At the end of last month, former New York Governor Cuomo signed into law a bill that amends the state’s Banking Law to require banks to follow certain check processing practices.  The amendments become effective on January 1, 2022.

The new law applies to “consumer checking accounts” offered by “banking institutions.” “Consumer checking accounts” are defined as “accounts established by natural persons primarily for personal, family or household purposes.”  Although the legislative history indicates that the new requirements are intended to apply only to New York-chartered banking organizations, the new law does not contain a definition of the term “banking institution.”  The new law directs the Department of Financial Services to issue regulations necessary to  implement the new requirements and such regulations could clarify the scope of the term “banking institution.”

The new law imposes the following requirements on a “banking institution”:

  • Checks must be paid either (i) in the order in which they are received or (ii) from smallest to largest dollar amount for each business day’s transactions.
  • If the bank dishonors a check for insufficient funds but then receives checks in smaller amounts that could be covered by the existing account balance, the bank must honor such smaller checks to the extent funds are available to do so.
  • A bank must provide a written disclosure to a consumer at the time an account is opened and prior to any change in such policy that indicates the order in which checks will be drawn.

We note that the new law only applies to checks and does not cover electronic payments that do not involve checks, such as ATM, POS, and ACH transactions.  In addition, the order of payment mandated by the new law could be contrary to the desires of many consumers.  For example, consumers would typically want larger dollar checks (such as those used to make mortgage payments or to make payments on auto financing) to be processed before smaller dollar checks.

On September 13, 2021, from 12:00 p.m. to 1:00 p.m., Ballard Spahr will hold a webinar: “Still in the Crosshairs: An Update on Bank Overdraft Practices.”  For more information and to register, click here.