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 therefore imperative that regulated depository institutions (“Institutions”) be transparent in the fees associated with deposit accounts and eliminate 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 Institutions to offer Bank On accounts, which, among other things, eliminate overdraft and non-sufficient funds (“NSF”) fees.[2]  The Department, through the supervisory process, has identified several unfair or deceptive 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 overdraft 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,[3] the Department understands that some Institutions may have already taken steps to avoid this practice.  To the extent that Institutions are currently charging overdraft fees related to APSN transactions, 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 transaction, 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 accompanying 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 overdraft.  The imposition of Double Fees offers no benefit to either consumers 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 consumers.  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 material 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.[4]  The Department has found that some Institutions charge a separate NSF fee for each presentment, or representment, 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 regular disclosure to consumers that they may be charged more than one NSF fee for the same attempted debit transaction when that debit is represented 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 communications 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 Multiple 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 entirely.

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.




Adrienne A. Harris, Superintendent
New York State Department of Financial Services

[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-survey/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.gov/industry_guidance/industry_letters/il20220415_offering_bank_on.

[3] See Federal Deposit Insurance Corporation, Consumer Compliance Supervisory Highlights (June 2019), available at https://www.fdic.gov/regulations/examinations/consumer-compliance-supervisory-highlights/documents/ccs-highlights-june2019.pdf; Consumer Financial Protection Bureau, Supervisory Highlights (Winter 2015), available at https://files.consumerfinance.gov/f/201503_cfpb_supervisory-highlights-winter-2015.pdf.

[4] National Automated Clearing House Association, ACH Operations Bulletin #1-2014:  Questionable ACH Debit Origination:  Roles and Responsibilities 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.