Garnishment of Accounts Containing Federal Benefit Payments, 9939-9962 [2011-3782]

Agencies

• Railroad Retirement Board
• Social Security Administration
• DEPARTMENT OF VETERANS AFFAIRS
• DEPARTMENT OF THE TREASURY
• Office of Personnel Management

[Federal Register Volume 76, Number 36 (Wednesday, February 23, 2011)]
[Rules and Regulations]
[Pages 9939-9962]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-3782]



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Federal Register / Vol. 76, No. 36 / Wednesday, February 23, 2011 / 
Rules and Regulations

[[Page 9939]]



OFFICE OF PERSONNEL MANAGEMENT

5 CFR Part 831, 841

RIN 3206-AM17

RAILROAD RETIREMENT BOARD

20 CFR Part 350

RIN 3220-AB63

SOCIAL SECURITY ADMINISTRATION

20 CFR Parts 404, 416

RIN 0960-AH18

DEPARTMENT OF THE TREASURY

 Fiscal Service

31 CFR Part 212

RIN 1505-AC20

DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 1

RIN 2900-AN67


Garnishment of Accounts Containing Federal Benefit Payments

AGENCY: Department of the Treasury, Fiscal Service (Treasury); Social 
Security Administration (SSA); Department of Veterans Affairs (VA); 
Railroad Retirement Board (RRB); Office of Personnel Management (OPM).

ACTION: Interim final rule with request for public comment.

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SUMMARY: Treasury, SSA, VA, RRB and OPM (Agencies) are issuing an 
interim final rule to implement statutory restrictions on the 
garnishment of Federal benefit payments. The rule establishes 
procedures that financial institutions must follow when they receive a 
garnishment order against an account holder who receives certain types 
of Federal benefit payments by direct deposit. The rule requires 
financial institutions that receive such a garnishment order to 
determine the sum of such Federal benefit payments deposited to the 
account during a two month period, and to ensure that the account 
holder has access to an amount equal to that sum or to the current 
balance of the account, whichever is lower.

DATES: This interim final rule is effective May 1, 2011. Comments must 
be received on or before May 24, 2011.

ADDRESSES: The Agencies invite comments on all aspects of this interim 
final rule. In accordance with the U.S. government's eRulemaking 
Initiative, the Agencies publish rulemaking information on https://www.regulations.gov. Regulations.gov offers the public the ability to 
comment on, search, and view publicly available rulemaking materials, 
including comments received on rules.
    The Agencies will jointly review all of the comments submitted. 
Comments on this rule must only be submitted using the following 
methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions on the Web site for submitting comments.
     Mail: Gary Grippo, Deputy Assistant Secretary, Fiscal 
Operations and Policy, U.S. Department of the Treasury, 1500 
Pennsylvania Avenue, NW., Room 2112, Washington, DC 20220.
    Instructions: All submissions received must include the Agencies' 
names and RIN numbers 3206-AM17, 3220-AB63, 0960-AH18, 1505-AC20, and 
2900-AN67 for this rulemaking. In general, comments received will be 
published on Regulations.gov without change, including any business or 
personal information provided. Treasury will also make such comments 
available for public inspection and copying in Treasury's Library, Room 
1428, Department of the Treasury, 1500 Pennsylvania Avenue, NW., 
Washington, DC 20220, on official business days between the hours of 10 
a.m. and 5 p.m. Eastern Time. You can make an appointment to inspect 
comments by telephoning (202) 622-0990. Comments received, including 
attachments and other supporting materials, are part of the public 
record and subject to public disclosure. Do not include any information 
in your comment or supporting materials that you consider confidential 
or inappropriate for public disclosure.

FOR FURTHER INFORMATION CONTACT: Gary Grippo, Deputy Assistant 
Secretary, Fiscal Operations and Policy, U.S. Department of the 
Treasury, at (202) 622-6222.

