• Agencies Announce Interim Final Rule to Implement Statutory Restrictions on the Garnishment of Federal Benefit Payments
  • April 7, 2011 | Authors: David N. Anthony; John C. Lynch; Ethan G. Ostroff; Alan D. Wingfield; Mary C. Zinsner
  • Law Firms: Troutman Sanders LLP - Richmond Office ; Troutman Sanders LLP - Virginia Beach Office ; Troutman Sanders LLP - Richmond Office ; Troutman Sanders LLP - McLean Office
  • The Department of the Treasury, the Social Security Administration, the Department of Veterans Affairs, the Railroad Retirement Board, and the Office of Personnel Management announced an interim final rule which will require financial institutions to analyze any account (whether classified as a master or a sub account) to which an electronic payment may be directly routed before answering a garnishment.  This interim final rule applies to all financial institutions that hold deposit accounts for use by persons and/or businesses, including all national banks, community banks, credit unions, etc.  The interim rule has an effective date as of May 1, 2011, and imposes new and potentially quite burdensome requirements on a depository institution receiving a garnishment.

    Under the rule, a financial institution that receives a garnishment first must determine if the United States or a State child support enforcement agency is the judgment creditor.  If so, the financial institution follows its normal procedures for handling the garnishment.

    However, if neither the United States or a State child support enforcement agency is the creditor, then the financial institution must review the account history for the prior two month period (the “lookback period”) to determine whether one or more exempt benefit payments were directly deposited into the account (the “account review”).  The lookback period begins on the date preceding the date of account review.  The account review must occur within two business days of receiving the garnishment.  However, if the garnishment order contains insufficient information to determine whether the debtor is an account holder, then the account review must commence within two business days from the receipt of sufficient information to identify whether the debtor is an account holder.  During the account review, there is no requirement that a financial institution determine the purpose of the garnishment (e.g., whether seeking to collect child support or alimony obligations).

    The financial institution may rely on the presence of certain unique garnishment exemption identifiers in the ACH Batch Header Record to determine whether the payment is an exempt benefit payment for purposes of the rule.  A payment constitutes a “benefit payment” only if the ACH Batch Header Record contains the characters “XX” encoded in positions 54 and 55 of the “Company Entry Description” field of the direct deposit entry. 

    If there is an exempt benefit payment directly deposited into the account during the lookback period, the financial institution must allow the account holder to have access to an amount equal to the lesser of the sum of exempt payments directly deposited into the account during the lookback period, or the balance of the account on the date of the account review (the “protected amount”).  Also, the financial institution must send a notice to the account holder within two business days of the completion of the account review, indicating it received a garnishment, briefly explaining what a garnishment is and including other information regarding the account holder’s rights.  However, the notice is not required if the balance in the account is zero or negative on the date of the account review.  The rule contains a model notice for use by financial institutions. 

    For an account containing a protected amount, the financial institution may not collect a garnishment fee from the protected amount.  However, if it customarily charges its other account holders a garnishment fee of the same nature and in the same amount, the financial institution may collect a garnishment fee against funds in the account in excess of the protected amount on the date of account review.  A garnishment fee may not be charged or collected after the date of the account review.