Overdraft Protection Programs
August 11, 2005
To the Chief Executive Officer of the Institution Addressed:
This letter sets forth and clarifies the Banking Department's position on the interpretation of certain aspects of Part 32 of the General Regulations of the Banking Board, which concerns the maximum charge that may be imposed on insufficient funds or on uncollected balances by a bank, trust company, savings bank, savings and loan association or a licensed branch of a foreign banking corporation (collectively an "institution") in connection with a check or other written order drawn upon it, irrespective of whether the instrument is paid, accepted or returned by the institution.
Part 32.1(a) indicates that an institution may impose an "insufficient funds" charge on the maker or drawer of a check or other written order irrespective of whether the instrument is paid, accepted or returned. The regulation provides that the amount of the fee is a business decision to be made by each institution, in its discretion, according to sound business judgment and safe and sound banking principles. Under the rule, an institution reasonably establishes such a charge if it considers the following factors, among others: (1) the cost incurred by the institution for honoring or dishonoring the instrument; (2) the deterrence of misuse by customers of banking services; (3) the enhancement of the competitive position of the institution; and (4) the maintenance of the safety and soundness of the institution. Part 32.1(b) states that ten dollars is the maximum charge that an institution may impose on the payee of a check or other written order subsequently dishonored and returned by the drawee.
The Banking Department interprets the provisions of the New York Banking Law that provide the statutory authority for Part 32 as permitting, and the Banking Department intends to recommend to the Banking Board that it adopt amendments to clarify that Part 32.1(a) enables, an institution (i) to impose different charges on accounts that are established and maintained primarily for personal, household or family purposes in contrast to those that are established and maintained for other purposes; (ii) to impose different charges depending upon whether an institution pays, accepts or returns a check or other payment order; and (iii) to impose charges on electronic as well as check and other written payment order transactions that overdraw an account. Consequently, in imposing a charge under Part 32.1(a), an institution may view the criteria set forth therein as permitting the imposition of a charge based, in part, upon the type of account and the type of transaction. The Department also intends to recommend to the Banking Board that it amend Part 32.1(b) to increase the ten dollar fee ceiling on return items (checks that are received for deposit or collection that are dishonored and returned by the drawee) to twenty dollars and make the ceiling inapplicable to accounts established and maintained primarily for other than personal, household or family purposes.
Part 32.2 addresses charges imposed in connection with the payment, acceptance or return of a check or other written order. It allows an institution, in addition to imposing the maximum charge set forth in Part 32.1(a), to charge interest authorized by law in connection with credit extended in conjunction with the payment of a check or other written order in accordance with a written agreement established pursuant to Sections 108(5), 235(8-b) or 380-i of the Banking Law. Any interest charged pursuant to such an agreement may not exceed the rate of 25% per annum. A licensed branch of a foreign bank is authorized by Section 202 to charge interest and fees permitted under Section 108(5).
Part 32.2 also permits an institution to charge interest on such an extension of credit without a written agreement. If an institution chooses to pay or accept a check or other written order in a case in which there are insufficient funds in the account to cover the check or other written order and there is no written agreement to extend credit to the account holder, an institution may, in addition to imposing on such account holder the one-time maximum fee established by the institution pursuant to the provisions of Part 32.1(a), charge interest for such extension of credit at a rate not exceeding 16% per annum on the credit extended to an individual or other non-corporate entity. If the credit is extended to a corporation, the interest rate may not exceed 25% per annum.
The Department is aware that Federal regulators are permitting federally chartered financial institutions to impose substantially higher charges than their New York State chartered counterparts. As the New York Legislature has expressed its intent that having a means to ensure parity in a timely manner is required to preserve and enhance the State charter, the Banking Department intends to recommend to the Banking Board that it exercise its authority pursuant to Sections 14-g and 14-h of the Banking Law (for banks and trust companies and savings banks and savings and loan associations, respectively) and Part 6 of its Regulations to permit New York State chartered banking institutions to impose charges for payments made against insufficient funds, uncollected balances and return items to the same extent and subject to the same conditions as their Federal counterparts, including the Joint Guidance on Overdraft Protection Programs, 70 Federal Register 9127 (February 23, 2005), applicable to banks and trust companies and the Guidance on Overdraft Protection Programs, 70 Federal Register 8428 (February 18, 2005), applicable to savings banks and savings and loan associations. Those "Wild Card" sections of the Banking Law authorize the Banking Board to adopt regulations that allow the institutions within the purview of such sections to "exercise any right, power, privilege or benefit, to engage in any activity, or to enter into any loan, investment or transaction which [a national bank or a federal savings association, as the case may be], acting directly or through a subsidiary or subsidiaries, may lawfully exercise or into which it may lawfully engage or enter."
Finally, to ensure continuing parity between New York State chartered banking institutions and their Federal counterparts in the future, Governor Pataki has proposed legislation (S.5518/A.8641) that would remove the current requirement that the Banking Board approve Wild Card regulations under Part 6 in each case and would allow banking institutions to initiate the exercise of Wild Card powers, subject to prior notice to the Superintendent of Banks and certain other conditions.
If you have any questions regarding the regulatory and legislative actions discussed in this letter, please do not hesitate to contact Sara Kelsey at 212-709-1640 or David Billet at 518-473-6160.
Diana L. Taylor
Superintendent of Banks