The New York State Department of Financial Services (DFS) has issued an Industry Letter providing guidance on overdraft and non-sufficient funds (NSF) fees to depository institutions that it supervises.

The DFS indicates that, through the supervisory process, it has identified several unfair or deceptive acts or practices regarding the imposition of overdraft and NSF fees.  The Industry Letter is intended to alert institutions that the DFS “will evaluate whether Institutions are engaged in deceptive or unfair practices with respect to overdraft and NSF fees in future Consumer Compliance and Fair Lending examinations.”

Authorize positive, settle negative (APSN) transactions. APSN transactions are situations where a bank charges an overdraft fee on debit card transactions when the consumer’s account had a sufficient available balance at the time that the transaction was authorized by the bank but a subsequent, unrelated transaction lowers the consumer’s available balance to below the amount of the original transaction when it is presented for settlement.  The DFS deems the imposition of overdraft fees on ASPN transactions to be an unfair practice because:

  • It causes injury to consumers that consumers cannot reasonably avoid since consumers have no control over or involvement in the settlement and presentment of debit card transactions, which typically takes place some days after the consumer conducts the transaction;
  • When an Institution authorizes a debit card transaction on an account with sufficient funds to cover the transaction, the consumer reasonably expects that they will not incur an overdraft charge on that transaction; and 
  • There is no benefit to consumers or competition from an Institution’s overdraft charges on APSN transactions.

The DFS states that it expects any institutions that are currently charging overdraft fees on APSN transactions to discontinue the practice.

Double fees arising from futile overdraft protection transfers. The DFS describes a scenario in which an institution offers consumers an overdraft protection service that automatically transfers funds from another account held by the consumer at the same institution, such as a savings account, to cover what would have otherwise been an overdraft transaction, thereby preventing the imposition of an overdraft fee.  The DFS states that it has found that some institutions charge a fee for overdraft protection transfers even where the transfer amount is insufficient to prevent the overdraft and the imposition of an overdraft fee.

The DFS deems the practice of charging a consumer both an overdraft fee and a fee for overdraft protection that failed to prevent the overdraft constitutes an unfair practice because such “double fees”:

  • Injure consumers by imposing fees for a transfer that provides no value to the consumer;
  • Are not reasonably avoidable by consumers, who have no reason to expect that they will be charged a fee for an overdraft protection transfer that does not in fact protect them against an overdraft; and
  • Offer no benefit to either consumers or competition. 

The DFS also deems the use of any disclosure that states that an overdraft protection transfer (including any associated fee) serves to prevent an overdraft, where it does not necessarily do so, is a deceptive practice.  According to the DFS, a consumer’s interpretation that a fee for an overdraft protection transfer will only be charged when the transfer actually protects against the overdraft is reasonable, and any misrepresentation is material to a consumer’s choice about whether to enroll in an overdraft protection transfer service.

The DFS states that it expects institutions will not charge double fees but confirms that institutions can continue to charge an overdraft protection fee or an overdraft fee, consistent with consumer disclosures.

NSF fees relating to representments. This situation involves NSF fees that are charged when a transaction such as an Automated Clearing House (ACH) transaction is presented for payment but is declined because the consumer has insufficient funds in his or her  account to cover the transaction.  If the institution returns a merchant’s attempted debit entry because of insufficient funds, ACH rules authorize the merchant to “reinitiate” or “re-present” the entry up to two times.  The Department states that it has found that some institutions charge a separate NSF fee for each presentment, or representment, of the same item, resulting in multiple NSF fees for a single transaction.

The DFS deems charging multiple NSF fees to be a deceptive practice when the institution’s disclosures do not disclose expressly that multiple fees may be charged “per item” or “per transaction.”  It also deems it a deceptive practice for an institution to represent that only one NSF fee will be charged “per item” or “per transaction” without disclosing that the same processed item may trigger multiple NSF fees.  The DFS states that it expects institutions currently charging multiple NSF fees make clear, conspicuous, and regular disclosure to consumers that they may be charged more than one NSF fee for the same attempted debit transaction when that debit is represented after being declined for insufficient funds.  To make “clear, conspicuous and regular disclosure,” according to the DFS, institutions must include this disclosure in their regular communications with consumers (e.g., in each account statement, rather than in account-opening materials only) together with a direct point of contact for consumers who may have been subject to multiple NSF fees.

The DFS deems charging multiple NSF fees to also be a potentially unfair practice and expects institutions to take immediate steps to mitigate the risk that consumers are charged multiple NSF fees such as limiting the NSF fees that can be imposed during a certain time period (e.g., a week), performing periodic manual reviews to identify instances of multiple NSF fees, and offering refunds to consumers when an institution becomes aware of individual consumers who have been charged multiple NSF fees.

The DFS acknowledges that the unilateral elimination of multiple NSF fees could be technically impracticable for some institutions in the short term, including in cases where an institution’s own software or the software of a third-party service provider needs to be updated to allow for automated identification of representments.  Nevertheless, the DFS expects institutions to update their internal systems and software and to work with their third-party service provider(s), as appropriate, to resolve this issue so that ultimately consumers are not charged more than one NSF fee per transaction, regardless of how many times the transaction is presented for payment.

The DFS indicates that institutions should expect a review of all of the practices identified in the Industry Letter to be included in Consumer Compliance and Fair Lending examinations conducted by the Department.  With respect to the imposition of multiple NSF fees, DFS examiners will closely review what steps an institution has taken to address the risk of multiple NSF fees in the short term, including what measures they have been able to take unilaterally and which measures require cooperation from third-party service providers to eliminate multiple NSF fees entirely.

The DFS concludes the Guidance by stating that it is currently undertaking a broader review of overdraft and NSF fee practices and may issue additional guidance in the future.

Overdraft fees continue to be a CFPB focus.  Also, in a recent report on significant consumer compliance issues identified by FDIC examiners during consumer compliance examinations, the FDIC raised concerns about charging multiple NSF fees for the re-presentment of unpaid transactions.  The FDIC indicated that the failure to disclose material information about re-presentment practices and fees can be deceptive and also potentially unfair and noted that it has required banks to provide additional restitution beyond what was agreed to in class action settlements.