Federal law forces banks to reassess their garnishment procedures

Until recently, bank personnel had no reason to check the source of a customer’s deposits before enforcing a garnishment order. In the wake of an increase in illegal garnishments, this is no longer the case. On May 1, 2011, a new federal rule took effect which aims to restrict garnishment of federal benefit payments and set procedures a financial institution must follow when processing such garnishment orders. While the law has been in effect for some time now, signs show that many institutions have failed to adopt new procedures to meet this change.

The restriction limits funds subject to garnishment by carving out an exemption for certain federal benefits. The exemption is applicable to social security benefits, supplemental security income, veterans’ benefits, and other specific federal benefits. The rule protects not only the customer’s interest in maintaining and accessing federal benefits but also protects the financial institutions maintaining customer accounts by setting forth clear guidance on how to properly process garnishment orders on these types of funds. This guidance, if properly followed, should stave off possible liability stemming from improper pursuit of exempt federal benefits.

The Procedure Explained

Upon receipt of a garnishment order, the first step for the financial institution is to determine whether the United States or a state child support enforcement agency is the plaintiff – within two days of receiving the order. This should not be an onerous task, as the order should be accompanied by a “Notice of Right to Garnish Federal Benefits“ where the plaintiff is one of these two entities. If the order is accompanied by the appropriate notice, the bank should follow its customary procedures for handling and executing the garnishment order. In other words, the bank may treat the account as if no federal benefit payments are present in the customer account.

However, where a private entity is the plaintiff, the bank must perform an “account review.” This review must be performed before taking any other action with respect to the garnishment order. The bank must determine within two business days of receiving the order whether federal benefit payments were directly deposited to the garnished account within two months of the date preceding the account review, which is also known as the “lookback period.” Importantly, federal benefits which are deposited by the customer are not protected from garnishment. The rule requires that the benefits entered the account by direct deposit. If no federal benefit payments were directly deposited during the lookback, the bank may follow normal procedures.

If federal benefit payments were directly deposited within the lookback period, the bank must ensure that the account holder has full and customary access to the “protected amount.” The “protected amount” is the lesser of an amount equal to the sum of the federal benefit payment deposits during the lookback, or the opening balance on the account review date. For example, if $5,000 of federal benefits were directly deposited during the lookback period, but the opening balance on the account review date was only $2,000, the protected amount is $2,000, the lesser of the protected deposits and the opening balance. The funds in excess of the “protected amount” are, again, available and subject to the bank’s normal procedures for garnishment.

Finally, within three business days of the account review, the bank must provide the account holder with written notice if a federal benefit agency deposited funds during the lookback period and the account balance is above zero. The notice should explain what a garnishment is, include information about the account holder’s rights, name the creditor, and inform the customer of the “protected amount” within the account. Compliance with each of these steps will prevent the possibility of bank liability to the judgment creditors seeking payment from their debtor.

Best Practices for Banking Clients

• Financial institutions should include weekends in calculating relevant day and timing requirements if open for business on those days.
• If a bank receives a garnishment order but is unable to identify whether the debtor and the account holder is the same person, the two-day period is tolled. It will only begin to run again once the bank receives sufficient information to that effect. No harm is done by ensuring that the bank has properly matched the account to the judgment debtor.
• If the customer has multiple accounts, banks should conduct a separate account review and determine a separate “protected amount” for each customer account.
• When performing the account review, banks are not required to internally segregate exempt and non-exempt funds. The review should be performed by looking only to the amount directly deposited into the customer account within the lookback period.
• The existence of a co-owner on the account is also not relevant to the account review. Perform the account review the same as if only one customer is on the account.
• The account review process should only be performed one time. However, if a new or different garnishment order is served upon the same account holder, a new account review should be conducted following each of the above steps.

Conclusion

Banks and any other institution with customer accounts, who have not done so already, should review and modify their own procedures to conform with these changes. The failure to do so may increase liability risk for the banks and cause confusion to bank employees attempting to execute garnishment orders.

The law and relevant comments can be found at 31 C.F.R. 212 of the Federal Register, which can be accessed at the following address: http://edocket.access.gpo.gov/2011/pdf/2011-3782.pdf.