On January 23, 2025 the New York Department of Financial Services (NYDFS) announced proposed regulations to curb overdraft fees and insufficient funds fees charged by banks in New York. The proposed rules aim to protect consumers from what the NYDFS describes as "exploitative and deceptive banking fees."
The proposed regulations would impose new limitations on a range of overdraft and NSF fee practices. Broadly, this includes restrictions on fees for small transactions, requirements for customer notification, and stricter transaction processing rules. Specifically, the proposed regulations include the following requirements:
- Elimination of Overdraft Fees for Small Transactions. The proposed regulations would prohibit New York-chartered banks from charging overdraft fees on overdraft transactions of less than $20 or if the overdrawn amount is less than the fee itself.
- Increasing Banks' Customer Communication Obligations. Banks would be required to notify customers of a potential overdraft before charging them for it, and the fee must also be priced "reasonably."
- Limits on Serial Daily Fees and Reordering Transactions. The regulations prohibit charging more than three overdraft fees per day on a customer's account, charging serial daily fees until an overdraft is repaid, and reordering incoming transactions to incur additional overdraft fees.
- Ban on Authorize-positive, Settle-negative Overdraft Fees. Banks would be banned from charging overdraft fees in authorize-positive, settle-negative situations, which occur when a customer's account no longer has enough money to cover a previously approved transaction by the time it is actually processed.
- Limits on NSF fees. Banks would be limited to charging at most one nonsufficient funds fee (NSF fee), for a declined transaction. If the transaction is resubmitted, charging new NSF fees would be prohibited. If the transaction is "instantaneously or near-instantaneously" declined, no NSF fee would be permitted.
Putting It Into Practice: The NYDFS proposal follows the CFPB's finalization of a rule intended to crack down on overdraft fees for banks with over $10 billion in assets (previously discussed here). While the CFPB's rule applies only to large financial institutions, the NYDFS proposal would apply to state-chartered banks of all sizes. State and federal regulators in 2024 also engaged in various other overdraft fee-related rulemaking and enforcement (previously discussed here, here, and here). The NYDFS proposed regulations may influence other states to consider similar actions, which could lead to a complex patchwork of state-level overdraft fee rules. Banks in other states should closely monitor legislative and regulatory developments in their jurisdictions and assess the potential impact of any new rules on their operations and compliance strategies.
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