Consumer Compliance Outlook > 2013 > Third Quarter 2013

Consumer Compliance Outlook: Third Quarter 2013

New Compliance Requirements Under the Garnishment Rule for Accounts Receiving Certain Federal Benefits

By Kenneth Benton, Senior Consumer Regulations Specialist, and Robert Sheerr, former Research Assistant, Federal Reserve Bank of Philadelphi.

INTRODUCTION

Federal law protects benefits provided through certain federal programs — such as Social Security and Veteran Affairs — from garnishment and the claims of judgment creditors.1 However, compliance has been a challenge for financial institutions because benefits are usually electronically deposited into a consumer’s deposit account and commingled with unprotected funds. Thus, when a financial institution receives a garnishment order for an account with commingled funds, it may not be clear whether any of the funds are protected. When financial institutions respond to a garnishment order by freezing all the funds in an account, protected funds could be garnished in error.2 Garnishing protected funds can impose severe financial hardship on account holders, especially persons whose only income is the federal benefit.3

In response to this problem, the Department of the Treasury (Treasury), the Social Security Administration (SSA), the Railroad Retirement Board (RRB), the Department of Veterans Affairs (VA), and the Office of Personnel Management (OPM) (Agencies) issued an interim final rule, Garnishment of Accounts Containing Federal Benefit Payments (Garnishment Rule), that became effective on May 1, 2011, to establish the policies and procedures financial institutions must follow to avoid garnishing protected funds.4 The Agencies adopted a final rule on May 29, 2013, which became effective on June 28, 2013, that included changes to the interim final rule.5 The rule is codified at 31 C.F.R. Part 212. This article reviews the compliance requirements of the final rule.

Scope of Rule

The Garnishment Rule applies to deposit accounts at financial institutions to which a federal benefits payment may be directly deposited. Financial institutions are defined in the regulation as any bank, savings association, credit union, or other entity chartered under federal or state law to engage in the business of banking.6 The following federal benefits are protected:

• Social Security benefits and Supplemental Security Income payments administered by the SSA
• veterans benefits administered by the VA
• federal railroad retirement, unemployment, and sickness benefits administered by the RRB, and
• Civil Service Retirement System and Federal Employee Retirement System benefits administered by the OPM.7

The federal banking agencies are charged with enforcing compliance with the Garnishment Rule.8

PROCEDUREs FOR FINANCIAL INSTITUTIONS

Receipt of Garnishment Order

When a financial institution receives a garnishment order, it must determine within two business days whether a “Notice of Right to Garnish Federal Benefits” is attached.9 This notice is used for garnishment by the United States or a state child support enforcement agency. The Garnishment Rule, 31 C.F.R. Part 212, does not apply to this type of garnishment. As a result, if this notice is attached, the institution simply follows its customary procedures for handling garnishment orders. But if the order does not contain this notice, the institution must follow the account review procedures set forth in 31 C.F.R. §§212.5 and 212.6, as discussed below.10

Account Review

Lookback Period. “Account review” refers to the process of examining deposits in an account to determine whether the SSA, VA, RRB, or OPM deposited a benefit payment into the account during the “lookback period.” The “lookback period” is the two-month period beginning on the date preceding the date of the account review and ending on either the corresponding date of the month two months earlier or the last date of the month two months earlier if the corresponding date does not exist.11 For example, if an institution begins the account review on October 15, 2013, the lookback period would run from August 14, 2013, through October 14, 2013.12

Timing. Generally, an institution must perform an account review no later than two business days after receiving the garnishment order and sufficient information from the creditor to determine whether the debtor is an account holder.13 The rule contains an exception for institutions receiving a large batch of garnishment orders.14 In that circumstance, the institution may use a later date with the permission of the creditor serving the batch of orders.15 The institution must also keep records of account activity and actions taken in response to such batches to demonstrate compliance with the Garnishment Rule.16

Benefit Payments Deposited During Lookback Period.17 If an institution finds after performing an account review that no covered benefit payment was deposited into the account, the provisions of 31 C.F.R. §212.6 (rules and procedures to protect benefits) do not apply. Instead, the institution can follow its customary procedures for handling garnishment orders.18 On the other hand, if covered benefit payments were deposited during the lookback period, the institution must follow the procedures in 31 C.F.R. §212.6 to protect the federal benefits.

