New York cracks down on bank overdraft fees. Will OCC, CFPB follow?
A new law in New York that’s designed to curb bank overdraft fees may not have much muscle on its own, but some observers believe it could be a harbinger of broader reform.
The measure — which is believed to be the first of its kind — requires state-chartered banks that offer consumer checking accounts to pay checks in the order they are received, or from the smallest to largest dollar amount for each business day's transactions.
Set to take effect on Jan. 1, the New York law does not apply to federally chartered banks, and it is not expected to apply to credit unions. Even for state-chartered banks, the impact figures to be fairly small, since checks have long been waning in popularity, and the law’s restrictions do not apply to either debit card transactions or electronic payments on the automated clearing house network.
Still, the law comes at a time when many banks are reevaluating their overdraft fee practices amid heightened regulatory scrutiny. Consumer advocates hope that the relatively modest step in New York will be a precursor to more consequential action at the federal level.
“Progress comes in fits and starts, but the trend is all in the same direction,” said Alex Horowitz, a senior officer at the Pew Charitable Trusts who studies overdraft practices.
The New York measure was first introduced in 2009, at a time when many banks were facing lawsuits over the practice of reordering transactions from the highest amount to the lowest. Such reordering, which often resulted in more overdraft fee revenue for banks, drew criticism from consumer advocates. Many of the lawsuits resulted in large settlements, and while some banks eliminated the controversial reordering practices, no uniform rules ever emerged.
That the legislation finally became law more than a decade after it was first introduced is a sign of how much traction overdraft reform has gained among Democratic lawmakers.
The bill sat on the legislative back-burner for 12 years, according to Sen. Neil Breslin, D-Delmar, who co-sponsored it with Assemblyman Thomas Abinanti, D-Westchester.
“It was never a priority bill,” Breslin said. But in March, the Democratic-controlled Legislature approved the measure. Then-Gov. Andrew Cuomo signed it last week, just five days before leaving office amid scandal.
In Washington, pressure on overdraft fees from Democratic lawmakers has been mounting. In May, Sen. Elizabeth Warren, D-Mass., criticized JPMorgan Chase CEO Jamie Dimon for collecting overdraft fees during the pandemic. A month later, Rep. Carolyn Maloney, D-N.Y., reintroduced a bill that would prevent banks from reordering customers’ transactions, limit the number of times banks can collect overdraft fees and ensure that the fees charged are “reasonable and proportional” to the overdraft itself.
The Office of the Comptroller of the Currency is currently conducting a review of banks’ overdraft practices, acting Comptroller Michael Hsu told the Senate Banking Committee at a hearing this month.
Hsu also described an inter-agency effort to address what’s known as the “$35 coffee” problem, which refers to consumers who make small-dollar purchases that cause overdrafts and lead to large fees.
“Excessive fees on overdrafts, predatory lending, high-cost debt traps — all these things should be prohibited. They don’t have a place in the federal banking system,” Hsu said during the committee hearing on Aug. 3. “We are looking very closely at overdrafts right now.”
Meanwhile, the Consumer Financial Protection Bureau is “continuing to closely monitor developments” in the overdraft market, which “has the potential to be very costly to consumers,” a CFPB spokeswoman said.
The CFPB, which is currently being led by acting Director Dave Uejio, has made no changes yet. President Biden’s pick to lead the agency, Rohit Chopra, awaits confirmation.
The outcome of the OCC review has the potential to be a game-changer regarding overdraft fees, according to Pew’s Horowitz.
“That could be consequential,” he said. “In the near term, that’s something that could have a big impact because the largest banks in the country are OCC banks, and they have the most customers.”
What happens at the CFPB is also important, according to Horowitz. He said that meaningful CFPB action on the issue of reordering transactions would “accelerate the benefits to consumers and help households that are living paycheck to paycheck.”
Amid both closer regulatory scrutiny and rising competition from fintechs that offer lower-cost accounts, banks’ overdraft fee revenue has been falling. Such revenue plummeted during the second quarter of 2020 as many banks waived fees to help customers through the early months of the pandemic, according to Federal Deposit Insurance Corp. data that was analyzed by the Center for Responsible Lending. Revenue from such fees has rebounded in subsequent quarters, but still remains far below pre-pandemic levels.
