NY’s DFS Declares Certain Overdraft Practices To Be Unfair And Deceptive

New York’s Department of Financial Services took an aggressive stand against certain overdraft and NSF practices yesterday, issuing a guidance  prohibiting state regulated institutions from continuing to offer certain types of overdraft services. 

While the DFS’s guidance just applies to state regulated institutions, federal credit unions should pay attention to this development as New York often is a bellwether for the sentiments of other blue state regulators and the CFPB is continuing to examine so-called “junk fees”. 

In the guidance, the DFS provided notice to state-chartered institutions that examiners would be penalizing credit unions that engage in any one of the following practices:

• Overdraft Fees Relating to Authorize Positive, Settle Negative (“APSN”) Transactions
• Double Fees Arising from Futile Overdraft Protection Transfers
• NSF Fees Relating to Representments

Impacted institutions should immediately examine their existing core processor systems to see how they process their payments.  For example, if your credit union uses a batch system and settles transactions hours or days after they have been authorized, you will have to make changes to your system.  This is just one basic example of the operational issues raised by this guidance.   

Because the state issued a guidance as opposed to a regulation following a public comment period, there are other important compliance issues not specifically addressed in the state’s pronouncement.  For example, the guidance does not address how financial institutions should comply with the Authorized Positive Settle Negative prohibition when the initial debit transaction does not reflect the amount the be charged to the member.  In contrast, when the Federal Reserve issued regulations implementing overdraft opt-in requirements for debit transactions more than a decade ago, it recognized that there are situations when it is impossible to know what the size of a debit is going to be at the time it is made [Electronic Fund Transfers, 74 FR 5212-01]. For example, when a member uses a debit card at a gas station, a hold is put on the transaction which may or may not reflect the amount of money ultimately charged; a spouse filling-up her Acura is going to be paying less than the spouse filling up the SUV.  The guidance does not explain how financial institutions should address these discrepancies. 

DFS is presumably interpreting the authority of state regulators to utilize UDAAP powers granted under the Dodd-Frank Act as outlined in a recent opinion letter issued by the CFPB.  But given the importance of the issues that DFS is addressing, one would hope that additional guidance explaining their legal rationale would be forthcoming.  This is all the more important in New York where the Attorney General, and not the DFS, has UDAAP authority.

What we know for sure is that the relative handful of credit unions in New York that choose to be chartered by the state now face a host of compliance issues which their counterparts regulated exclusively by the NCUA do not.