Protected Amount. The Garnishment Rule prohibits financial institutions from freezing funds that make up an account holder’s “protected amount,” which is defined as the lesser of (a) the sum of all federal benefit payments deposited into the account between the close of business on the beginning date of the lookback period and the open of business on the ending date of the lookback period, or (b) the balance in the account when an account review is performed.19

After an institution receives a garnishment order, verifies that it does not contain a “Notice of Right to Garnish Federal Benefits,” performs an account review, and finds one or more covered benefit payments deposited during the lookback period, the institution must immediately calculate the protected amount for each account in the account holder’s name and ensure the account holder has full access to these funds.20

Separate Account Reviews. After receiving a garnishment order against an account holder, institutions must perform account reviews for each account in the account holder’s name. However, institutions are prohibited from tracing the movement of funds between accounts to associate funds from a benefit payment deposited into one account and later transferred to another.21 For example, if (1) a $500 Social Security benefit was deposited into account A; (2) on the same day, the account holder transferred $300 of the $500 into account B in the holder’s name at the same institution; and (3) the next day, the institution receives a garnishment order with no “Notice of Right to Garnish” against the account holder. In this circumstance, the institution must perform separate reviews of both account A and account B. The entire $500 social security benefit deposit — including the $300 transferred out of the account — will be added to the protected amount for Account A, while none of the $300 transferred into Account B will be added to the protected amount for Account B.22

Customary Procedures for Funds in Excess of Protected Amount

After calculating and establishing the protected amount in each account in the account holder’s name, the financial institution should follow its customary procedures for handling garnishment orders against any funds in excess of the protected amount in each account.23

Garnishment Fee Restrictions

Financial institutions may not charge or collect garnishment fees either against protected amounts or after the date of the account review.24 For example, the Garnishment Rule prohibits an institution from charging a garnishment fee against an account where an account contains only a protected amount on the date of the account review and non-protected funds are deposited into the account on the date after the account review.25 But if funds other than a benefit payment are deposited into the account during the account review period, institutions can charge or collect a garnishment fee up to five business days after an account review but the fee cannot be more than the amount of nonbenefit deposited funds.26

Notice

Financial institutions are required to notify account holders within three business days of the account review only if it shows:

• a covered benefit payment was deposited into the holder’s account during the lookback period
• the balance in the account on the date of account review was greater than $0 and the institution established a protected amount, and
• funds in the account exceed the protected amount.27

Any method of delivery for notices is permitted, including electronic delivery, if agreed to by the financial institution and the account holder.28

Content of Notice. If the institution is required to notify an account holder under 31 C.F.R. §212.7(a), the notice must contain the following information in “readily understandable language”:

• the institution’s receipt of a garnishment order against the account holder
• the date on which the institution was served the garnishment order
• a succinct explanation of garnishment
• an explanation of the institution’s requirement, when a covered benefit is deposited into one of the account holder’s accounts within the last two months, to calculate and establish a protected amount and ensure that the protected amount is made available to the account holder
• the account or accounts subject to the garnishment order
• the protected amount the institution established
• the institution’s requirement to freeze funds in excess of the protected amount, if applicable, pursuant to state law to satisfy the garnishment order
• the amount of any garnishment fee charged to the account, consistent with 31 C.F.R. §212.6(h)
• a list of all federal benefit payments covered by the Garnishment Rule, as identified in 31 C.F.R. §212.2(b)
• the account holder’s right to assert exemption for amounts above the protected amount against the creditor that initiated the garnishment order by taking an action customarily applicable in a given jurisdiction, such as completing exemption claim forms, contacting the court of jurisdiction, or contacting the creditor
• the account holder’s right to obtain legal aid in asserting exemption against the creditor that initiated the garnishment order
• the name of the creditor, and
• the means of contacting the creditor if contact information was included in the order.29

Financial institutions have the option under 31 C.F.R. §212.7(c) to include the following content in the required notice, provided it is in “readily understandable language”:

means of contacting a local attorney or legal aid service

• means of contacting the financial institution, and
• a statement that the financial institution is not providing legal advice by issuing the notice required by 31 C.F.R. §212.7(a).30

Institutions can amend the required notice under 31 C.F.R. §212.7(d) to integrate information about a state’s garnishment rules and protections to avoid potential confusion, harmonize the notice with state requirements, or provide more complete information about an account. Institutions may issue a single notice to an account holder with more than one account at the institution, provided that the notice contains the information required by §212.7(b) for each account.31

Obligations After Account Review

Financial institutions may perform an account review only one time for each garnishment order after service of the first order. If the same garnishment order is served again, the institution may not repeat the account review or take any other action related to the order. Institutions are required to review an account holder’s account again only if the institution is served a new or different garnishment order against the same account holder.32

The Garnishment Rule further prohibits financial institutions from garnishing amounts deposited or credited to an account holder’s account after the account review. Institutions may not freeze funds deposited or credited to an account after the account review unless the institution is served a new or different garnishment order against the same account holder.33

SAFE HARBORS FOR FINANCIAL INSTITUTIONS

Financial institutions that comply in good faith with the regulation receive safe harbor protection from certain types of liability. The safe harbors are discussed below.

During Receipt and Review of the Garnishment Order

Institutions complying with the Garnishment Rule receive a safe harbor from liability to a creditor that initiates a garnishment order and for any penalty under state law, contempt of court, civil procedure, or any other law if the institution fails to honor a garnishment order for account activity.34 This protection applies during the two business days after the institution receives the garnishment order, during which time the institution must determine whether a Notice of Right to Garnish Federal Benefits was attached pursuant to 31 C.F.R. §212.4, or during the time between when the institution receives the order and the date by which the institution must perform the account review under 31 C.F.R. §212.5.

