California Laws Governing Bank Overdraft Fees

State and federal bank overdraft laws protect California consumers from unfair overdraft fees. Taken together, the laws give California consumers the right to pursue significant remedies when they are assessed illegal fees for overdrafts.

Although a federal law regulating overdraft fees took effect in 2010, consumers continue to be hit with overdraft fees that they did not knowingly agree to pay. A recent study by The Pew Charitable Trusts found that more than half of all people who were charged fees for overdrawing their accounts with a debit card had no idea that they were enrolled in an “overdraft protection plan” that authorized those fees.

The Overdraft Protection Racket

Banks promote overdraft protection plans as if they are doing a favor for their customers. When customers who are not enrolled in the plan withdraw money from an ATM or make a purchase with a debit card, the bank will decline the transaction if the customer does not have sufficient funds on deposit to cover it. That costs the customer nothing.

When the customer is enrolled in an overdraft protection plan, however, the bank processes the transaction, effectively advancing the overdraft as a short-term loan. That sounds like a consumer benefit, but “protection” comes with a cost. Banks charge a fee for every overdraft. A typical overdraft fee is $35. If you purchase a $250 lawnmower with your ATM but only have $245 in your bank account, that $5 overdraft will cost you an extra $35 (or whatever overdraft fee your bank charges for “protection”).

Another version of an overdraft protection plan covers your overdraft from a linked account. In other words, if you have a $5 overdraft in your checking account, the bank will transfer $5 from your savings account to the checking account. Banks charge less for overdraft account transfers (about $10), but the overdraft fee might still be more than the overdraft. If the bank has issued you a credit card, an even worse option is to charge the overdraft to the card. That may result in a cash advance fee in addition to an overdraft fee.

The overdraft protection racket is profitable for banks but harmful to consumers who don’t realize that they are about to overdraw their accounts. Keeping track of account balances is tricky, and banks make it harder when they are not transparent about the way they process transactions.

For example, you might make a deposit in the morning that would prevent an overdraft when you make an afternoon purchase, but the bank might not credit your deposit until the end of the banking day — after you used your debit card. Another shady accounting practice is to change the order in which deposits and withdrawals are processed in order to create the appearance of a shortage in your account that never actually existed.

Consumer Impact

Overdraft protection might be useful if you fear that you will bounce a check and are willing to pay an overdraft fee rather than having the check returned to the payee. Most consumers, however, are better off without overdraft protection. If your debit card purchase is declined, you can elect to pay by cash or credit card, or to forego the purchase until you have sufficient funds in your account. Allowing purchases or ATM withdrawals to be declined allows you to avoid overdraft protection fees.

Although excessive fee laws require banks to allow their consumers to opt out of overdraft protection plans, those laws are poorly enforced. As a result, consumers find themselves enrolled in protection plans — and paying unnecessary fees — without their knowledge. According to The Pew Charitable Trusts, overdraft fees are most commonly assessed against consumers who earn less than $30,000 per year — the people who can least afford them.

Overdraft Laws That Protect Consumers

Consumers who understand that overdraft protection is usually a bad deal would prefer not to have it. Banks understand that. Banks also understand that they make more money if their customers enroll in overdraft protection. For that reason, banks not only market overdraft protection as a benefit, they often enroll customers in overdraft protection plans without their knowledge.

A federal law that took effect in 2010 requires banks to obtain a customer’s consent before enrolling the customer in an overdraft protection plan. When a customer opens a new account, the customer cannot be enrolled in an overdraft protection plan without the customer’s express agreement. The customer must also be allowed to opt out of overdraft protection at any time. Despite those protections, consumers are often charged overdraft protection fees that they did not authorize.

Recent court decisions have allowed California consumers to sue banks that use accounting practices to create artificial overdrafts (and the assessment of overdraft fees) under California’s Unfair Competition Law and the Consumer Legal Remedies Act. Courts have concluded that those laws permit consumers to seek remedies for fraudulent or unlawful acts involving debit and ATM cards.

A class action lawsuit is often the best remedy for unjust fees imposed by overdraft protection plans. Consumers who band together in class actions gain economic power by seeking vindication on behalf of every customer who was harmed by a bank’s fraudulent practices. A class action lawyer who handles bank overdraft cases is in the best position to advise California consumers who have been charged unexpected or unfair overdraft fees.