning that overdraft and returned deposited item fees may violate California’s Unfair Competition Law (UCL) and the federal Consumer Financial Protection Act (CFPA). The AG Letter encourages the institutions to review their practices and policies regarding: “(1) surprise overdraft fees, which are assessed even when a consumer cannot reasonably anticipate that a debit or checking transaction will overdraw their account; and (2) returned deposited item fees, which are assessed when a consumer deposits a check that is returned, even when the consumer has no knowledge of or control over the circumstances that caused the check to be returned.”
California’s UCL prohibits unfair, unlawful, and fraudulent business acts and practices. A business act or practice is unfair if the gravity of the harm to the alleged victim outweighs the utility of the defendant’s conduct. Actions under the UCL for any noncompliance with the AG Letter may have significant consequences to small institutions. The UCL permits any person to bring a claim for specific or preventative relief. The UCL sets forth a civil penalty up to $2,500 for each violation in an action brought by Attorney General, District Attorney, County Counsel, and City Attorneys. The UCL further states “[i]n assessing the amount of the civil penalty, the court shall consider any one or more of the relevant circumstances presented by any of the parties to the case, including, but not limited to, the following: the nature and seriousness of the misconduct, the number of violations, the persistence of the misconduct, the length of time over which the misconduct occurred, the willfulness of the defendant’s misconduct, and the defendant’s assets, liabilities, and net worth.”
Section 1036 of the CFPA also prohibits unfair, deceptive, or abusive acts or practices. An act or practice is unfair when: (1) it causes or is likely to cause substantial injury to consumers that is not reasonably avoidable by consumers; and (2) the injury is not outweighed by countervailing benefits to consumers or to competition. The CFPB and States may bring actions under the Section 1036 of CFPA against any person that engages in offering or providing a consumer financial product or service.
In his press release, Attorney General Rob Bonta states, “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 AG Letter cites to the CFPB’s December 2023 report, Overdraft and Nonsufficient Fund Fees: Insights from the Making Ends Meet Survey and Consumer Credit Panel, to state that Black, Hispanic and consumers from economically disadvantaged households are more likely to incur overdraft fees and that many consumers are surprised when they are charged an overdraft fee. The AG Letter also cites to the annual report published by the California Department of Financial Protection & Innovation (DFPI) to state that California-chartered financial institutions alone generated nearly $220 million in revenue from overdraft fees in 2022 with some financial institutions over relying on the revenue.
At first glance, the AG Letter seems to piggyback onto the CFPB’s unfairness arguments in CFPB Circular 2022-06 addressing the practice of charging “surprise overdraft fees” for authorize positive settle negative (ASPN) transactions and the CFPB Compliance Bulletin 2022-06 addressing the practice of charging a fee for returned deposited items issued on October 26, 2022. However, the AG Letter potentially casts a broader net than the CFPB Circular by stating “[t]he practice of charging surprise overdraft fees that cannot be reasonably anticipated by a consumer—such as fees assessed on APSN transactions—likely is an unfair business practice that violates the UCL and CFPA.” (emphasis added). It is unclear how courts or the DFPI would apply an unfairness analysis to overdraft fees other than those charged on ASPN transactions. While institutions could argue that overdraft fees and returned deposit fees are used to lower the overall cost of consumer checking accounts, the AG Letter suggests that the DFPI would conclude that even assuming such fees reduce overall costs, any benefit to consumers is not outweighed by the harm such fees cause to consumers by disguising the true cost of banking and making comparison shopping more difficult.
The AG Letter also cites to the prior OCC and FDIC guidance on APSN overdraft fee practices and the CFPB’s proposed rule on overdraft credit. The proposed rule on overdraft credit only applies to very large financial institutions. Earlier this month, the California Senate introduced a bill to regulate overdrafts and non-sufficient (NSF) fees that would require any state-chartered credit union to provide a 5 business days’ grace period before assessing an overdraft fee or nonsufficient funds fee and limit the total number of overdraft and NSF fees charged to 3 per month. The California bill would also require a state-chartered credit union to disclose these charges to all customers by January 31, 2025, and annually thereafter.
On March 5, 2024, Ballard Spahr will host a webinar on the CFPB’s proposed new rules restricting overdraft fees and prohibiting NSF fees on certain declined transactions.
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