NY Dept. of Financial Services issues overdraft fee guidelines / NSF | Ballard Spahr LLP

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The New York State Department of Financial Services (DFS) published a letter to the industry provide advice on overdraft and insufficient funds (NSF) fees to deposit-taking institutions he oversees.

The DFS says that through the monitoring 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 assess whether institutions are engaging in deceptive or unfair practices with respect to overdraft and NSF fees during future consumer compliance and fair lending reviews. “.

Authorize Positive Transactions, Settle Negative Transactions (APSN). APSN transactions are situations in which a bank charges an overdraft fee on debit card transactions when the consumer’s account had sufficient available balance at the time the transaction was authorized by the bank, but a subsequent transaction unrelated reduces the consumer’s available balance below the amount. of the original transaction when it is presented for settlement. The DFS considers the imposition of overdraft fees on ASPN transactions to be an unfair practice because:

  • It causes harm to consumers that consumers cannot reasonably avoid since consumers have no control over or involvement in the settlement and presentation of debit card transactions, which usually take place within days of the consumer making the transaction ;
  • Where an institution authorizes a debit card transaction to an account with sufficient funds to cover the transaction, the consumer reasonably expects not to incur overdraft fees on that transaction; and
  • There is no benefit to consumers or competition from any institution’s overdraft fees on APSN transactions.

DFS says it expects all institutions that currently charge overdraft fees on APSN transactions to end the practice.

Double charges resulting from unnecessary transfers of overdraft protection. 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 otherwise have been an overdraft transaction, thus preventing the imposition of an overdraft fee. The DFS says it has found that some institutions charge fees for overdraft protection transfers even when the transfer amount is insufficient to prevent the overdraft and the imposition of overdraft fees.

The DFS considers the practice of charging a consumer both an overdraft fee and an overdraft protection fee that has failed to prevent the overdraft to be an unfair practice because these “double charges”:

  • Harm consumers by charging a fee 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 consumers or competitors.

The DFS also considers the use of any disclosure indicating that an overdraft protection transfer (including associated fees) serves to prevent an overdraft, when it does not necessarily do so, to be a misleading practice. According to DFS, a consumer’s interpretation that a fee for an overdraft protection transfer will only be charged when the transfer actually protects against overdraft is reasonable, and any misrepresentation is material to the consumer’s choice of whether or not to sign up for an overdraft protection transfer service.

DFS states that it expects institutions not to charge double fees, but confirms that institutions may continue to charge overdraft protection fees or overdraft fees, according to information provided to consumers.

Non-funding expenses related to performances. This situation involves NSF fees which are charged when a transaction such as an Automated Clearing House (ACH) transaction is presented for payment but is declined because the consumer does not have sufficient funds in their account to cover the transaction. If the institution returns a merchant’s debit entry attempt due to insufficient funds, ACH rules allow the merchant to “reset” or “re-present” the entry up to two times. . The department says it has found that some institutions charge separate NSF fees for each presentation or performance of the same item, resulting in multiple NSF fees for a single transaction.

DFS considers charging multiple fees to NSF to be a misleading practice when the institution’s statements do not expressly disclose that multiple fees may be charged “per item” or “per transaction”. It also considers it a misleading practice for an institution to state 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. DFS states that it expects institutions currently charging multiple NSF fees to clearly, clearly and consistently inform consumers that they may be charged more than one NSF fee for the same attempted debit transaction when this debit is resubmitted after being declined for insufficient funds. To make “clear, visible, and regular disclosure,” according to the DFS, institutions must include such disclosure in their regular communications with consumers (for example, in each account statement, rather than only in account opening documents). ) as well as a direct point of contact. contact for consumers who may have been subject to multiple NSF charges.

DFS considers the imposition of multiple NSF fees to also be a potentially unfair practice and expects institutions to take immediate action to mitigate the risk of consumers being charged multiple NSF fees, such as limiting the NSF fees that may be charged over a period of time (e.g., per week), performing periodic manual reviews to identify instances of multiple NSFs, and offering refunds to consumers when an institution becomes aware of individual consumers who have been charged with several NSF charges.

DFS recognizes that the unilateral elimination of several NSF fees may be technically impractical for some institutions in the short term, including in cases where an institution’s software or software from a third-party service provider needs to be upgraded. to allow automated identification. of representations. Nonetheless, DFS expects institutions to update their internal systems and software and work with their third-party service provider(s), if applicable, to resolve this issue so that ultimately consumers are not charged more than one NSF fee per transaction, regardless of the number of times the transaction is presented for payment.

DFS says institutions should expect a review of all practices identified in the industry letter to be included in consumer compliance and fair lending reviews conducted by the department. With respect to the imposition of multiple NSF charges, DSF reviewers will look closely at the steps an institution has taken to address the risk of multiple NSF charges in the near term, including steps it has been able to take unilaterally and those that require the cooperation of third-party service providers to completely eliminate multiple NSF charges.

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

Overdraft fees continue to be a CFPB focus. Also, in a recent report On the significant consumer compliance issues identified by FDIC examiners during consumer compliance reviews, the FDIC raised concerns regarding the charging of multiple NSF fees for the representation of unpaid transactions. The FDIC indicated that failure to disclose material information about practices and representation costs may be misleading and also potentially unfair and noted that it required banks to provide additional restitution beyond what had been agreed to in the class action settlements.

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