SUPPLEMENTARY INFORMATION:

I. Background and Summary of Proposed Rule

Background

    On April 19, 2010, the Agencies published a proposed rule to 
address concerns associated with the garnishment of certain exempt 
Federal benefit payments, including Social Security benefits, 
Supplemental Security Income (SSI) benefits, VA benefits, Federal 
Railroad retirement benefits, Federal Railroad unemployment and 
sickness benefits, Civil Service Retirement System benefits and Federal 
Employee Retirement System benefits. See 75 FR 20299. The Agencies 
received 586 comments on the proposed rule, including comments from 
individuals, consumer advocacy organizations, legal services 
organizations, financial institutions and their trade associations, 
State attorneys general and State child support enforcement agencies. 
As described in Parts II and III of this SUPPLEMENTARY INFORMATION, the 
interim final rule adopts the proposal with a number of changes.
    Social Security benefits, SSI benefits, VA benefits, Federal 
Railroad retirement benefits, Federal Railroad unemployment and 
sickness benefits, Civil Service Retirement System benefits and Federal 
Employee Retirement System benefits are protected under Federal law 
from garnishment and the claims of judgment creditors.\1\ This legal 
protection continues after benefits are deposited to an individual's 
account at a financial institution. Nevertheless, creditors and debt 
collectors are often able to obtain court orders garnishing funds in an 
individual's account. To comply with court garnishment orders and 
preserve funds subject to the orders, financial

[[Page 9940]]

institutions often place a temporary freeze on an account upon receipt 
of a garnishment order and remit the garnished funds to the court or 
creditor. Although State laws provide account owners with an 
opportunity to assert any rights, exemptions, and challenges to the 
garnishment order, including the exemptions under applicable Federal 
benefits laws, the freezing of funds during the time it takes to file 
and adjudicate such a claim can cause significant hardship for account 
owners.
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    \1\ See 42 U.S.C. 407(a); 42 U.S.C. 1383(d)(1); 38 U.S.C. 
5301(a); 45 U.S.C. 231m(a); 45 U.S.C. 352(e); 5 U.S.C. 8346(a) and 5 
U.S.C. 8470.
---------------------------------------------------------------------------

Proposed Rule

    To address the foregoing problems, the Agencies published for 
comment a proposed rule to require financial institutions to follow 
certain procedures upon receipt of a garnishment order, as follows: 
Upon receipt of a garnishment order, a financial institution would 
first determine if the United States is the plaintiff that obtained the 
order. If not, the financial institution would review the account 
history during the 60-day period that precedes the receipt of the 
garnishment order. If, during this ``lookback period,'' one or more 
exempt payments were directly deposited to the account, the financial 
institution would allow the account holder to have access to 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 (the ``protected 
amount''). The financial institution would be required to notify the 
account holder of the protections from garnishment that apply to exempt 
funds. The notice, which would have to include certain information, 
would be required to be sent within two business days of the completion 
of the account review. Financial institutions could choose to use a 
model notice contained in the rule in order to be deemed to be in 
compliance with the notice content requirements. Financial institutions 
that complied with the proposed rule's requirements would be protected 
from liability.
    For an account containing a protected amount, the financial 
institution would be 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 financial institution 
customarily charges its other account holders a garnishment fee of the 
same nature and in the same amount. In addition, for accounts 
containing a protected amount, a financial institution would not be 
permitted to charge or collect a garnishment fee after the date of 
account review. The proposed rule would not have required financial 
institutions to determine the purpose of a garnishment order, including 
whether the order seeks to collect child support or alimony 
obligations.

II. Comments and Analysis

    In general, individuals, consumer groups, legal aid organizations 
and State attorneys general were supportive of the proposed rule and 
urged that it be finalized, subject to a number of changes. Banks and 
banking industry trade groups generally acknowledged the need for the 
rule, but were critical of various aspects of the rule and commented 
that a number of changes should be made to the proposed rule in order 
to facilitate banks' ability to comply with the requirements of the 
rule. Many credit unions and several credit union trade associations 
opposed the proposed rule, and objected to various provisions as time-
intensive and burdensome, particularly for smaller credit unions. 
Several State child support enforcement agencies commented that the 
proposed rule would harm custodial parents and children receiving child 
support, and opposed the adoption of the rule unless protection from 
garnishment for child support obligations is removed.