Some banks are making changes on their own that they expect will result in a decrease in overdraft fee revenue.
For instance, Ally Bank in Detroit is no longer charging overdraft fees. Huntington Bancorp in Columbus, Ohio, announced a line of credit designed to help customers avoid the charges, and Cullen/Frost Bankers in San Antonio is waiving fees on transactions of up to $100 that take customer balances into negative territory, as long as customers set up a monthly direct deposit of at least $500.
In addition to changing their overdraft programs, a growing number of banks are joining “Bank On,” an initiative by the Cities for Financial Empowerment Fund that offers certification to bank and credit union accounts that feature low costs and do not charge overdraft fees.
The American Bankers Association has encouraged all banks to consider offering those accounts as a way to expand banking services to unbanked and underbanked consumers.
New York is home to about 80 state-chartered banks, according to the FDIC. Those banks include M&T Bank in Buffalo, New York Community Bancorp in Hicksville, Signature Bank in New York City and dozens of community banks, including Tompkins Financial Corp., which operates Tompkins Bank of Castile.
Tompkins Bank of Castile does not currently offer a Bank On-certified account, but it is “actively evaluating the program for the future,” a spokesman said. In the meantime, the Batavia, New York-based bank has already adopted some of the policies required by the new legislation, according to President and CEO John McKenna.
“As a community-focused financial institution, our first priority is always doing what is right for our customers and fortunately this means not much will change for how we currently operate,” he said in an email.
In addition to requiring state-chartered banks to pay checks in the order they are received, or from smallest to largest, the New York law requires banks to honor smaller checks that can be paid if the account has sufficient funds. In the past, banks could decline a large check if there wasn’t enough money to pay it and then decline subsequent checks, even if those smaller checks could be covered by the available funds.
The law will make a difference for customers who frequently write checks and struggle to keep their accounts positive, said Rebecca Borné, senior policy counsel at the Center for Responsible Lending.
At the same time, “checks are not a large part of people’s overall transactions like they used to be,” Borné noted. “Debit card transactions and ACH transactions, those are the more frequent cause of overdraft, so reordering those transactions can still cause people a lot of trouble.”
Wei Ke, managing partner of the North American banking practice at Simon-Kucher & Partners, a strategy and marketing consulting firm, agreed that the law will have a limited impact.
“Even if you do write a couple of checks, it won’t be at the frequency that it would make the scenario described in the legislation a common occurrence,” Ke said. “So the practical implications are probably not a big deal for banks.”
Still, New York could be the first mover in an industry-wide overhaul of overdraft practices, Ke said. “The impact is limited, but it leads to a broader question of where overdraft fees are headed.”
Industry trade groups offered mixed reactions to the law. The New York Bankers Association praised the state’s work to “protect certain consumers” with an account management tool that “many banks already provide,” but it also expressed concern that the law is “another blow” to the state’s banking charter.
“New York’s state-chartered banks provide essential support in the localities they serve and requirements that apply only to those banks make it more difficult for them to fulfill their community-focused mission,” Clare Cusack, the trade group’s president and CEO, said in an email.
The Consumer Bankers Association cautioned that changing overdraft policies by legislation without offering a back-up solution for customers who need short-term, small-dollar liquidity could drive those consumers out of the banking system entirely.
“Policy changes that could eliminate the product altogether won’t get rid of the need, which is why protecting banks’ ability to innovate is so important,” Dan Smith, CBA’s head of regulatory affairs, said in an email.
Industry watchers said they will be waiting to learn whether the New York law has any ripple effects, either in the Empire State or more broadly.
“State laws can affect overdraft practices at state-chartered banks and we’re glad to see state laws like this,” Borné of the Center for Responsible Lending said. “At the same time, to see the kind of comprehensive systemic reform that’s really needed to address this monstrous issue, I think that will take federal action.”