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Banking Interpretations

Part 32 Gen Regs
NYSBL §9-g(1), 108(8), 202(8)
§254-b Real Property Law

Memorandum

To: Examiner Valdes

From: Jacquelyn A. Hart – Legal Division 

Date: January 21, 2003 

Subject:    

1.         Part 32.1(b) of the General Regulations of the Banking Board (“GRBB”) states that the maximum charge which may be imposed by a bank, trust company, savings bank, savings and loan association or licensed branch of a foreign banking corporation in connection with a check or other written order received by it for deposit or collection and subsequently dishonored and returned for any reason by the drawee is $10.00. 

A review of the records of __________________, a New Jersey state chartered bank (“______”), disclosed that ______ was in fact applying a $15.00 charge.

______ was required to immediately revise the Schedule of Interest and Charges.  In addition, an analysis was to be completed of all accounts with checks returned and the excess fees reimbursed to the customers. This review would encompass the period from March 31, 2000 to date. 

______’s response states that it is not subject to the definition of a “bank” and that §§108(8) and 202(8) of the New York State Banking Law (the “Banking Law”) do not apply to ______.  Therefore, ______ is not subject to the $10 fee limit. 

______’s argument, that it is not a “bank” under §§108(8) or 202(8) of the Banking Law, is an incorrect analysis of applicable law.  However, its conclusion is valid.  The Riegle-Neal Amendments Act of 1997 (Pub. L. 105-24, 111 Stat. 238) (“Riegle-Neal”) amends 12 U.S.C. §1831a to provide that “[t]he laws of a host state, including laws regarding … consumer protection … shall apply to any branch in the host state of an out-of-state bank to the same extent as such state laws apply to a branch in the host state of an out-of-state national bank.  To the extent host state law is inapplicable to a branch of an out-of-state state bank in such host state pursuant to the preceding sentence, home state law shall apply to such branch.”  The standard established by Riegle-Neal has been included in the Conference of State Board Supervisors’ Nationwide Cooperative Agreement, revised December 9, 1997 (the “CSBS Protocol”), to which both the New York and New Jersey Banking Departments are a party. 

In the case of ______, a New Jersey state chartered bank with branches in New York, New York is considered the host state and New Jersey is its home state.  §32.1 of the GRBB specifically applies to all banks, trust companies, savings banks, savings and loan associations and licensed branches of a foreign banking corporation, but not to out-of-state national banks.  Therefore, the fee limitation imposed does not apply to ______.  ______ is subject to the fee limitations, if any, established by New Jersey Banking Law.  A determination should be made by your division that ______ is in compliance with the requirements of New Jersey Banking Law regarding the maximum charge that may be imposed by a New Jersey state chartered bank with respect to dishonored and returned checks. 

It should be noted that if, as discussed below in response to item 4, Part 32.1(b) of the GRBB applied more generally to all banking institutions (and had not been otherwise preempted by federal law), then ______ would be subject to the fee limitations established therein.   

4.            Section 9-g(1) of the Banking Law states that no banking institution shall assert, claim or exercise any right of set off against any deposit account into which social security or supplemental security income payments are deposited pursuant to an agreement with such banking institution which provides that such payments be deposited directly into such deposit account without presentation to the depositor at the time of deposit. 

______’s Deposit Account Agreement and Disclosure Information (the “Disclosure Information”) states that ______ may, without notice, withdraw any or all money from the account and apply that money to reduce any indebtedness that is owed to ______, as permitted by law. 

Although the Disclosure Information states “as permitted by law,” ______ was required to revise both the agreement and the disclosure to specifically disclose the actual language as contained in §9-g(1). 

______’s response refers to a decision by the Second Circuit that overrides State law on the question of set off against an account into which Social Security benefits are deposited. 

______’s argument -- that federal law is dispositive on the question, citing two Second Circuit cases[1] to support its position that 42 U.S.C.§407(a) (§207 of the Social Security Act), which provides in relevant part that Social Security benefits cannot be “subject to execution, levy, attachment, garnishment, or other legal process”, supplants §9-g of the Banking Law, is not supported by the case law cited.