Effective Date

    Many banks and banking industry associations commented that the 
rule should not become effective until one year following the 
implementation of the garnishment exemption identifiers that the 
Treasury will encode in Automated Clearinghouse (ACH) Batch Header 
Records. The commenters stated that systems programming and testing 
would be required to automate the detection of the identifiers. The 
Agencies are not delaying the effective date of the rule until a year 
after garnishment exemption identifiers have been included in the ACH 
Records. Although the Agencies understand that many financial 
institutions will make systems changes to help automate compliance, the 
Agencies do not consider such changes to be necessary for compliance 
and do not believe they should be established as a pre-condition to 
protecting Federal benefits exempt from garnishment by law. However, to 
provide financial institutions with additional time for staff training 
and procedural changes, as well as for potential systems changes, we 
are delaying the effective date until May 1, 2011. Before this date, 
the Treasury will include the garnishment exemption identifiers in 
benefit payments and will provide additional information on the 
identifiers in an update to the Green Book, A Guide to Federal 
Government ACH Payments and Collections.

Scope (Proposed Sec.  212.2)

    Some commenters, primarily individuals, noted that the proposed 
rule did not include within its scope various Federal payments that are 
protected from garnishment by statute. These commenters urged that the 
final rule cover all such payments, which include military retirement 
payments, as well as certain payments made by the Army, Navy, Air 
Force, Marines, Coast Guard, National Oceanographic and Atmospheric 
Administration and the Public Health Service.
    The Agencies are aware that some other Federal payments are also 
protected from garnishment and have structured the rule so as to create 
a framework in which such payments can be included in the future. 
Federal agencies that issue such payments could, through a public 
notice-and-comment rulemaking process, amend their regulations to 
provide that their exempt payments are covered by this rule. The 
Agencies would then issue a rulemaking to include those payments within 
the scope of this rule.

Definition of ``Account'' (Proposed Sec.  212.3)

    Some banks and bank trade groups expressed concerns with the broad 
definition of ``account'' in the proposed rule, which defined an 
``account'' as ``an account at a financial institution to which benefit 
payments can be delivered by direct deposit.'' Banks observed that this 
definition does not distinguish between personal and business accounts, 
both of which could receive direct deposits of Federal benefits. Banks 
indicated that the definition raises operational issues, because if an 
account, such as a business account, is not held in the name of the 
personal customer or debtor it is not likely to be found during the 
search of accounts. They therefore recommended that the definition of 
the term ``account'' should be expressly limited to ``a personal 
consumer account at a financial institution to which benefit payments 
can be delivered by direct deposit,'' a definition that would more 
closely align with bank record keeping and research systems.
    The Agencies are not limiting the definition of account in the rule 
to an account held for personal, family or household purposes. Although 
the delivery of a benefit payment to a business account may be 
relatively uncommon, the Agencies see no reason why the protection 
afforded to a benefit payment should be contingent on its delivery to a 
personal account, as opposed to a business account. The

[[Page 9941]]

Agencies have refined the definition of account to include any account, 
whether classified as a master account or a sub account, to which an 
electronic payment may be directly routed. This clarifies, for example, 
how the definition would apply to credit union accounting structures 
where there is a main member number under which there are individual 
transactional accounts. It also makes the definition more consistent 
with the provisions of the rule that require financial institutions to 
conduct a separate account review for each account that may receive a 
benefit payment.

Definition of ``Benefit Payment'' and Use of a Garnishment Exemption 
Identifier (Proposed Sec.  212.3)

