You wanted to know the industry practice and the applicable Connecticut and federal laws relating to bounced check and deposit return item fees.

SUMMARY

Federal law does not place a cap on the fees banks can charge for bounced checks or items that are returned unpaid. Although it is unlikely that a state's limitations on bank service fees would apply to national banks because of preemption issues, states do have the ability to limit bank service fees for state-charted banks. However, Connecticut does not regulate bank service fees. Service fees are generally a matter of contract between the bank and the deposit holder. The state's deposit account contract law and similar federal laws merely require notice about changes.

In addition to the deposit agreement, which must set out any fees that may be assessed, a number of factors influence when and how bounced check and return item fees are assessed, including the bank's geographic location, account type, and account history. Connecticut banks and savings associations charged an average of $22.09 for NSF checks, $23.08 for overdrafts and $12.55 for return items in 2002, according to the 2003 Annual Report to Congress on Retail Fees and Services of Depository Institutions published by the Board of Governors of the Federal Reserve System. Although the report was not published in 2004 or 2005, it is likely that these figures are significantly higher.

EXPLANATION OF FEES

A check “bounces” when there are not enough funds in the check writer's account to pay it. In these situations, a bank will either (1) impose an insufficient funds fee (NSF fee) and not pay the check or (2) pay the check and impose an “overdraft” fee (because the account is overdrawn). These two fees are usually the same or similar. The bank can also charge fees if people write checks against funds that are in the account but not yet available because of check hold periods (sometimes this is called a non-available or uncollected funds fee). This fee is usually the same as or similar to the overdraft/NSF fee. In addition, a bank can impose a deposit return item fee (DRI fee) or “return item fee” on the person who accepts a check and deposits it into his account if that check later bounces.

 The Uniform Commercial Code, generally adopted in each state, addresses the issue of overdrafts and return items. In accordance with the Code, a bank may charge against the account of a customer an item that is properly payable even though the charge creates an overdraft. An item is properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and the bank (C.G.S. § 42a-4-401). Additionally, the Code addresses the issue of returned checks, or “items,” stating that if bank has given a customer a provisional credit for an item and fails to receive payment from the bank on which the item is drawn because of dishonor or other reasons, it may charge-back the account of its customer or seek a refund from its customer's account (C.G.S. § 42a-4-214).

FEDERAL DEPOSIT ACCOUNT CHARGE REGULATION

Federal regulations specify that national banks' non-interest charges and fees, including deposit account service charges, are a business decision that each bank, in its discretion, must make according to sound banking judgment and federal standards of safety and soundness. The federal rules provide a few general guidelines for how national banks should set these fees. They should arrive at these charges on a competitive basis, and not on the basis of any agreement, arrangement, undertaking, understanding, or discussion with other banks or their officers. A bank is considered to reasonably establish these fees if it considers, among others factors:

The regulations also state that the Office of the Comptroller of the Currency evaluates whether a national bank may establish non-interest charges or fees on a case-by-case basis, notwithstanding a contrary state law that purports to limit or prohibit such charges or fees. Thus, the state appears to generally not have authority over national banks' account charges (12 C.F.R. Sec. 7.4002(d)).

Federal law gives national banks broad authority to exercise all incidental powers necessary to carry on the business of banking (12 U.S.C. A., Sec. 24). It preempts state laws that might try to regulate a national bank's legitimate business decisions (such as how to invest its assets and how to price its products).

Questions of preemption are often difficult. Historically, states have had the most success in applying consumer protection requirements, such as disclosures and notifications, to national banks. Sometimes the legislature has included federally chartered banks in its laws on the theory that federal law will operate to preempt them for national banks if preemption applies. Other times, national banks have complied with state laws even though they might be exempted if they challenged them.

STATE BANK FEE LAWS

 Some states do limit the amount of NSF, overdraft, and DRI fees that may be charged by state-charted banks. In reviewing the laws of a few area states, it appears that New York and Massachusetts limit the fees that may be charged while Connecticut and New Jersey do not.

According to the 2003 Annual Report to Congress on Retail Fees and Services of Depository Institutions, published by the Board of Governors of the Federal Reserve System, United States banks and savings associations charged an average of $21.73 for NSF checks, $21.80 for overdrafts, and $6.88 for return items in 2002. The report was not published in 2004 or 2005; however, from a cursory review of on-line fee schedules, it appears that these fees are closer to $30 for NSF and overdraft fees and $10 for DRI fees.

New York

New York law gives its banking board the authority to prescribe, by regulation, (1) the maximum charge which may be imposed by a savings bank in connection with a check or other written order drawn upon it on insufficient funds, regardless of whether the instrument is paid, accepted or returned by the bank, and (2) the maximum charge which may be imposed in the state in connection with a check or other written order received by it for deposit or collection and subsequently dishonored and returned for any reason by the drawee (McKinney's Banking Law §235-c). Current regulations governing NSF and overdraft fees in New York mirror the federal regulations discussed above, which require banks to take certain factors into consideration in setting fees. These standards were put into place in 1999 when the $15 ceiling on NSF charges was removed. Regulations set the maximum charge that a bank may impose in connection with a check received by it for deposit or collection and subsequently dishonored and returned by the drawee at $10. (3 NY Comp. Codes R. & Regs. §32.1).

Proposed amendments to these regulations would allow banks to consider the nature of the account in establishing NSF fees and establish different charges for accounts depending on whether or not they are personal accounts and whether the item is to be paid, accepted, or returned. The proposed amendments would also raise the maximum return item fee to $20 but limit the maximum standard to personal accounts. The comment period for these proposed regulations ended November 21, 2005.

Massachusetts

Massachusetts law limits the fees that may be charged for returned items, allowing banks to assess only a reasonable fee, charge, or assessment that represents its direct costs incurred for processing such check, draft, or money order. The fee is established annually by the banking commissioner (M.G.L.A. 167D § 3). The 2005 DRI fee is $4.73.

Connecticut

Connecticut does not regulate bank service fees. According to the Connecticut Bankers Association (CBA), NSF or overdraft fees and DRI fees allow banks to recover their processing costs and serve as a deterrent. However, CBA and area banks listed a number of factors, in addition to the deposit account agreement, that might influence how or when the fees are assessed. Such factors include the type of account, the account history, and the geographic location of the bank. For instance, banks may waive NSF or overdraft fees for longstanding customers and the fee may vary depending on the number of occurrences within a certain time period. Regarding DRI fees, it was noted that banks might automatically re-deposit the item before assessing the fee in case it is only a timing issue, particularly if the person does not have a history of depositing bad checks. Other banks may simply return the check and charge a DRI fee, or automatically redeposit at least once and charge a second DRI fee if the check is returned again. It is generally accepted that overdraft or NSF fees are assessed even if they are the result of a DRI.

 Table 1 shows overdraft/NSF and deposit return item fees at seven banks that vary in charter type, location, and size. It should be noted that additional or different bounced-check fees may be imposed by the merchant or by the bank if the customer participates in an overdraft protection program. Additionally, check clearing times and the order of posting checks may impact fee assessment.

Table 1: Bank Service Fees

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