California Attorney General Rob Bonta this week issued letters to small banks and credit unions warning that overdraft and returned deposited item fees may violate California’s Unfair Competition Law, or UCL, and the federal Consumer Financial Protection Act, or CFPA.

Some financial institutions charge up to $36 or more for each overdraft. 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. Bonta’s letter was sent to banks and credit unions in California with assets under $10 billion.

“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 Attorney General Bonta. “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.”

Consumers from poor households are more likely to incur overdraft fees, as are Black and Hispanic consumers.

The Consumer Financial Protection Bureau has found 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.

In the letter, Attorney General Bonta explains how overdraft and returned deposited item fees harm consumers and may violate the UCL and CFPA, which both prohibit unfair acts and practices against consumers. Under the UCL, an act is unfair if the “the gravity of the harm to the alleged victim” outweighs “the utility of the defendant’s conduct.”

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.

The letter also warns about the use of returned deposited item fees, which are charged to consumers when the consumer deposits a check that is returned due to a problem with the check originator — the check originator has insufficient funds, their account is closed, there is a stop payment order, or the signature or other information on the check is questionable.

The consumer that deposits the check typically has no knowledge of or control over the circumstances that cause the check to be returned. Charging such fees causes substantial harm because a consumer cannot reasonably avoid the injury in most instances.

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. This “back-end” pricing actually obscures the true cost of banking while making it more difficult for consumers to compare financial products and services.

The letters follow action by the CFPB, which recently issued guidance to large banks regarding similar fees.

The CFPB has also issued guidance indicating that the blanket practice of charging returned deposited item fees for every returned check likely is an unfair practice that violates the CFPA.

Additionally, the CFPB has brought enforcement actions against several banks for charging overdraft fees. Regions Bank agreed in a consent order to pay about $191 million in restitution and penalties for charging overdraft fees, and Wells Fargo agreed to pay $200 million in restitution to affected consumers for surprise overdraft fees.

In April 2022, Attorney General Bonta, as part of a multistate coalition, urged JPMorgan, Bank of America, U.S. Bank, and Wells Fargo to eliminate overdraft fees.