Fetterusso v. State of New York is distinguishable on its face.  In Fetterusso, the court addressed the issue of whether §43.03(c) of the New York Mental Hygiene Law obligating involuntary committees to the custody of the New York State Office of Mental Health (“OMH”) to contribute to their care and maintenance and the attachment of their Social Security benefits in furtherance of this obligation was in violation of §407(a).  In that case, the lower court determined that the plaintiffs’ Social Security benefits used to defer the cost of their care, were “not attached by legal process.  Rather, they [were] remitted by the representative payees designated.”[2]  In this case, OMH was the representative payee for each of the plaintiffs and the use of Social Security benefits to pay for their care was deemed an appropriate use of those benefits.  This finding was upheld on appeal. 

______ states that “the [c]ourt’s holding was based on the fact that there was no indication that the plaintiffs did not consent to use of their Social Security benefits to satisfy their costs, and thus no execution, levy, attachment, garnishment or other legal process was present to trigger a §407(a) violation.” 

______ ignores a fundamental piece of the courts’ determination.  The lower court relied on the fact that the plaintiffs in Fetterusso were criminals who were committed pursuant to a “criminal court’s findings of (1) not guilty of charged crimes because of mental illness and (2) dangerousness because of mental illness.”[3]  The court found that federal regulations specifically provide for the application of Social Security benefits to the costs of care for mental incapacity.[4]  This finding was affirmed by the appellate court, which went into substantial detail to limit its findings to those cases involving only people found not guilty of a crime because of mental illness and only to the extent of treatment pursuant to a commitment order, not to any period of “automatic custody.”[5]

In Frazier v. Marine Midland Bank, the facts are as follows:  Plaintiff was a co-obligor on an installment loan agreement executed by her niece.  This agreement was assigned to Marine Midland Bank.  Plaintiff also established a checking account with Marine Midland.  The agreement entered into at the time the checking account was established authorized Marine Midland to use any money in her account to offset any indebtedness she may have to Marine Midland.  Plaintiff regularly made deposits at the teller’s window of Marine Midland.  Included in these deposits was at least one social security check issued by the government. 

______ argues that the court determined that there was no violation of §407(a) “because the set off arose by operation of an agreement between the plaintiff and [Marine] Midland.  The [c]ourt also noted that plaintiff only needed to close her checking account at Marine [Midland] and open an account elsewhere to avoid … a setoff of funds.”  This argument ignores basic facts found by the court.  According to the record in the court proceedings, the plaintiff made all of her deposits in person at a teller window; almost all of her deposits were of cash; and only one of the non-cash deposits consisted of a government-issued check.  The court believed that, based on this record, the plaintiff’s “social security benefit funds in plaintiff’s account were, at the very least, ‘intermingled’ with funds from other sources, and it was unreasonable for defendant to treat those funds as alienable by operation of its contractual right to setoff rather than as inalienable ‘moneys paid or payable’ under the Social Security Act.”[6]  In the case of moneys direct-deposited into an account which are the focus of §9-g of the Banking Law, those funds are not intermingled, but readily identifiable as inalienable Social Security benefits. 

Further, the court specifically stated that  

the purpose of §407 is to insure that a beneficiary has sufficient resources to meet her basic needs, and this is accomplished by allowing uninterrupted access to moneys received as benefits. … The immediate effect of §9-g of New York’s Banking Law is to prohibit banks from setting off against any depository account that is subject to an agreement between the depositor and the bank for the direct deposit of social security or supplemental security income benefit payments, and to provide same-day notice of setoffs against any other accounts. … Such an effect does not impede, modify, or conflict with the purposes of §407; rather §9-g supplements federal law by creating a defense mechanism for depositors, where none had previously existed, against a bank’s right of common law setoff.  That mechanism insures the ultimate welfare of the social security benefits recipient by providing a means of insulating those benefits from a bank’s setoff procedures.[7]  

Additionally, the court differentiated the facts in Frazier from the protection addressed in §9-g, specifically stating that the “fact that §9-g has the additional effect of allowing setoff against funds derived from social security payments deposited in an account by the recipient herself.”[8]  

______ further argues that its customers have voluntarily opened their accounts, constituting a contractual agreement with ______, and that the customers have made arrangements for direct deposit of their Social Security benefits into those accounts.  It does not require direct deposit into the accounts.  While this is certainly true, as far as it goes, §9-g of the Banking Law requires that this contractual arrangement cannot include a setoff against Social Security benefits direct deposited into those accounts. 

______ further argues that public policy concerns demand a finding that ______’s practices be upheld because the overall objective of the Social Security system is ‘the protection of its beneficiaries from some of the hardships of existence.’”[9]  This argument is totally without merit.  As discussed in both Fetterusso and Frazier, the purpose of §407(a) is to insure that Social Security recipients have the resources to meet their most basic needs.  These usually fall into the areas of food, shelter, basic clothing – not payment of overdrafts.

