NY Regulator and Lawmakers Join CFPB in Push to Ban Overdraft Fees

Rohit Chopra, director of the Consumer Financial Protection Bureau (CFPB), has made it a priority for the bureau to fight against “junk fees,” overdraft fees, non-sufficient fund (NSF) fees and credit card late fees. He has also encouraged state regulators to take a more active role in applying consumer finance protection rules, as federal law doesn’t prevent them from applying certain rules. 

On Tuesday, July 12, the New York Department of Financial Services (DFS) showed Mr. Chopra that it is listening. Adrienne Harris, superintendent of the DFS, announced that the regulator is prohibiting unfair and deceptive overdraft and NFS practices. 

In a very similar speech used by Chopra before, Harris said, “this Guidance sets clear expectations for New York banks and credit unions to prevent improper or unfair charges of overdraft and NSF fees, to encourage these institutions to address demand for low-cost banking services and to prevent harm to the most vulnerable consumers of banking services.” 

The Guidance doesn’t prohibit all types of overdraft or NSF fees; it targets three types that, in the regulator’s view, are more likely to constitute an unfair or deceptive practice.  

First, overdraft fees relating to Authorize Positive, Settle Negative transactions. This is when institutions are charging consumers an overdraft fee even though they had a sufficient positive balance at the time that the transaction is authorized by the Institution, but then the balance goes to a negative level due to other unrelated transactions. The DFS recognizes that many institutions have already taken steps to avoid this practice, but it expects all institutions to discontinue this practice. 

Second, double fees from futile overdraft protection transfers. Some banks offer overdraft protection services for a fee. This means that before an account goes below a certain level and to avoid an overdraft fee, the bank transfers money from another account the customer holds with the bank to cover the difference. However, the regulator found that some banks charge a fee for this transfer even if the amount transferred is insufficient to prevent the overdraft. As a result, the customer is charged twice, one for the transfer and one for the overdraft. 

Third, NSF fees relating to representments. When a customer’s card is declined for insufficient funds to cover a transaction, some institutions charge an NSF fee, and the regulator is ok with that. The problem comes when the merchant attempts more times to complete the transaction, the card is again declined, but the customer is charged an NSF fee each time that the card is declined. In this case the regulator wants institutions to change this practice, but it didn’t go as far as prohibiting it. The regulator is requiring institutions to be more transparent and tell customers that they may be charged more than once for each transaction. It also urged them to “take immediate actions to mitigate the risks that consumers are charged multiple NSF fees,” for instance by limiting NFS fees to a certain time period (i.e. a week) or offering refunds to customers. 

While this was happening in New York, the CFPB could see that more supporters were joining in its crusade against overdraft fees in Washington D.C.  

Congresswoman Maloney and Senators Booker and Warren gathered in D.C. in a press conference also on Tuesday, July 12, to rekindle their efforts to prohibit overdraft fees through legislation at the federal level. Congresswoman Maloney introduced in 2021 the Overdraft Protection Act in the House of Representatives, and Senator Booker did the same in the Senate with the Stop Overdraft Profiteering Act with Senator Warren as cosponsor. 

These proposals seek to limit the amount of overdraft and NSF fees that institutions can charge and require that these charges need to be “reasonable and proportional” to the cost of processing these transactions and the amount of the overdraft.   

Read more: CFPB May Examine Banks With High Overdraft Fees