Federal Preemption of State Law Limiting Account Charges

Issue/Inquiry

The Bank charges $23.00 for returned deposited checks. The Bank has a new customer who was under the impression that banks could not charge more than $10.00 for a returned deposited check. Are there are any legal restrictions on the amount that can be charged for returned deposited items in New York State?

Response Summary

Federal law preempts New York law pertaining to account charges and fees. Therefore, as a federal savings bank, the Bank has the discretion to establish return deposit fees in accordance with sound judgment and safe and sound banking principles.

Response Detail

Under New York banking regulations, the maximum charge a bank may impose regarding a check or other written order received for deposit or collection and subsequently dishonored and returned to the drawee is $10.00. NY CRR 32.1(b).

The State of New York has authority to legislate limits on account charges for its own state-chartered banking institutions. However, the Bank is a federal savings bank overseen by the Office of Comptroller of the Currency (“OCC”). To some degree, federal law preempts state laws regulating mortgage rate limits, credit card rate limits, account fees, account charges, ATM fees, gift card fees, branching, insurance, deposit account charges, reserve requirements, capital ratios, truth-in-lending, and truth-in-savings.

In this case, a determination must be made concerning the extent to which the account charges of the Bank are governed by New York State laws and regulations.

A national bank is permitted to establish non-interest charges and fees at its own discretion, in accordance with safe and sound banking principles. As such, it should employ a decision-making process that considers factors such as:

• The cost incurred by the bank in providing the service
• The deterrence of misuse by customers of banking services
• The enhancement of the competitive position of the bank in accordance with the bank’s business plan and marketing strategy
• The maintenance of the safety and soundness of the institution. 12 CFR 7.4002(a)(2).

Under the regulations of the OCC implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act, federal savings banks are subject to the same laws and legal standards that are applicable to national banks regarding the preemption of state law.  12 CFR 7.4010(a).

In this case, federal law preempts New York State law limiting the charge that can be made for returned items. Therefore, the Bank can establish this charge at its own discretion, in accordance with safe and sound banking principles.

The same preemption pertains to other account charges and fees of the Bank. As such, the Bank should be able to demonstrate that it has considered the factors prescribed by the OCC regulations. For example, it could compare its fees to those of its peers, work out the cost for handling an item or providing a service, or indicate the effect of not having the restraint of fees and charges on its operations or safety and soundness.

This response is for informational purposes only and is not intended for legal guidance.

This entry was posted on Monday, July 20th, 2020 at 9:47 am.