On August 19, 2021, New York state enacted legislation requiring banks to adopt check processing practices intended to minimize non-sufficient funds charges. These new requirements come amid a number of other initiatives aimed at providing relief to economically vulnerable consumers and those adversely impacted by the COVID-19 pandemic, including New York’s relief from overdraft and other fees and proposed federal legislation seeking to address overdraft fees and marketing. New York’s new law, which becomes effective on January 1, 2022, will have a potentially significant impact on banks operating in New York.

  • What are the new requirements? The new law requires banks to pay checks either (i) in the order in which they are received or (ii) from smallest to largest dollar amount for each day’s transactions. However, if a bank dishonors a check for insufficient funds but then receives checks in smaller amounts that could be covered by the existing account balance, the bank must honor such smaller checks to the extent funds are available to do so. Under current New York law, banks are permitted to process checks in any order (and charge fees on any dishonored check), so long as the terms of the bank’s processes are properly disclosed to the consumer and the fees are within the applicable limits. This change may require banks to reconfigure their settlement processes and make conforming changes to their internal and external written materials.
  • Disclosures. At the time an account is opened or prior to any change in policy, banks will be required to provide written disclosures covering the new requirements. Overdraft disclosures have been a point of emphasis for federal and state regulators when examining banks’ transaction processing and overdraft programs, especially when evaluating whether unfair or deceptive acts and practices may be occurring. To mitigate these risks and address changes in bank policy, banks should review materials that inform consumers about processing and overdraft practices, including overdraft policies and procedures, deposit agreements, consumer notices, marketing materials, training materials, and sales scripts.
  • What entities are covered? The new law provides that it will apply to all “banking institutions,” but that term is not defined in the statute, leaving open the question of whether the law’s requirements are intended to apply only to New York-chartered banking institutions or more broadly to all banks operating in New York. Notably, New York has adopted varying definitions of “banking institutions” in other sections of the Banking Law, including those that are limited to New York-chartered institutions and those that more broadly capture all institutions operating in New York irrespective of their chartering authority. Although a passage from the new law’s legislative history suggests that lawmakers intended it to apply only to New York-chartered banking institutions, we anticipate that this issue will be clarified either through the rulemaking process required of the Department of Financial Services under the new law, which hopefully will be completed before the law becomes effective at the beginning of next year, or possibly by a technical amendment through additional legislation.  In the event the Department of Financial Services seeks to extend the reach of the new law beyond banks they charter solely through the rulemaking process, we would expect legal challenges to such rulemaking. At a minimum, as 2022 is quickly approaching, New York-chartered banking institutions should not wait to begin implementing any necessary changes to their overdraft practices and disclosures.

Institutions seeking advice on the new law, including its applicability to New York operations of non-New York chartered banks, are encouraged to reach out to any of the authors of this Advisory or their usual Arnold & Porter contact.