California’s ban on overdraft fees at ATMs went into effect at the start of the year. Coupled with the Consumer Financial Protection Bureau’s new rule last month limiting overdraft fees to $5, this could signal the beginning of the end for these charges.
The new California law prohibits state-regulated banks and credit unions from imposing fees when consumers attempt to withdraw money but are declined due to insufficient funds. While the federal Electronic Fund Transfer Act already prevents banks from charging overdraft fees on ATM and one-time debit card transactions unless consumers have explicitly opted in, the California law takes this a step further by completely eliminating such fees.
“Consumers receive no service at all in exchange for the fee,” said California State Senator Tim Grayson upon proposing the bill last April. “The fees themselves, which average $34, do not represent the marginal costs to institutions for declining the transaction.”
Banks in California can still charge overdraft fees in other circumstances. Starting 2026, however, credit union overdraft fees will be capped at $14, unless a lower federal limit is set.
The CFPB Pushes Forward
That lower limit may soon become a reality. The CFPB rule capping overdraft fees would apply to banks and credit unions with at least $10 billion in assets. According to the CFPB, this measure is expected to save consumers $5 billion annually in overdraft fees.
The CFPB’s overdraft rule will take effect on October 1. However, the Consumer Bankers Association has filed a lawsuit against the CFPB in Mississippi, claiming that the agency exceeded its statutory authority.
Banks argue that overdraft fees offer protection to their customers. They claim that turning all overdrafts into returned payments could result in late payment fees and potential negative impacts on credit ratings. The CFPB counters that overdraft coverage functions as a loan to the customer, akin to credit cards, and should therefore be subject to the Truth in Lending Act. This law requires the disclosure of all applicable loan costs to borrowers.
Several major U.S. banks, including Ally Bank, Capital One, and Citibank, have already eliminated overdraft fees. Although the rule applies only to larger banks, the industry recognizes that cost pressures may also extend to smaller financial institutions.
“While the rule targets institutions with more than $10 billion in assets, the realities of the marketplace mean that overdraft programs at all credit unions are endangered,” Virginia Credit Union League President/CEO Carrie Hunt said last year. “CFPB again misses the point that not all fees are abusive. They are the cost of doing business.”
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