The New York State Department of Financial Services has released a proposed rule that would regulate overdraft, non-sufficient funds (NSF), and return deposit item fees charged by banks, trust companies, savings banks, savings and loan associations, credit unions and investment companies.

Under the proposal, announced by Gov. Kathy Hochul, state-chartered banking institutions would be prohibited from charging:

  • Overdraft and NSF fees on overdrafts of less than $20.
  • Overdraft fees that exceed the overdrawn amount.
  • NSF fees than exceed the amount of the NSF transaction
  • More than three overdraft or non-sufficient funds (NSF) fees per consumer account per day.
  • NSF or overdraft fees for the same transaction, including when a merchant resubmits a declined transaction.
  • NSF fees for an electronic debit that is declined instantaneously or near-instantaneously.
  • A sustained, continuous or daily overdraft fee for each day an overdraft balance is not repaid.
  • Fees to transfer funds from another account to cover the overdraft if the transfer does not prevent an overdraft or NSF fee.
  • Double fees to cover an overdraft—for example, charging one fee for automatically transferring funds from another account and a second fee for the overdraft itself.
  • An overdraft fee for an electronic or transfer when a consumer’s account indicated sufficient funds at the time the transaction was initiated (commonly referred to as authorize positive settle negative (APSN) transactions).
  • A return deposit item fee on a consumer account for a return deposit item drawn against a consumer account unless the check that the accountholder attempted to deposit: (a) is from the same originator as another check that the accountholder attempted to deposit within the previous year that was also dishonored; (b) lacks a signature; (c) bears a date later than the date on which the accountholder attempted to deposit the check; or (d) was presented for deposit by the accountholder to the banking institution after the time allowed for deposit stated on the check had expired.

Banking institutions also would be prohibited from processing electronic debit transactions in a way that is intended to maximize overdraft and NSF fees. The proposed rule also requires that banking institutions to send consumers notices:

  • If an electronic debit is likely to result in an overdraft charge,
  • Following first imposition of an insufficient funds charge in a calendar year,
  • Following first return deposit item in a calendar year, and
  • Thirty calendar days advance notice of a change in overdraft or NSF fees.

Before formally filing a proposed rule for publication in the New York State Register for a formal comment period, the financial services department must provide a draft for ten days for comment by interested persons, and the public, including small businesses and local governments. That comment period expires Feb. 3. After that, a formal proposed rule will be published.

While banking institution may be able to leverage some existing controls for overdraft and NSF fees, tying the fee amount to the overdrawn amount is likely a new control that will require additional system programming.

Governor Hochul’s 2024 fiscal budget proposal also targeted overdraft and NSF fees but contemplated legislation changes to effect changes to abusive bank fee practices. In 2025, the Governor shifted from legislation to rulemaking to address these practices.

New York is not alone in taking action on overdraft fees.

Last month, the CFPB issued a final rule governing overdrafts at financial institutions with more than $10 billion in assets. That final rule, issued will give financial institutions the three following options for their overdraft programs:

  • Cap their overdraft fee at $5 breakeven fee, which is the CFPB’s estimated level at which most banks would be able to recoup their costs associated with administering a courtesy overdraft program.
  • Set their overdraft fee based on a calculation from the allowed costs and losses associated with operating overdraft service.
  • Offer “overdraft lending” by complying with Regulation Z requirements. This option would require financial institutions to deliver TILA and MLA disclosures, make an ability-to-repay determination, send consumers periodic statements and give them the opportunity to pay automatically or manually.

Days before the New York proposal was issued—and in the closing days of the Biden Administration—the CFPB urged state regulators to increase their focus on consumer protection laws.

The National Credit Union Administration, under the chairmanship of Democrat Todd Harper, recently announced it would continue to focus on overdraft programs at credit unions. However, Republican Kyle Hauptman became chairman when President Trump took office. He recently outlined his priorities and overdraft programs were not included.