A Strategic Reset for Credit Unions

When California  Senate Bill 1075 takes effect on January 1, 2026, state-chartered credit unions in California will face a new limit on overdraft and insufficient funds (NSF) fees. SB 1075 prohibits charging more than $14 per overdraft or NSF fee, or the amount set by the federal Consumer Financial Protection Bureau (CFPB), whichever is lower.

In addition, the law requires credit unions to provide notice to members each time an overdraft or NSF fee is assessed.

The immediate questions are already surfacing:

How do we preserve revenue when overdraft fees compress?

The answer is not simply to replace one fee with another. The institutions that adapt successfully will rethink how overdraft moments function within the broader member relationship.

Additional documentation on implementation can be found in the 

California Credit Union League’s SB 1075 compliance resource

How We Got Here: Regulatory Context

Overdraft and NSF fees have been long-standing sources of revenue for financial institutions — including credit union overdraft protection programs. However, these fees have been under scrutiny for years due to concerns about fairness and impact on financially vulnerable members.

In 2024, the CFPB proposed a federal rule that would have limited overdraft fees or tied overdraft pricing to cost-based models. Broad industry pushback followed, and that proposed rule was eventually nullified. Despite that, California chose to enact its own state-level fee cap through SB 1075. 

SB 1075 specifically applies to state-chartered credit unions doing business in California and mandates both enhanced notification requirements and a fee cap beginning 2026.

What the Law Requires

1. Fee Notification (Effective January 1, 2025)

Credit unions must provide a notification to members each time a fee is assessed. The notification must include key details about the transaction and any consequences of not correcting the account balance.

2. Fee Cap (Effective January 1, 2026)

Beginning in 2026, overdraft and NSF fees cannot exceed $14 or the lower CFPB-set amount, if such a federal standard is established. 

This fee cap applies specifically to California state-chartered credit unions and state-licensed credit unions doing business in California.

Why This Matters for Credit Unions

Member Experience and Trust

Overdraft and NSF fee events often occur at stressful moments for members. The timing gap between seeing an available balance and a transaction posting can lead to surprise fees, which erode trust and increase dissatisfaction.

A fee cap alone reduces the dollar amount collected, but it does not prevent the frustration members feel when they’re surprised by fees. Institutions that focus solely on the cap may protect compliance, but not member relationships.

Preserving Revenue by Reducing Churn

Credit union revenue from overdraft fees may compress under SB 1075, but the broader financial impact depends on retention, member satisfaction, and downstream income.

When members feel blindsided by fees, they are more likely to:

• reduce product usage
• shift direct deposits elsewhere
• close accounts
• escalate service disputes

In a capped-fee environment, each of these outcomes has a greater relative cost than the fee itself. Minimizing avoidable friction, especially around overdraft and NSF moments, therefore becomes a revenue preservation strategy in its own right.

Replacing Surprise With Visibility

A key driver of overdraft frustration is timing: members often don’t see a pending transaction before it posts. Institutions can address this in a way that:

• provides earlier visibility
• gives members a window to act
• reinforces fairness and choice

Real-time alerts, delivered through digital banking channels, help members make informed decisions. When members see what’s coming, they are less likely to view fees as punitive and more likely to stay engaged with their financial institution.

Strategically, this signals a shift from penalty-driven revenue to transparency-enabled retention, which aligns with evolving consumer expectations and regulatory scrutiny.

Operational and Compliance Benefits

SB 1075’s notification requirement also increases expectations for documentation and oversight. When institutions provide timely fee notices that include details about the transaction, it supports:

• cleaner audit trails
• fewer disputes
• improved compliance documentation

These benefits translate into lower servicing costs and stronger defenses during examinations. In California, state regulators already require institutions to report annual overdraft and NSF fee revenue as part of regulatory oversight of fee practices.

Strategic Steps for 2026 Readiness

To navigate the overdraft fee cap while preserving member trust and operational stability, credit unions can consider the following pillars:

A) Reduce avoidable overdraft events

Analyze transaction timing patterns and member segments most affected by overdraft risks.

B) Increase member visibility

Integrate overdraft alerts into digital channels well before outcomes finalize.

C) Strengthen documentation and compliance reviews

Capture member interactions and decision timestamps to support internal reviews and regulatory reporting.

D) Align pricing with value

In addition to fee caps, consider predictable pricing and service value propositions that members see as fair and transparent.

The Bottom Line

The 2026 overdraft fee cap will reduce per-transaction revenue for state-chartered credit unions in California. That outcome is fixed under SB 1075.

But institutions that look beyond the fee cap, focusing on transparency, choice, and member experience, will be better positioned to retain account holders and preserve revenue through reduced churn and stronger relationships. This approach aligns with broader trends in banking fee regulation and consumer protection. SB 1075 is a signal that regulatory expectations are evolving toward clarity, fairness, and accountability.