Three Things to Know About the New York State Department of Financial Services’ Overdraft Proposal

On January 22, 2025, the New York State Department of Financial Services (DFS) informally proposed regulations¹ that would restrict the overdraft and insufficient fund (NSF) fees that New York-chartered banks can charge their customers (the Overdraft Proposal).² Initial comments on the Overdraft Proposal were due by February 3, 2025, but if DFS elects to formally propose the regulations, there will be a subsequent opportunity to comment on the proposal.

1. What would the Overdraft Proposal do?

The Overdraft Proposal would prohibit, among other things:

• Charging overdraft fees on overdrafts of less than $20
• Charging overdraft fees that exceed the overdrawn amount
• Charging more than three overdraft or NSF fees per consumer account per day
• Charging NSF fees for instantaneously declined electronic transactions
• Charging multiple overdraft or NSF fees for the same transaction, including when a merchant resubmits a declined transaction
• Charging an overdraft fee for an electronic transaction when the consumer’s account indicates sufficient funds at the time the transaction was initiated, or “Authorize-Positive, Settle-Negative” (APSN) transactions
• Processing electronic debit transactions in a manner intended to maximize the number of overdraft and NSF fees

2. The Overdraft Proposal builds on prior DFS guidance and changes to New York law.

Certain components of the Overdraft Proposal will sound familiar to DFS watchers. In a 2022 guidance document, DFS outlined several practices that it considers “unfair” or “potentially unfair,” including:

• APSN Transactions. DFS explained that it would be unfair for an institution to charge an overdraft fee for a debit card transaction that could have been covered by the funds in a consumer’s account at the time the transaction was initiated but could not be covered by the funds in the consumer’s account at the time of settlement since consumers have no control over the settlement or presentment of debit card transactions. This practice also came under scrutiny in guidance issued by the Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) in 2023.³
• Double Fee Transactions. DFS also explained that it is unfair for an institution to charge a fee for “overdraft protection” (i.e., a service in which an institution charges a fee to move funds from one of a consumer’s accounts to another account with insufficient funds) if the transfer of money is not enough to prevent the original account from being overdrawn. The Double Fee injures consumers by imposing a fee for a transfer that doesn’t actually address the underlying problem and has no value to the consumer.
• Multiple NSF Fees. Finally, DFS stated that charging multiple NSF fees for re-presentment (i.e., when a merchant re-submits a transaction for payment after the payment was already declined for insufficient funds) would be “deceptive” if the possibility of multiple fees was not clearly explained in the institution’s consumer disclosure. Additionally, DFS stated that the practice of charging multiple NSF fees at all was “potentially unfair,” regardless of the institutions’ disclosures, since consumers have no control over re-presentments. Like APSN transactions, this practice has also come under scrutiny in prior FDIC and OCC guidance.⁴

Following DFS’ 2022 overdraft guidance, New York enacted a law in 2023 that would enable DFS to directly regulate overdraft and NSF fees without having to use New York’s general law prohibiting unfair, deceptive, or abusive acts or practices.⁵ The new proposal by DFS appears to take advantage of that new authority.

3. New York will try to fill consumer protection gaps created by deregulation under the Trump administration.

Over the next four years, we expect to see DFS and other state financial regulators attempt to fill the perceived consumer financial protection “gaps”⁶ created by deregulation under the Trump administration, and overdraft fees is likely one area in which the Trump administration will walk back actions taken by the Biden administration. The FDIC and OCC’s 2023 overdraft guidance, which does not have the force of law, can be rescinded by new agency leadership. And, the Consumer Financial Protection Bureau’s (CFPB) December 2024 overdraft rule,⁷ which would have closed a loophole that exempted overdraft loans from consumer lending laws, was set to take effect on October 1, 2025, but will likely be stalled by President Trump’s recent executive order calling for a regulatory freeze.⁸ 

© Arnold & Porter Kaye Scholer LLP 2025 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.