NYDFS Issues Guidance on Avoiding Improper Practices Related to Overdraft and Non-Sufficient Fund Fees

On July 12, 2022, the New York State Department of Financial Services (NYDFS) issued new guidance alerting New York State-regulated depository institutions (Institutions) that they will be evaluated on whether they engage in deceptive or unfair practices with respect to overdraft and non-sufficient fund (NSF) fees in future Consumer Compliance and Fair Lending examinations. The guidance was welcomed by state lawmakers and nonprofit organizations who expressed concern that such fees disproportionately impact the most vulnerable consumers, such as those who are living paycheck to paycheck and struggling to make ends meet, as well as communities of color.

The guidance informs Institutions of the need to avoid the following practices:

• Charging consumers an overdraft fee in “Authorize Positive, Settle Negative” transactions where the consumer had a positive account balance sufficient to cover the transaction when it was authorized, but a subsequent, unrelated transaction lowers the consumer’s available balance to below the amount of the original transaction when presented for settlement.
• Charging consumers a fee for an “overdraft protection” transfer from another account, held by the consumer at the same depository institution, that is of an insufficient amount to avoid an overdraft. The result could be the consumer also being charged an overdraft fee regardless.
• Charging consumers more than one NSF fee for the same declined transaction, without adequate disclosures, where a merchant re-presents the same transaction to the Institution in a second or third attempt to collect funds. Recognizing that the elimination of such fees may be impracticable in the short term—because, for example, Institutions may need to first update their internal systems and software or work with third-party service providers—NYDFS expects Institutions to make clear, conspicuous, and regular disclosures to consumers if they are currently charging multiple NSF fees. However, as NYDFS also expects Institutions to ultimately eliminate multiple NSF fees entirely, Consumer Compliance and Fair Lending examinations will closely review what steps an Institution has taken to address the risk of such fees.

This latest guidance is part of New York’s broader financial inclusion agenda. As discussed in a prior Advisory, New York enacted legislation requiring banks to adopt check processing practices intended to minimize NSF fees, which became effective on January 1, 2022. Since then, NYDFS has also issued guidance which expands access to low-cost bank accounts and promulgated a proposed regulation—currently open for public comment—which sets forth a new methodology for calculating check cashing fees and establishes the maximum fee that a check casher can charge.

Furthermore, on July 15, 2022, Governor Kathy Hochul signed legislation directing NYDFS to conduct a study on overdraft fees, which will “inform the State’s ongoing efforts to address excessive finance fees and help low-income New Yorkers access affordable banking options that protect and grow hard-earned savings.” As NYDFS continues to review practices related to the imposition of overdraft and NSF fees, it may issue additional guidance in the future.

Institutions interested in the new NYDFS guidance’s impact on their businesses may contact any of the authors of this Advisory or their usual Arnold & Porter contact. The firm’s Financial Services team would be pleased to assist with any questions about NYDFS supervision or consumer finance more broadly. 

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.