Lastly, as discussed in response to item 1 above, 12 U.S.C. §1831a permits New York, as host state to ______, to apply the same laws to ______ as it would to an out-of-state national bank.  Section 9-g of the Banking Law specifically applies to all banking institutions.  This would include ______.

 ______ states that it has revised its Disclosure Information to provide more detailed information concerning Social Security benefits and the issue of setoff.  This revised language should be reviewed and amended as needed to conform to §9-g of the Banking Law. 

5.            Section 254-b(1) of the Real Property Law provides that banks may neither impose late charges, before the 15th day after a payment is due, nor, impose a charge which is greater than 2% of the installment due.

______’s current practice is to impose late charges on adjustable rate mortgage loans at the rate of 5%, in violation of this law.

______ was required to immediately revise the Schedule of Interest and Charges.  In addition, an analysis was to be completed of all mortgage accounts where late fees were applied and the excess fees reimbursed to the customers.  This review would encompass the period from March 31, 2000 to date.

______ is of the opinion that Federal law has pre-empted State law with regard to banks chartered out of New York State.  The response refers to the Federal Deposit Insurance Act being “dispositive” with regards to what a New Jersey chartered bank with branches in New York may charge for late fees on loans made to borrowers residing in New York.

Section 6.1 of the CSBS Protocol provides that “[h]ost state law that applies to the operations of a branch established in the host state by an out-of-state national bank, shall apply to the operations of a host state branch of a multi-state bank, including … consumer protection laws, including lending and usury laws to the extent that laws or court decisions regarding the exportation of interest rates are inapplicable.”  Generally, §254-b(1) of the Real Property Law applies to all mortgages and lenders.  This would include ______.  ______ argues, however, that §27 of the Federal Deposit Insurance Act (“FDIA”), 12 U.S.C. §1831d, governs the charging of “interest rates” by state-chartered insured depository institutions and that this provision preempts §254-b(1) of the Real Property Law.  I agree with this interpretation.

FDIC General Counsel’s Opinion No. 10: Interest Charges Under Section 27 of the Federal Deposit Insurance Act (“General Counsel’s Opinion No. 10”) provides that §27 of the FDIA is intended to extend the “most favored lender” status established for national banks under §85 of the National Bank Act to insured state-chartered banks, like ______.  Further, General Counsel’s Opinion No. 10 discusses the extensive interpretation courts have given to determining what constitutes “interest” for purposes of §27 of the FDIA.  Courts have held that, in addition to traditional interest, fees such as late payment fees, cash advance fees, overlimit fees, annual fees and membership fees, should be included in the scope of charges that are entitled to “most favored lender” status under §27 of the FDIA.  States have the ability to “opt-out” of §27 by adopting legislation or certifying that the voters of the state have voted in favor of any provision, constitutional or otherwise, which states explicitly and by its terms that the state does not want the amendment made by such section to apply with respect to loans made in that state.[10]  There is no statutory evidence that New York ever opted-out, as provided therein. 

Therefore, it appears that, pursuant to §27 of the FDIA, ______ is authorized to export interest and related charges, such as late payment fees, charged in the State of New Jersey on loans made to customers in the State of New York.  A determination should be made by your division that ______ is in compliance with the requirements of New Jersey law regarding the imposition of late charges on mortgage loans. 

Noted:  ________
               SAK

cc:       Ms. Barbara Kent
            Mr. Daniel Muccia
            Mr. Edward Kramer 


[1]         Fetterusso v. State of New York, 715 F.Supp. 1272 (S.D.N.Y. 1989), aff’d 898 F.2d 322 (2d Cir. 1990), and Frazier v. Marine Midland Bank, 702 F. Supp. 1000 (W.D.N.Y. 1988). 
[2]         Fetterusso v. State of New York, 715 F.Supp. 1272, 1274 (S.D.N.Y. 1989).
[3]         Id. at 1273. 
[4]         Id. at 1274. 
[5]         Fetterusso v. State of New York, 898 F.2d 322, 326-7 (2d Cir 1990). 
[6]         Frazier v. Marine Midland Bank, 702 F.Supp. 1000, 1004 (W.D.N.Y. 1988). 
[7]         Id., emphasis added. 
[8]         Id. 
[9]         citing United States v. Silk, 331 U.S. 704, 711 (1947). 
[10]
        12 U.S.C. §1730g note. 

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