NYDFS Proposals Target Overdraft Fees

The New York Department of Financial Services (NYDFS) has proposed amendments to 3 NYCRR Parts 32 and 6 (Proposed Rule), which introduce stringent requirements governing overdraft and insufficient funds (NSF) fees. These changes, part of Governor Hochul’s consumer protection initiative, represent a critical shift in state-level regulation as the Consumer Financial Protection Bureau (CFPB) withdraws its national overdraft fee rule given the new federal administration. This state-led approach may signal broader trends in consumer financial protection.  

These measures underscore states' potential to create consumer protection mechanisms in the absence of robust federal action. Financial institutions must anticipate these developments and align their operations with evolving state mandates.

Key Provisions of the Proposed Rule

• Limits on Charges
  • Single NSF (Non-Sufficient Funds) Fee Cap: Institutions cannot impose more than one NSF fee for a declined transaction, even if the payee represents or reinitiates the debit.
  • Daily Fee Limits: A maximum of three NSF or overdraft fees can be imposed per day.
  • Small Transactions: No NSF charges are allowed for transactions under $20.
  • Proportionality: Fees cannot exceed the overdraft or NSF transaction amount.
• Transaction Processing Rules
  • Settlement Ordering: Institutions must process electronic debits in the order authorized or from the lowest to highest dollar amount.
  • Prohibited Practices: Processing transactions from highest to lowest dollar amounts is presumed a violation unless it aligns with permitted methods.
• Notice and Disclosures
  • Pre-Debit Alerts: Prior to imposing overdraft charges on an electronic debit, banks must notify consumers via the fastest communication channel (email, text, or app alerts).
• Advance Fee Change Notices: Institutions are required to send notice at least 30 days before NSF or overdraft fee increases and may only charge up to three (3) NSF charges per account per day.
• Notice Requirement After First Insufficient Funds Charge: Within 10 business days after imposing the first insufficient funds charge on a consumer's account in a calendar year, an institution must send a notice to the account holder. This notice can be sent by mail or by email (if the account holder has agreed to receive electronic communications). The notice must include:
  • Identification of the insufficient funds charge imposed;
  • An explanation of why the charge was imposed;
  • Information on how the account holder can avoid such charges in the future; and
  • A description of all methods available for the account holder to check their account balance.
• Overdraft Fee Restrictions: Prohibits institutions from imposing overdraft fees on any electronic debit if the consumer's account balance, as shown in a mobile app, website, ATM, or via telephone, was enough to cover the transaction when it was authorized – even if the balance is negative when the transaction is settled.
• Limits on Return Deposit Item Charges: Prohibits institutions from imposing return deposit fee item fees unless specific conditions are met (e.g., checks lacking a signature or presented after expiration dates).
• Fixed Fee Structures: Requires institutions to set fixed amounts for overdraft and NSF fees. NSF fees cannot exceed overdraft fees.

In addition to addressing overdraft and NSF fees, as part of her 2025 State of the State address, Governor Hochul also proposed legislation targeting emerging financial products and practices, including Buy Now, Pay Later (BNPL) services. Other proposals called for bolstering consumer education and safeguarding against predatory practices across various financial services.

Our Take

NYDFS' Proposed Rule comes after the CFPB decision to withdraw its Overdraft Fee Rule. The CFPB’s decision to walk back its rule created an opening for states like New York to fill this consumer protection gap. Indeed, on January 15, 2025, outgoing CFPB Director Rohit Chopra and General Counsel Seth Frotman published an article encouraging states to leverage their consumer protection authority.¹ We may see other Democratic-led states follow a similar format to the Proposed Rule and, more generally, may see such states seek to enforce other aspects of consumer protection given the likelihood that the CFPB soon reverses much of the rulemaking and guidance promulgated during Director Chopra’s tenure. The result for financial institutions and financial services companies could be a complex, state-by-state framework that makes it harder to ensure operational efficiency and compliance.

For potentially impacted institutions, we recommend the following:

• Evaluate Current Policies: Review existing practices related to overdraft and NSF fees and transaction processing systems to ensure alignment with the NYDFS rules.
• Strengthen Consumer Communications: Develop clear, compliant notifications for pre-debit alerts and annual fee disclosures.
• Enhance Operational Systems: Update transaction ordering systems to comply with the proposed requirements, including ensuring credits are applied before debits.

The Proposed Rule is open for public comment until February 3, 2025.

¹ See Rohit Chopra & Seth Frotman, State Enforcement as a Federal Legislative Tool, Harv. J.L. (2025). Available at: https://journals.law.harvard.edu/jol/2025/01/15/state-enforcement-as-a-federal-legislative-tool/.