The U.S. Treasury and four other federal agencies jointly issued their final rule1requiring depository institutions to protect up to two months’ worth of their depositors’ direct deposits of Social Security and certain other federal benefits against depletion by garnishment and similar orders. The final rule, which is effective June 28, 2013, amends the interim final rule2 that went into effect May 1, 2011.
Many federal benefit payments are exempt from execution or similar legal process even after the payments are deposited in a bank account. Prior to the effective date of the interim final rule it was up to the depositor to claim the exemption in the court that issued the garnishment or other enforcement order. The interim final rule changed that by requiring that banks must automatically protect their depositors’ Automated Clearing House (ACH) direct deposits of certain federal benefit payments from garnishments and similar orders issued by a court.
The final rule expands the types of writs and orders from which federal benefit deposits are protected to include garnishments and similar orders (including orders to freeze assets in an account) issued directly by a state or state agency, or by a municipality or municipal corporation, in addition to orders issued by a court that were covered by the interim final rule. Garnishment orders obtained by the United States or by a state child support enforcement agency are not covered by the final rule.
The final rule eases some of the requirements of the interim final rule. For example, under the final rule the account balance in the depositor’s account at the time of the account review is to be used in determining the protected amount. Under the interim final rule, the opening balance in the account on the day of the account review was used. Additionally, a bank may now impose its garnishment fee on non-benefit funds deposited to the depositor’s account within five days after the account review, and a bank is no longer required to send a notice to the depositor if, as a result of the account review, the bank established a protected amount for the depositor’s account but there are no funds in the account in excess of the protected amount.
The final rule does not apply to a direct deposit unless both (a) the character “XX” is encoded in positions 54 and 55 of the Company Entry Field and (b) the number code “2” is encoded in the Originator Status Field of the Batch Header Record.
The major provisions of the final rule are summarized below.
Covered benefits. Protected from garnishment under the final rule are Social Security benefits, Supplemental Security Income (SSI), Veterans Affairs benefits, Federal Railroad retirement benefits, Federal Railroad unemployment and sickness benefits, Civil Service Retirement System benefits, and Federal Employee Retirement System benefits, where payment of the benefit is made by ACH direct deposit. Other federal benefit payments that are exempt from garnishment are not covered by the rule. Depositors who receive those benefit payments must continue to claim the exemption in the court or from the agency that issued the garnishment order.
Timetable for compliance. The final rule sets a strict timetable for banks to follow upon receiving a garnishment order against a natural person (an individual). Within two business days after receiving the garnishment order, the bank must determine whether the U.S. or a state child support enforcement agency is the party that obtained the garnishment. In making this determination, the bank is entitled to rely on the presence or absence of a Notice of Right to Garnish Federal Benefits attached to or served along with the garnishment. If the Notice is attached, the final rule does not apply, and the bank should follow its customary procedures for garnishment orders and treat the depositor’s account as if no protected federal benefit payment was included in the balance. If the Notice is not attached to the garnishment writ, the bank must follow the new rule.
Account review. If the Notice is not attached, the bank should review the ACH Batch Header Record of direct deposit entries for the account. A direct deposit is covered by the final rule only if the characters “XX” are encoded in positions 54 and 55 of the Company Entry Description field and the number code “2” appears in the Originator Status Code field. For example, a Social Security benefit payment that was previously coded “SOC SEC” in fields 54 and 55 is now encoded “XXSOC SEC” in those fields and the Originator Status Code for the payment is “2.” If both of these coding requirements are met, within two business days after receiving the garnishment order the bank must review the depositor’s account history to determine whether any covered exempt ACH direct deposit was credited to the account during the two month period looking back from the business day immediately preceding the day the review is conducted. This is called the “account review.”
The bank must perform the account review separately for each account the depositor named in the garnishment order has with the bank, unless no purpose would be served by making any further review. The bank must not freeze or place a hold on any funds in the depositor’s account until the account review is completed. The bank is not required to trace any funds that were transferred prior to the review from the account that received the ACH direct deposit to another account in the bank. If the account review determines that the depositor received no direct deposit of exempt benefit payments during the two-month lookback period, the bank should follow its customary procedure for responding to garnishment orders.
The bank is only required to perform the account review one time per garnishment order, even if the garnishment order is served on the bank several times. However, each new garnishment order served with respect to the same depositor requires a new account review and new determination of any protected amount for each deposit account of that depositor.
Protected amount. If the depositor received at least one direct deposit of covered exempt benefits during the lookback period, the bank must allow the depositor full access to the lesser of (a) the sum of all exempt direct deposits posted to 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 entire balance of the account when the account review is performed. This amount is called the “protected amount.” The bank may answer the garnishment or order “indebted” only with regard to any funds in the account in excess of the protected amount. Only those excess funds, if any, may be frozen and held. Five examples that illustrate the “protected amount,” as revised by the final rule, are set out in Appendix C to the rule.
Garnishment fees. The bank may assess its usual garnishment fee only against any excess funds in the account at the time of the account review and any non-benefit funds deposited in the account within five days after the account review. It cannot assess the garnishment fee against the protected amount or against any future balance in the account after the end of the five-day period.
Notice to depositor. Within three business days after the account review is made, the bank must notify the depositor of certain information specified by the rule. A model form of notice to the depositor is included in the rule. The bank is protected from liability for non-compliance if it uses the model form and completes it correctly. The notice need not be sent if the account review reflects an overdraft or a zero balance in the depositor’s account. The notice also is not required where the account review results in the determination of a protected amount but the funds in the depositor’s account do not exceed the protected amount. The supplementary information that accompanied the final rule states that the rule does not prohibit a bank, at its election, from also sending the notice to other depositors on the account and including language to the effect that the depositor may be receiving the notice because he or she is a joint depositor on the account that has been garnished.
No continuing garnishments. If the final rule applies to an account balance, the bank is not permitted to give effect to continuing garnishment orders that require the bank to continue to withhold and remit payments from the depositor’s account until notified otherwise or until a specified amount has been paid. If any covered federal benefit payment received by ACH direct deposit was credited to the depositor’s account during the lookback period, the final rule says that all garnishments of the account are deemed to be garnishments against the account balance in excess of the protected amount only, regardless of the language contained in the garnishment order.
Protection of bank. The final rule provides that a bank that complies with its requirements in good faith is protected from liability to the creditor that initiated the garnishment order and from sanction by the court or agency that issued the order. State laws and regulations are preempted only to the extent they are inconsistent with the final rule, however.
Record retention. Banks are required to keep records sufficient to demonstrate compliance with the rule for two years from the date each garnishment order is received.
Exception for checks. The final rule does not apply to deposits of federal benefit payments made by check.