BILL NUMBER: S7742

SPONSOR: SEPULVEDA
 
TITLE OF BILL:

An act to amend the banking law, in relation to overdraft fees charged
by banking organizations

 
PURPOSE:

Requires the annual reporting of overdraft fees and non-sufficient funds
fees by banking organizations and credit unions subject to the authority
of the Superintendent of the Department of Financial Services who shall
issue an annual report on such information.  Imposes additional require-
ments regarding the imposition of overdraft fees and non-sufficient
funds fees.

 
SUMMARY OF PROVISIONS:

Section one: Adds a new section 37-b to the banking law requiring an
annual report on overdraft fees and non-sufficient funds fees.

              

Section two: Adds a new section 135 to the banking law requiring a ten-
day grace period before an overdraft fee or a non-sufficient funds fee
can be imposed.

Section three: Adds a new subdivision 10 to section 456 of the banking
law requiring a ten-day grace period before an overdraft fee or a non-
sufficient funds fee can be imposed. Also defines non-sufficient funds
fee and overdraft fees for purposes of the subdivision.

Section four: Adds a new section 6-q to the banking law regarding
improper practices relating to the imposition of certain fees

Section five: Provides for the effective date.

 
JUSTIFICATION:

On July 12, 2022 the NYS Department of Financial Service's issued a
guidance letter to all regulated depository institutions regarding
deceptive and unfair practices with regard to the imposition of over-
draft fees and nonsufficient funds (NSF) fees. This legislation seeks to
codify the recommendations set forth by the department in that letter.

The department's guidance letter which follows sets forth the complete
justification for this legislation.

July 12, 2022

Industry Letter: Avoiding Improper Practices Related to Overdraft and
Non-Sufficient Funds Fees TO: All Regulated Depository Institutions

The New York State Department of Financial Services (the "Department"),
as part of its mission, continues to focus on making affordable banking
products and services available to underserved communities, including
low- and moderate-income individuals, immigrants, and people of color.
It is well documented that high and unpredictable bank account fees are
among the reasons that many households remain unbanked. 
1 It is there-
fore imperative that regulated depository institutions ("Institutions")
be transparent in the fees associated with deposit accounts and elimi-
nate onerous fees, in order to attract and retain consumers from these
underserved communities in the banking system.

Earlier this year, the Department issued Guidance encouraging Insti-
tutions to offer Bank On accounts, which, among other things, eliminate
overdraft and non-sufficient funds ("NSF") fees.121 The Department,
through the supervisory process, has identified several unfair or decep-
tive acts or practices regarding the imposition of overdraft fees and
NSF fees. The purpose of this Guidance is to alert Institutions that the
Department 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.

I. Overdraft Fees Relating to Authorize Positive, Settle Negative
("APSN") Transactions

The Department has found that some Institutions charge an overdraft fee
on debit card transactions that do not exceed the account's positive
balance in cases where a subsequent, unrelated transaction lowers the
consumer's available balance to below the amount of the original charge
when the original transaction is presented for settlement. Stated
differently, some Institutions are charging consumers an overdraft fee
even though they had a sufficient positive balance at the time that the
transaction was authorized by the Institution. The imposition of over-
draft fees in such situations (referred to as "Authorize Positive,
Settle Negative" or "APSN" transactions) is unfair, because it causes
injury to consumers that consumers cannot reasonably avoid. 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. Furthermore, there is no benefit
to consumers or competition from an Institution's overdraft charges on
APSN transactions.  Given previous federal regulatory scrutiny of this
topic,111 the Department understands that some Institutions may have
already taken steps to avoid this practice. To the extent that Insti-
tutions are currently charging overdraft fees related to APSN trans-
actions, the Department expects those Institutions to discontinue the
practice.

II. Double Fees Arising from Futile Overdraft Protection Transfers

Institutions frequently offer consumers an overdraft protection service
for a fee. This service 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 trans-
action, thereby preventing the imposition of an overdraft fee. The
Department has found that some Institutions charge a fee for overdraft
protection transfers even where the transfer amount is insufficient to
prevent the actual overdraft. In those cases, the transfer fails to
prevent the occurrence of an overdraft and the imposition of an accompa-
nying overdraft fee.

The practice of charging a consumer both an overdraft protection fee and
a fee for the overdraft that the "protection" failed to prevent (a
"Double Fee") constitutes an unfair practice. A Double Fee injures
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 over-
draft. The imposition of Double Fees offers no benefit to either consum-
ers or competition.

In addition, utilizing 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 deceptive to consum-
ers. 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 mate-
rial to a consumer's choice about whether to enroll in an overdraft
protection transfer service.

