Garnishment of Accounts Containing Federal Benefit Payments

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1 Anthony Dandola, Esq., MBA, CRCM Senior Research Manager, Research and Development Enterprise Government, Risk & Compliance (EGRC) Solutions

2 The interim final rule, which specifies the steps which depository institutions must take to protect deposited federal benefit payments from garnishment, is effective May 1, 2011 even though comments are being accepted by the agencies through May 24th. On February 23, 2011, the Department of the Treasury, Fiscal Service; Social Security Administration; Department of Veterans Affairs; Railroad Retirement Board; and Office of Personnel Management jointly published an interim final rule which specifies the steps in which depository institutions must take to protect deposited federal benefit payments from garnishment. This interim final rule is effective May 1, 2011 even though comments are being accepted by the agencies through May 24, Application of the Interim Final Rule As it relates to deposits, a garnishment order is a claim made by a judgment creditor to the funds of an account holder. The interim final rule broadly defines garnishment as an execution, levy, attachment, garnishment, or other legal process. The title of a garnishment order which is based on state law may differ, but is considered a garnishment, if it demands the payment of deposited funds belonging to another. Federal benefits paid by each of the agencies are protected by federal law from garnishment and the claims of judgment creditors. This legal protection continues after benefits are deposited in an account at a depository institution. The interim final rule provides a framework for compliance related to such benefits received by direct deposit, but does not cover federal benefit payments deposited by check. This rule does not apply to garnishment orders by the United States (such as IRS levies) and excludes garnishment orders issued by a state child support enforcement agency that administers a child support program under the Social Security Act. Such orders must include a Notice of Right to Garnish Federal Benefits to be excluded from the requirements of the interim final rule. The procedures used for handling garnishment orders of the United States remain unchanged. Preemption of State Law The interim final rule preempts any state or local government law that is inconsistent with any provision of the rule. Such preemption occurs only to the extent that an inconsistency between the rule and state law would prevent a depository institution from complying with the requirements of the rule. State law requiring continuing garnishments are preempted and depository institutions are prohibited from freezing funds deposited after the one-time account review. State law that protects funds from garnishment in an amount that exceeds the protected amount is not inconsistent with this rule FIS and/or its subsidiaries. All Rights Reserved. 2

3 Garnishment orders obtained by the United States are already governed by the Federal Debt Collection Procedures Act, 28 U.S.C et seq., which establishes a uniform framework with exclusive civil procedures for the collection of all judgments due the United States, including cases where the United States is prohibited from garnishing federal benefit payments as well as cases where it is expressly allowed to garnish such payments. Procedures Upon receipt of a garnishment order, a depository institution (called the garnishee) must first determine if the United States is the plaintiff that obtained the order; or if it was issued by a state child support enforcement agency that provides a Notice of Right to Garnish Federal Benefits with the order. If these exceptions do not apply, then within two business days of receipt of the garnishment order, the depository institution must review the transactions in the account of the named depositor to determine if the account contains direct deposits of federal benefit payments. This lookback period is measured two months from the date preceding the date of the account review (date-to-date). For example, for a review which begins on September 16th, the lookback period will begin on September 15th and end on July 15th. To address situations in which a depository institution receives a garnishment order that does not include sufficient information to identify whether the debtor is an account holder, the rule provides that the two-business-day deadline commences when the depository institution receives sufficient information to determine whether the debtor is an account holder. In cases where a depository institution is served a batch of a large number of orders at the same time, the interim final rule extends the account review deadline to a date that may be permitted by the creditor that initiated the orders. If, during this lookback period, one or more exempt payments were directly deposited to the account, the depository institution must allow the account holder to have access to the protected amount, which is an amount equal to the lesser of the sum of such exempt payments or the balance of the account on the date of the account review. Items presented for payment against the account that arrive on the date of account review should not be included in the protected amount. The protected amount is specific to the account to which benefit payments are directly deposited. Within three business days of the completion of the account review, the depository institution must notify the account holder named in the garnishment order (but not joint account holders) of the protections from garnishment that apply to exempt funds (see model form in regulation). There is no requirement to send a notice if the balance in the account is zero or negative on the date of account review. A two-year record retention period is specified in the interim final rule FIS and/or its subsidiaries. All Rights Reserved. 3

4 Identifying Benefit Payments by Code A payment constitutes a benefit payment only if the ACH Batch Header Record contains a specified unique garnishment exemption identifier. The rule provides that a payment constitutes a benefit payment if it contains the characters XX encoded in positions 54 and 55 of the Company Entry Description field of the Batch Header Record of the direct deposit entry. For example, with the garnishment exemption identifier in the Company Entry Description, a Social Security payment (before the effective date) that contains SOC SEC in this field will be encoded as XXSOC SEC on and after May 1, A federal retirement payment encoded as FED ANNUT (before the effective date) will appear as XXFED ANN on and after May 1, All benefit payments subject to the interim final rule will be similarly encoded. Garnishment Fee For an account containing a protected amount, the depository institution is permitted to collect a garnishment fee only against funds in the account in excess of the protected amount on the date of the account review and only if the depository institution customarily charges its other account holders a garnishment fee of the same nature and in the same amount. A depository institution may not charge or collect a garnishment fee after the date of account review. An account review may only be performed one time per order received and may not be repeated in cases where the same garnishment order is served again on the financial institution. Action Plan Revise existing processing procedures to identify garnishment orders of the United States or a state child support enforcement agency authorized by the United States. These orders may be processed under existing procedures and are subject to the requirements of the Federal Debt Collection Procedures Act. For all other garnishment orders received on or after May 1, 2011, timely determine if the named account holder has received federal benefit payments by direct deposit during the lookback period. The Guidelines for Garnishment of Accounts Containing provides the information necessary for reading the ACH codes related to direct deposits to identify which funds are exempt from garnishment. For accounts subject to the garnishment order, withhold any funds which are determined to be non-exempt, provide the prescribed notice to the account holder, and process the garnishment order. References Interim Final Rule: Guidelines for Garnishment of Accounts Containing : FIS and/or its subsidiaries. All Rights Reserved. 4

5 About the Author Anthony brings more than 30 years of banking experience to FIS. His expertise covers all areas of consumer compliance and banking operations. Anthony provides FIS Compliance Managers with legal research and opinion concerning complex regulatory questions. He holds a Certified Regulatory Compliance Manager (CRCM) designation and conducts training for others in preparation for the CRCM exam. Anthony is the editor of the FIS Regulatory Compliance Weekly Update distributed to clients and writes extensively on the latest compliance topics that impact FIS clients. Previous Experience Besides his banking experience, Anthony served as the Director of Financial Services for a large real estate broker; founded a residential mortgage banking firm; and was a certified Federal Compliance Regulator with the Office of Thrift Supervision. Special Skill Sets All areas of consumer regulatory compliance Fair lending Corporate governance and director issues Commercial lending Bank Secrecy Act and anti-money laundering compliance Memberships and Certifications Member, New York Bar Certified Regulatory Compliance Manager (CRCM) Education Bachelor of Science in Finance, Seton Hall University Master of Business Administration, Seton Hall University Juris Doctor, School of Law, Seton Hall University Contact us FIS Enterprise Governance, Risk and Compliance (EGRC) Solutions FIS and/or its subsidiaries. All Rights Reserved. 5