76 Fed. Reg. 36 (Feb. 23, 2011) (to be codified at 31 C.F.R. pt. 212)

I. Introduction

The Department of Revenue and other federal agencies have issued an Interim Final Rule governing garnishment of accounts containing federal benefits. The rule requires financial institutions, in response to garnishments and other process which are not excluded from the rule, to follow mandated procedures to calculate and preserve the account holder’s access to a “protected amount” of qualifying federal benefits. The rule becomes effective on May 1, 2011, and will require banks, credit unions, and other financial institutions to change the way in which they process and respond to garnishments and certain other legal process. 

II. Short Summary of Mandated Procedure

In short, as discussed in more detail below, the Rule requires essentially four steps:  (1) within two business days, determine if the garnishment/order is from the United States or a state child enforcement agency and contains the requisite notice to be excluded from the rule; (2) within two business days, review the activity in the account during the two month lookback period to determine the amount of appropriately coded benefit payments which were directly deposited into the account and entitled to protection; (3) ensure the account holder has full access to the calculated protected amount of federal benefits; and (4) within three business days, provide notice to the account holder of certain mandatory disclosures if a protected benefit payment was deposited into the account during the lookback period and the balance of the account is greater than zero.

III. Scope

The Rule is broad in scope and reaches process other than garnishment and all accounts in which the debtor has a beneficial interest.

A. Protected Federal Benefits: The rule applies to Federal benefits pursuant to certain specified authorities and includes Social Security benefits, SSI benefits, VA benefits, Federal Railroad retirement, unemployment, and sickness benefits, Civil Service Retirement benefits, and Federal Employee Retirement Systems.¹ Not all Federal payments which are exempt from garnishment are covered under the Interim Rule. Qualifying Federal benefits are determined by ACH encoding, discussed below, and thus checks and other forms of payment are not covered.

B. Applicable Legal Process: The Interim Rule applies to “garnishments,” which is defined broadly to include “execution, levy, attachment, garnishment, or other legal process.”² As a consequence, though garnishments are only allowed in limited circumstances in South Carolina, for example, the rule is broad enough to apply to levies and court orders. 

C. Exclusion for United States and State Child Support Enforcement: The provisions do not apply to garnishments by the United States or State child support enforcement agencies, which must provide a Notice of Right to Garnish Federal Benefits, discussed below.

D. Applicable Account: Account holder “Accounts” governed by the provisions include any master or sub account to which an electronic payment may be directly routed. In addition, “Account holder” is defined to mean “a natural person against who a garnishment order is issued and who name appears in a financial institution’s records as the direct or beneficial owner of the account.”³

IV. Required Procedure

A. Determine if Exclusion Applies: 

No later than two business days following receipt of the order, the financial institution must examine garnishment order to determine if the exclusion for the United States or a State child enforcement agency applies.⁴

1. The United States or State child support agency is required to attach or include a “Notice of Right to Garnish Federal Benefits” in order to assert the exclusion. A form Notice is provided in Appendix B to Interim Rule. If no Notice is provided, the garnishment is not excluded from the required procedures even if it is served by the United States or a State child support agency.

2. For the excluded garnishments providing the Notice, the financial institution should continue to follow its existing customary procedures for such garnishments⁵.

B. Account Review:

Second, if not excluded, the financial institution must perform an account review to determine the “protected amount” of benefit payments on deposit during the required lookback period⁶.

1. Timing: Review is required to be performed no later than two business days following receipt of: (A) the garnishment order and (B) [if the order provides insufficient information to identify the account holder], sufficient information from the creditor to determine whether the debtor is an account holder. There is a limited exception to the two business days for cases where the financial institution is served with a large batch of orders and the creditor agrees to a later date consistent with the terms of the order.

2. Qualifying benefit payments: “Benefit payments” which qualify under the Interim Rule are those which are paid by direct deposit to an account with the character “XX” encoded in positions 54 and 55 of the Company Entry Description field of the Batch Header Record of the direct deposit entry.⁷

3. Lookback period: The “lookback period” in which the financial institution must determine the amount of benefit payments is “the two month period that begins on the date preceding the date of the account review and ends on the corresponding date of the months two months earlier, or on the last date of the month two months earlier if the corresponding date does not exist.”⁸ For example: financial institution receives order on March 17 and performs the account review on the same day. The lookback period begins on March 16, the date preceding the account review, and ends on January 16, the corresponding date two months earlier. If the day preceding the account review was April 30, the ending date of the review period would be February 28, since there is no February 30. Additional examples are in Appendix C to the Interim Final Rule.

