A new California law will limit the ability of nonbanks to charge overdraft fees by effectively banning the deposit of state public assistance funds into certain accounts that feature the charges.
The law, signed by California Gov. Gavin Newsom on Tuesday, is likely to affect both payday lenders that offer debit cards and neobanks. It is aimed at broadening existing overdraft-fee limitations on prepaid cards.
Supporters say the law will limit the ability of companies to exploit a loophole in a Consumer Financial Protection Bureau rule that took effect in 2019 and
“This bill closes an important loophole to protect vulnerable families,” state Sen. Monique Limón, the California Democrat who authored the law, said in a press release.
INFiN, a trade group that represents prepaid card issuers, payday lenders and other alternative financial service companies, said the California law puts at risk services that offer “innovative, dependable financial solutions” for underserved communities.
Nonbanks that offer these accounts do so in partnership with banks, the trade group said.
“California’s new law risks eliminating these valued products, denying accessible, affordable banking services to Californians, especially those with limited options, likely forcing them into more restrictive, costlier products, or out of the banking system altogether,” INFiN Executive Director Ed D’Alessio said in an emailed statement.
The National Consumer Law Center, which supports the California law, flagged two examples of accounts the measure is targeting. The overdraft charges on both accounts are smaller than the standard fee in the banking industry of roughly $30-$35.
One example is the ACE Flare Account by MetaBank, which is offered by the payday lender ACE Cash Express, the prepaid card issuer NetSpend and MetaBank, a South Dakota bank with about $7 billion in assets.
Customers with ACE Flare accounts can choose to opt into overdraft services. Those who do so typically pay a $20 fee for each overdraft, though they are not charged fees if they overdraw their accounts by $10 or less. Customers can overdraw their accounts up to five times per month.
Lauren Saunders, associate director at the NCLC, calls the product a “fake bank account” designed to get around the CFPB’s restrictions, which the industry fought heavily.
Overdraft fees make it “harder for people to make ends meet, and it’s especially inappropriate to drain public funds, taxpayer funds, that are intended to support families,” Saunders said.
ACE Cash Express and MetaBank did not respond to requests for comment. NetSpend declined to comment.
Saunders also identified the Revolve Finance debit card, which the payday lender CURO offers in partnership with Republic Bank of Chicago, as an example of the products that the California law is targeting. Revolve Finance is a CURO brand.
The Revolve Finance account charges a $15 fee for each overdraft and allows a maximum of five overdrafts per month. Customers do not get charged overdraft fees on small purchases or those that lead to a total overdraft balance of $10 or less, and the card offers a 24-hour grace period for charges.
The Revolve Finance website advertises the overdraft feature to younger customers, saying they should “take a break from adulting” and that they “deserve some wiggle room” with respect to their checking accounts.
“The overdraft feature on the bank issued demand deposit account complies with all federal banking regulations, including notice to the consumer, opt-in, and qualification requirements,” CURO said in a statement.
The new California law also targets features that allow for voluntary “tipping” when customers overdraw their accounts.
The neobank Chime, which gained popularity with its no-overdraft fee accounts, lets its customers leave an optional tip once they repay a negative balance. Chime’s SpotMe feature lets customers overdraw up to $200 without paying a fee.
In a statement, a Chime spokesperson said the company’s “products help Americans build a strong financial foundation” without monthly fees and with free overdrafts, early access to paychecks and a secured credit card that allows borrowers to improve their credit scores.
“We are reviewing the law and welcome the opportunity to work with California regulators and policymakers on smart regulation that promotes innovation, protects consumers and allows us to serve those who need alternatives,” the Chime spokesperson said.
