WASHINGTON - The New York State Banking Department has finalized a rule that will let state banks charge higher overdraft and bounced-check fees.
Bankers are hoping that other states will soon follow suit, while consumer advocates decried the New York rule.
But Diana Taylor, the agency's superintendent, said in an interview Wednesday that she had little choice. She argued that more state banks could have converted to national charters to avoid complying with state consumer-protection laws.
"I did feel like we had to do it," Ms. Taylor said. "If we don't allow our banks to do the same things that national banks can do, then the probability of them changing charters increases. Do we want to allow all banks to leave our charter?"
The rule, which the agency's banking board passed Feb. 2, emulates one federal regulators enacted in May that classified overdraft and bounce-protection programs as services, not extensions of credit. The state department said its "wild card" authority allowed it to give state-chartered banks powers similar to those of national banks.
The state is expected to publish the new rule Feb. 22.
The New York department was hard hit by the 2004 charter conversions of the two largest banking companies it supervised: JPMorgan Chase & Co. and HSBC Holdings PLC. The department - which, like most regulators, is funded by exam fees - took a 30% revenue hit from the two charter switches.
Other state regulators have also feared that a January 2004 rule from the Office of the Comptroller of the Currency that established broad preemption for national banks, exempting them from most state consumer-protection laws, could lead to similar conversions.
"It's about parity," Ms. Taylor said. "We are in a very tough position as a state banking regulator as a result of preemption."
Some observers said that the New York rule will persuade other state regulators to issue similar rules.
"It's a harbinger of things to come elsewhere," said former Rep. John LaFalce, now a law professor at Canisius College in Buffalo. "The banks will undoubtedly be clamoring for this."
Eric Halperin, senior policy counsel for the Center for Responsive for Lending, said it is watching other states carefully.
"It is something we are concerned about, but it's unclear whether or not the same set of circumstances will present itself elsewhere," he said. "The federal regulators have set a very low bar, and we fear that states like New York that had generally supported consumer protections" could be moving away from those interests for competitive reasons.
Ms. Taylor said she believes the New York rule is "a very good template" for other states. "We will continue to tweak it," and that if consumers find they are being charged excessive fees, the department will address such incidences on a case-by-case basis.
Banking industry representatives said they were pleased with the New York rule.
"To the extent that it increases competition among charters and institutions themselves, it is positive for the industry," said Krista Shonk, the regulatory counsel for America's Community Bankers.
The new rule largely reflected a proposal that the department issued in September and consumer groups opposed. However, the department changed the proposal to require state banks to provide a one-time notice of overdraft and bounced-check services separate from their general disclosure statement.
Consumer advocates said that the notifications were insufficient, and that it would be better for banks to block transactions made by customers with insufficient funds or provide real-time information during debit-card transactions that make it clear that consumers will be charged fees and interest.
Ms. Taylor said that the consumer advocates had raised valid questions, but the technology for providing such information during a debit transaction does not exist. The notification provision is at least an improvement over federal guidelines, which do not require any new disclosures, she said.
It is better to let state banks charge for services and provide notification than to lose institutions to federal regulators, Ms. Taylor said. "I think it's cutting off your nose to spite your face in this situation to not make a compromise."
Consumer advocates said they remained disappointed by the rule.
Ruhi Maker, a lawyer who testified on behalf of the Greater Rochester Community Reinvestment Coalition during hearings on the rule last year, said that state regulators are not doing enough to protect consumers.
"It's very frustrating that we've always had very strong consumer protections in New York, but as the feds get too loose ... we are in a race to the bottom," and the states feel that they have to go to "the least common denominator," Ms. Maker said. "It was a terrible decision by the New York State Banking Board; it gives the banks exactly what they want: more fees, more revenue," Mr. LaFalce said. "It doesn't protect the consumer."