When Protecting or Freezing Funds

Compliance with the Garnishment Rule also exempts an institution from liability to a creditor that initiates a garnishment order, to an account holder for any frozen amounts, and for any penalty under state law, contempt of court, civil procedure, or other law for failing to honor a garnishment order.35 This protection applies when a benefit agency deposited a covered benefit payment into an account during the lookback period or the institution determined that the order was obtained by the United States or issued by a state child support enforcement agency by following the procedures in 31 C.F.R. §212.4.

When Providing Additional Information to Account Holder

Financial institutions also receive a safe harbor when providing in good faith any optional information set forth in 31 C.F.R. §212.7(c) and (d) in the notice to an account holder.36

Safe Harbors for Other Potential Liabilities

Finally, 31 C.F.R. §202.10(d) protects institutions from liability for:

• bona fide errors that occur despite reasonable procedures put in place by the institution to prevent such errors
• customary clearing and settlement adjustments that affect an account balance, including a protected amount (such as deposit reversals caused by the return of unpaid items or debit card transactions settled for amounts higher than originally authorized), and
• honoring an account holder’s express written instruction to use an otherwise protected amount to satisfy the order, as long as the instruction is both dated and provided by the account holder to the financial institution following the date on which the institution has been served a particular garnishment order.

Conclusion

The Garnishment Rule will help protect consumers who receive certain federal benefits when their accounts are garnished. Financial institutions should review their policies and procedures and provide training to the appropriate staff to ensure they are complying with the requirements of the new rule. Specific issues and questions should be raised with your primary regulator.

• 1 See 42 U.S.C. §407(a) and 42 U.S.C. §1383(d)(1) (social security benefits); 38 U.S.C. §5301(a) (VA benefits); 45 U.S.C. §231m(a) and 45 U.S.C. §352(e) (federal railroad retirement benefits); 5 U.S.C. §8346 (Civil Service Retirement System benefits); and 5 U.S.C. §8470 (federal employees retirement systems).
• 2 “Frozen Out: A Review of Bank Treatment of Social Security Benefits,” Hearing Before the Senate Finance Committee, September 20, 2007; Ellen Schultz, “Closing the Benefits Loophole,” The Wall Street Journal, May 30, 2009
• 3 Garnishment of Accounts Containing Federal Benefit Payments, 76 Fed. Reg. 9939-40 (Feb. 23, 2011)
• 4 76 Fed. Reg. 9939 (Feb. 23, 2011)
• 5 78 Fed. Reg. 32099 (May 29, 2013)
• 6 31 C.F.R. §212.3
• 7 U.S. Department of the Treasury, Guidelines for Garnishment of Accounts Containing Federal Benefit Payments (March 2011) at 3-4
• 8 31 C.F.R. §212.11(a)
• 9 The model form for this notice is located in Appendix B to 31 C.F.R. Part 212.
• 10 31 C.F.R. §212.4
• 11 31 C.F.R. §212.3
• 12 For more examples, see Appendix C to 31 C.F.R. Part 212
• 13 31 C.F.R. §212.5(a)(1)
• 14 States often bundle garnishment orders and deliver them to financial institutions in large batches. The agencies created this exception to address the difficulty of complying with the two-business day deadline after receiving a large batch of garnishment orders. See 76 Fed. Reg. at 9944.
• 15 31 C.F.R. §212.5(a)(2)
• 16 31 C.F.R. §§212.5(a)(2), 212.11(b)
• 17 “Benefit payment” is a federal benefit paid by direct deposit to an account with the character “XX” encoded in positions 54 and 55 of the company entry description field and the number “2” encoded in the originator status code of the batch header record of the direct deposit entry. (emphasis added) See 31 C.F.R. §212.3
• 18 31 C.F.R. §212.5(b)
• 19 31 C.F.R. §212.3
• 20 31 C.F.R. §212.6(a)
• 21 31 C.F.R. §212.5(f)
• 22 “Treasury Garnishment Guidelines” at p. 7
• 23 31 C.F.R. §212.6(d)
• 24 31 C.F.R. §212.6(h)
• 25 “Treasury Garnishment Guidelines” at p. 11
• 26 31 C.F.R. §212.6(h)
• 27 31 C.F.R. §212.7(a)
• 28 78 Fed. Reg. 32106 (May 29, 2013)
• 29 31 C.F.R. §212.7(b); a Model Notice to Account Holder can be found in Appendix A to 31 C.F.R. Part 212.
• 30 31 C.F.R. §212.7(c). Section 212.7(h) states that giving the notice required by 31 C.F.R. §212.7 neither obligates the institution to provide legal advice nor may be deemed an offer of legal advice by the institution.
• 31 31 C.F.R. §212.7(e)
• 32 31 C.F.R. §212.6(f)
• 33 31 C.F.R. §212.6(g)
• 34 31 C.F.R. §212.10(a)
• 35 31 C.F.R. §212.10(b)
• 36 31 C.F.R. §212.10(c)