Attorney General Bonta Supports Protecting Consumers by Closing Overdraft Fee Loophole

In 2022, consumers paid over $7.7 billion in overdraft fees

OAKLAND — California Attorney General Rob Bonta joined 17 attorneys general in submitting a comment letter supporting the Consumer Financial Protection Bureau’s (CFPB) proposed overdraft fee rule, amending Truth in Lending Act (TILA) regulations. The proposed rule would require large banks to apply consumer protections, include interest rate disclosures, to overdraft fees. In doing so, the proposed rule would close a regulatory loophole that enables banks to extract billions of dollars from consumers by charging overdraft fees without adequately disclosing basic credit terms.

“Overdraft fees are a relic and should be left in the past. These fees harm low-income Californians the most, while lining the pockets of large financial institutions,” said Attorney General Bonta. “The Consumer Financial Protection Bureau's proposed rule would protect consumers' pocketbooks and create more transparency about how overdraft fees are handled in the places where they bank. By closing this archaic loophole, we work toward a California where consumers are treated more equitably and fairly by financial institutions.”

TILA was enacted in 1968 when many families used the mail to send and receive checks and had little certainty about when their deposits and withdrawals would clear. When a bank clears a check and the consumer doesn’t have funds in the account, the bank charges an overdraft fee and in doing so is issuing a loan to cover the difference. The Federal Reserve Board created an exemption to TILA protections if the bank was honoring a check when their depositor inadvertently overdrew their account. At the time, this was used infrequently and resulted in a small cost for consumers. It was not a major profit driver.

This exception no longer serves its original purpose given the automation of overdraft pay, prevalence of debit card transactions as an alternative to checks, and drastically increased amount of overdraft fees. Approximately 23 million households pay overdraft fees in any given year. Banks usually charge $35 for an overdraft, most of which are repaid within three days—representing an annual percentage rate (APR) of approximately 17,000%. An APR is the yearly rate charged for a loan or earned by an investment and includes interest and fees. Typically, personal loan APRs are from 6% to 36%. In 2022, consumers paid over $7.7 billion in overdraft and non sufficient fund fees.

In the letter, the attorneys general endorse the proposed rule and request that the CFPB set the benchmark overdraft fee at $3, which would not trigger TILA disclosures and reduce overdraft fees for consumers. The attorneys general also urge the CFPB to consider expanding the proposed rule to small financial institutions given that many are among the most frequent chargers of costly overdraft fees.

In submitting the letter, Attorney General Bonta joins the attorneys general of New York, Colorado, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nevada, North Carolina, Oregon, Pennsylvania, Washington, and the District of Columbia.

Attorney General Bonta is committed to protecting consumers from hidden fees, and ensuring consumer financial protection though enforcement action, consumer outreach, and sponsoring legislation. 

• Earlier this month, Attorney General Bonta issued a consumer alert with tips on filing and preparing taxes safely. 
• Also this month, Attorney General Bonta joined Senator Monique Limón (D- Santa Barbara) and a coalition of prominent consumer advocacy organizations in unveiling Senate Bill 1061, legislation seeking to protect consumers from having their credit ruined by prohibiting medical debt from being reported on credit reports.
• In February, Attorney General Bonta sent a letter small banks and credit unions warning that overdraft and returned deposited item fees may violate California’s Unfair Competition Law and the federal Consumer Financial Protection Act, and urged small financial institutions to eliminate these fees. 
• Also in February, Attorney General Bonta supported the Federal Trade Commission’s new “Rule on Unfair or Deceptive Fees,” which would ban hidden fees nationwide.
• Last year, Attorney General Bonta and the California Low-Income Consumer Coalition co-sponsored Senate Bill 478 (SB 478), which combats hidden fees by requiring the advertised, displayed, or offered price of goods or services to include all mandatory fees, other than tax and shipping. SB 478 was signed by Governor Newsom in October and will take effect on July 1, 2024.

A copy of the letter is available here.