Arlington-based Leader Bank, which has a national charter, has opted to adopt the fee cap for deposit return items that has been set for state-chartered financial institutions.
When a check bounces, two financial institutions – the one on which the check was drawn, and the one to which it was deposited – are affected. And they both probably charge fees of some sort as a result, or at least have the ability to do so.
In Massachusetts, however, state-chartered financial institutions receiving bad checks are only allowed to charge so much. The fee cap that state-chartered banks and credit unions are allowed to charge for processing dishonored checks, also known as deposit return items, or DRIs, is now $4.77. The new rate was recently set and announced by the Massachusetts Division of Banks. Although it is only up a few cents, industry experts say it raises bigger issues related to banking fees, and it also underlines an imbalance between state-chartered and federally charged financial institutions.
Kevin Handly, director and shareholder at the law firm of Gallagher Callahan & Gartrell in Boston, said he understands that the idea of having an imposed fee cap on DRIs may not seem like such a big deal. “But if you have enough regulations [for state-chartered banks that federally chartered banks don’t have to follow], you start to make the federal charter attractive,” he added.
Handly said he believes it is unlikely that an institution would opt to switch charters due to regulations. He said it is more likely something that de novo banks will weigh when making the decision as to which charter they would like to operate under.
Although bankers may not especially like the idea of imposed fee caps, it is a comfort to consumers, he said.
“That is a reason for consumers to patronize state-chartered banks,” he noted. “Generally Massachusetts has a posture of being very pro-consumer, very consumer-protective, and this is part of that posture.”
‘Providing a Benefit’
The DOB was given the authority to cap DRI fees in 1997 under Massachusetts General Laws Chapter 167D, Section 3, and Chapter 171, Section 41A, which govern consumer deposit accounts. The action was a result of a push by the Massachusetts Public Interest Research Group. Since then, other bills have been filed in attempts to set caps on more of the fees being charged by local financial institutions, but none has made it into law.
“It’s frustrating that we have these types of limitations,” said Kevin Kiley, executive vice president and chief operating officer for the Massachusetts Bankers Association. Fighting proposed legislation to implement fee caps for financial institutions, he said, is “an ongoing issue that we need to continue to be vigilant on.”
Kiley said there are several problems with having a state impose caps on the fees banks can charge. He said an obvious problem is that the federal institutions, theoretically with the largest number of consumers, are free to charge whatever they like, putting the smaller banks at a disadvantage. However, Kiley added that it is not always in an institution’s best interest to charge what it likes and some federally chartered banks follow the state limits just as protocol. Whatever the case may be, it should be up to the institutions to set their own limits, he said.
“We think the free market should be the determiner,” said Kiley. “The association has had a long-standing opinion that the free market is the best way for these issues to be addressed.”
However, not every financial institution that can charge DRI fees in excess of the limit does so, and it is commonly known that several banks will often wave DRI and other fees at times.
Arlington-based Leader Bank has a national charter and therefore could charge whatever it wanted for DRI fees. Some national banks are known for charging $10 or more.
However, Leader decided that it would adopt the cap set for state-chartered financial institutions. When Leader opened a few years ago, it set its DRI fee at $2.50 to be in line with what local banks were charging. Although the state DOB has raised the cap, Leader has no intention of raising its fee.
Brian Taylor, senior vice president and chief lending officer for Leader, said he thinks the $10-plus fees that some banks charge are unreasonable. He added that Leader’s fee often is waived for customers.
Sushil K. Tuli, president and chief operating officer of the bank, agreed, saying in total the bank waives about 70 percent of all fees associated with bounced checks.
When it comes to DRIs, Leader sees about five bad checks deposited per day. Although it waives many fees to the consumer’s advantage, there is still a cost to the bank for processing such transactions.
“We are probably providing a benefit to our customers. This [DRI] isn’t something they had anything to do with,” said Taylor. “We want long-term relationships.
Anytime we decide on fees, we definitely keep that in mind. The challenge is you are running a business.”
According to David Cotney, chief operating officer of the Massachusetts Division of Banks, state regulators examine the maximum amount of money that state-chartered institutions can charge their customers for depositing a bad check on an ongoing basis and make adjustments actually. This year the division raised the limit only slightly from $4.73 to $4.77 per item. The fee cap is reflective of the median cost institutions incur for handling the checks. However, the cost and time associated with DRI ranges greatly, costing anywhere from 89 cents to $14.51 per item, according to the DOB. The time ranges from one minute to 31 minutes.
“[The adjustment to the fee cap is] substantially similar to past decisions, except for the dollar amount,” said Cotney.
The information was based on surveys of 98 financial institutions regarding how much it costs to process bad checks. The DOB, which maintains its headquarters in Boston’s South Station, looked at 60 banks and 38 credit unions.