The Department expects that Institutions will not charge Double Fees.
Institutions may, however, continue to charge an overdraft protection
fee or an overdraft fee, consistent with consumer disclosures.

III. NSF Fees Relating to Representments

Institutions frequently charge an NSF fee in cases where a transaction,
including an Automated Clearing House ("ACH") transaction, is presented
for payment but is declined because the consumer has insufficient funds
in their account to cover the transaction. Where an Institution returns
a merchant's attempted debit entry because the consumer's account had
insufficient funds to cover the debit, ACH rules authorize the merchant
to "reinitiate" or "re-present" the entry a maximum of two times in an
attempt to collect funds.1 The Department has found that some Insti-
tutions charge a separate NSF fee for each presentment, or represent-
ment, of the same item, resulting in multiple NSF fees for a single
transaction ("Multiple NSF Fees").  The practice of charging a consumer
Multiple NSF Fees is deceptive where the Institution's disclosures fail
to disclose expressly that multiple fees may be charged "per item" or
"per transaction."  Further, it is deceptive when the Institution
represents 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. Accordingly, the Department expects that Institutions
currently charging Multiple NSF Fees make clear, conspicuous, and regu-
lar disclosure to consumers that they may be charged more than one NSF
fee for the same attempted debit transaction when that debit is repres-
ented after being declined for insufficient funds. The Department
considers "clear, conspicuous and regular disclosure" to mean that
Institutions will include this disclosure in their regular communi-
cations 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 practice of charging Multiple NSF fees is also potentially unfair.
Consumers have no control over, or involvement in, the representment of
debit transactions and no way to avoid representments once a consumer
has attempted a transaction. The Department expects Institutions to take
immediate action to mitigate the risk that consumers are charged Multi-
ple NSF Fees. Steps that Institutions could take to address this issue
include limiting 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
Institutions become aware of individual consumers who have been charged
Multiple NSF Fees.

The Department recognizes that the unilateral elimination of Multiple
NSF Fees may be technically impracticable for some Institutions in the
short term, including in cases where their own software or the software
of their third-party service providers needs to be updated to allow for
automated identification of representments. Nonetheless, Institutions
are expected to update their internal systems and software and to work
with their third-party service provider(s), as appropriate, to resolve
this issue. The Department ultimately expects

Institutions will not charge more than one NSF fee per transaction,
regardless of how many times that transaction is presented for payment.
Institutions should expect a review of all of the practices identified
in this 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, these examinations
will closely review what steps the 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 require cooperation
from third-party service providers to eliminate this type of fee entire-
ly.

The Department is currently undertaking a broader review of practices
related to the imposition of overdraft and NSF fees and may in the
future issue additional guidance related to these practices.

 
1 Federal Deposit Insurance Corporation, FDIC National Survey of
Unbanked and Underbanked Households, Executive Summary (2017), at 4,
available at
https.//www.fdic.gov/analysis/household-survev/2017/2017execsumm.pdf.

 
2 New York State Department of Financial Services, Industry Letter
titled "Offering Bank On Accounts as an Alternative to New York Basic
Banking Accounts" (Apr. 15, 2022), available at
https://www.dfs.ny.goviindustry_guidance/industry_letters/i120220415
offering_bank_on

 
3 See Federal Deposit Insurance Corporation, Consumer Compliance
Supervisory Highlights (June 2019), available at
https://www.fdic.gov/regutlations/examinations/consumer- compliance-su-
pervisory/ -highlights/documents/ccs-highlights-june2019.pdf; Consumer
Financial Protection Bureau, Supervisory Highlights (Winter 2015),
available at https://files.consumerfinance.gov/f201503_cfpb_supervisory-
highlights-winter-2015.pdf.

 
4 National Automated Clearing House Association, ACH Operations Bulle-
tin  1- 2014: Questionable ACH Debit Origination: Roles and Responsibil-
ities of ODFIs and RDFIs (Sept. 30, 2014), available at
https://www.nacha.org/news/ach-operations-bulletin-1-2014- questionable-
ach-debit-origination-roles-and-responsibilities). The ACH rules require
that representments include the description "RETRY PYMT," which allows
consumers and Institutions to identify representments. ACH Network Risk
and Enforcement Topics (Sept. 18, 2015), available at
https://www.nacha.org/rules/ach-network-risk-and-enforcement-topics.

 
LEGISLATIVE HISTORY:

New Bill

 
FISCAL IMPLICATIONS:

None to New York State

 
LOCAL FISCAL IMPLICATIONS:

None

 
EFFECTIVE DATE:
Sixty days after it shall have become a law.