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Financial Services Law Insights and Observations

NYDFS issues overdraft and NSF fee guidance

State Issues State Regulators NYDFS Consumer Finance New York Overdraft NSF Fees Unfair Deceptive

State Issues

On July 12, NYDFS issued guidance in an industry letter to regulated banking institutions, calling into question bank practices that can cause consumers to receive multiple overdraft and non-sufficient funds (NSF) fees from a single transaction. The industry letter identifies three specific types of fee practices as unfair or deceptive:

  • Charging overdraft fees for “authorize positive, settle negative” transactions, where consumers are charged an overdraft fee even if they have sufficient money in their account when a bank approves a transaction, but the balance is negative when the payment is settled. Per NYDFS, imposing an overdraft fee in this situation is unfair because, among other things, consumers “have no control over or involvement in” when or how their debit transactions get settled.
  • Charging “double fees” to consumers for a failed overdraft protection plan transfer, which occurs when a bank goes to transfer money from one deposit account to another deposit account to cover an overdraft transaction, but the first account lacks sufficient funds to cover the overdraft. Per NYDFS, double fees injure consumers “by imposing fees for a transfer that provides no value to the consumer and is 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.”
  • Charging NSF representment fees when a merchant tries several times to process a transaction that is deemed an overdraft and the bank charges a fee for each blocked representment without adequate disclosure. Banks that currently charge multiple NSF fees should “make clear, conspicuous, and regular disclosure to consumers that they may be charged more than one NSF fee for the same attempted debit transaction,” NYDFS stated. Additionally, banks are advised to consider other steps to mitigate the risk that consumers are charged multiple NSF fees, including limiting time periods for when multiple NSF fees may be charged, performing periodic manual reviews to identify instances of multiple NSF Fees, and offering refunds to affected consumers. NYDFS “ultimately expects [i]nstitutions will not charge more than one NSF fee per transaction, regardless of how many times that transaction is presented for payment,” the industry letter said.

NYDFS informed regulated entities that it will evaluate whether they “are engaged in deceptive or unfair practices with respect to overdraft and NSF fees in future Consumer Compliance and Fair Lending examinations.”