4. Determining Protected Amount: The “protected amount” of benefit payments is the lesser of: (A) the sum of all benefit payments posted to the account between the close of business on the beginning date of the lookback period [i.e., the day preceding the account review] and the open of business on the ending date or (B) the balance in an account at the open of business on the date of account review.⁹ Examples of calculation are in Appendix C to the Interim Final Rule.

5. The rule requires the financial institution to perform the review without regard to the following:¹⁰

a) Presence of other funds in the account;

b) Existence of any co-owner on the account;

c) Existence of benefit payments to multiple beneficiaries or under multiple programs deposited into the account;

d) The balance in the account provided it is greater than zero;

e) Instructions to the contrary in the order; or

f) The nature of the underlying debt/obligation.

6. For debtors with multiple accounts, the financial institution must perform the review for each account and calculate a protected amount for each account. The financial institution is not required (and shall not) trace movement of funds between accounts by attempting to associate funds from a benefit deposit into one account with amounts subsequently transferred to another account.¹¹

7. If no benefit payments are deposited during the lookback period, the financial institution should follow its existing customary procedures for handling the garnishment.¹² If benefit payments are deposited during the lookback period, the financial institution must follow the required procedures for the protected amount, discussed below.

C. Protected Amount:

After the financial institution establishes the protected amount pursuant to the account review, it shall ensure the account holder has full access to the protected amount, which the financial institution shall not freeze. The account holder is not required to first assert an exemption prior to accessing the protected amount.¹³

1. Protected amounts for each separate account of the account holder must be preserved.

2. The interim rule provides the calculated protected amount is conclusively considered to be exempt from garnishment¹⁴– i.e., not subject to challenge by the creditor.

3. For funds in excess of the protected amount, the financial institution shall follow its existing procedures, including the freezing of funds.¹⁵

4. One time review process: The financial institution is required to perform the account review only once for a given garnishment and thus shall not repeat the review or take action if subsequently served with the same order. Separate, subsequent garnishments cause separate reviews.¹⁶

5. The financial institution shall not continually garnish amounts following the date of account review and take no action to freeze funds subsequent deposited or credit, unless the institution is served with a new or different garnishment order.¹⁷ This provision preempts any contrary state law providing for continuing garnishment.

6. Prohibited Garnishment Fees: The financial institution may not charge a garnishment fee against a protected amount and may not charge or collect a garnishment fee after the date of the account review.¹⁸

D. Notice to Account Holder:

Within three business days of the account review, the financial institution must send a notice to the account holder if a benefit payment was deposited into an account during the lookback period and the balance of the account was above zero dollars and the financial institution established a protected amount. [In other words, if the account balance was zero or overdrawn, the financial institution does not have to send the notice.]

1. Content: The Interim Final Rule provides certain required content and optional content for the notice.¹⁹ A form Model Notice to Account Holder which satisfies the rule requirements is set forth in Appendix A.

2. The notice should be delivered to the account holder or to a fiduciary who administers the account on behalf of the account holder. Only information and documents pertaining to the garnishment order may be included with the notice.²⁰ The notice can be sent regular mail and should be sent to the account holder named in the garnishment and not to co-owners of an affected account, according to the comments to the Rules.

3. One notice may be issued that covers multiple accounts.

V. Other Noteworthy Provisions:

A. Account Agreements: The Rule provides it should not be construed to invalidate any term of an account agreement which is not inconsistent with this part.²¹ In their comments, the agencies indicate they are not addressing a financial institutions right to take a security interest in its deposit accounts, exercise contractual rights to deduct fees, or exercise a common law right of offset, except in the narrow context of deducting a garnishment fee from an account containing a protected amount.

B. Safe Harbors: The Rule provides certain safe harbors from liability to financial institutions for the account activity during the review period and good faith compliance with the Rule.

C. Record Retention: The Rule requires record retention which is sufficient to demonstrate compliance for a period of two years from the date the financial institution receives the garnishment order.

D. Preemption:²² The Rule preempts inconsistent state law.

 

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