    Some banks and bank trade groups requested that the definition of 
``benefit payment'' be revised to avoid confusion in circumstances 
where an individual's benefit payments have been directly deposited to 
an account held by a representative payee. These commenters suggested 
that the term benefit payment be defined to mean ``a direct deposit 
payment made by a benefit agency to a natural person, or to a 
representative payee receiving payments on behalf of a natural person 
`whose name appears in the bank's records as account owner,' under a 
federal program listed in Sec.  212.2(b).'' Other banks specifically 
urged the Agencies to revise the definition of benefit payment in 
proposed Sec.  212.3 to exclude payments made to organizational 
representative payees.
    Many banks and payment organizations urged that the definition of 
``benefit payment'' be revised to make it clear that a payment 
constitutes a ``benefit payment'' only if the ACH Batch Header record 
contains the unique garnishment exemption identifiers discussed in the 
proposed rule. These commenters stated that an institution should be 
able to rely on these unique identifiers, and that this ability be 
codified in the regulation itself, by amending the definition of 
``benefit payment'' and/or the provisions in Sec.  212.5(a) regarding 
the account review to be performed by the financial institution. With 
respect to the proposal to encode an ``X'' in position 20 of the 
``Company Name'' Field of the Batch Header Record for each exempt 
benefit ACH payment, many financial institutions noted that encoding an 
``X'' in position 20 can result in the ``X'' not being readily readable 
because it is the last character position of that field. They 
recommended that, instead, an ``X'' be encoded in the first two 
positions of the ``Company Name'' Field--positions 5 and 6--which would 
make the identifier easier to recognize and would reduce the potential 
for false positives where a non-Federal agency company name begins with 
a single letter ``X.''
    One consumer advocacy organization urged that deposits made by 
check be protected under the same procedures applicable to a ``benefit 
payment,'' which was defined in the proposed rule to include only a 
directly deposited payment. The organization argued that a financial 
institution that has a particular type of account designated for 
recipients of exempt funds or that notes the exempt source at the time 
of the deposit should be encouraged not to freeze those exempt funds 
and should be provided the safe harbor protections under this rule.
    The Agencies are revising the definition of ``benefit payment,'' as 
recommended by the commenters, to make it clear that 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. While the proposed rule indicated that the garnishment 
exemption identifier should be in the ``Company Name'' Field of the 
Batch Header Record, the interim final rule provides that the 
identifier will be in the ``Company Entry Description'' Field to ensure 
that the identifier can be used with all types of ACH transactions. For 
example, placing the identifier in the ``Company Name'' Field would 
preclude its use with the International ACH Transaction (IAT) Standard 
Entry Class code, which does not contain the ``Company Name'' Field. As 
with the ``Company Name'' Field, the ``Company Entry Description'' 
Field is typically captured and included in an account statement, 
allowing both the financial institution and the account holder to 
readily identify Federal benefit payments exempt from garnishment.
    With the garnishment exemption identifier in the ``Company Entry 
Description,'' a Social Security payment that currently contains ``SOC 
SEC'' in this field will now be encoded as ``XXSOC SEC.'' A Federal 
retirement payment currently encoded as ``FED ANNUT'' will now appear 
as ``XXFED ANN.'' All benefit payments subject to the interim final 
rule will be similarly encoded. The encoding of payments will be in 
place by May 1, 2011.
    The comments regarding benefit payments delivered to representative 
payees have been addressed by changes to the definition of ``benefit 
payment'' and the addition of a new defined term, ``account holder.'' 
The reference to representative payees has been deleted from the 
definition of ``benefit payment,'' and the new term ``account holder'' 
is defined to mean ``a natural person against whom a garnishment order 
is issued and whose name appears in a financial institutions records as 
direct or beneficial owner of an account.'' These changes clarify that 
the protections in the rule apply whenever a person's name appears in 
the financial institution's records with an ownership interest in an 
account, either as the directly named owner or as the beneficial owner 
on an individual or organizational representative payee account, or on 
another type of fiduciary account.
    The scope of the interim final rule does not extend to check 
payments. Checks do not raise the same concerns raised by the direct 
deposit of exempt funds because a benefit recipient who receives a 
Treasury check representing exempt funds can choose to cash the check 
rather than to deposit the check and take on the risk that the funds 
will be garnished. In addition, financial institutions cannot readily 
identify whether a Treasury check that was deposited to an account 
represents exempt funds. Whereas ACH record formats and systems 
facilitate both the encoding and recognition of a garnishment exemption 
identifier with directly deposited payments, the systems and processes 
used to produce and receive Treasury checks do not facilitate an 
equivalent approach that would make it possible for financial 
institutions to determine whether a Treasury check represents an exempt 
payment. Even if the Agencies could develop a feasible way for an 
identifier to be included on a Treasury check, a financial institution 
would need to manually retrieve images or copies of recent items to 
find Treasury checks and visually inspect them. The fact that the rule 
does not address Treasury checks in no way affects an individual's 
right to assert or receive an exemption from garnishment by following 
the procedures specified under the applicable law.

Definition of ``Garnishment'' and ``Garnishment Order'' (Proposed Sec.  
212.3)

    Several commenters requested clarification on whether pre-judgment 
garnishments and similar extraordinary legal process are excluded from 
the scope of the definition of garnishment and the requirements of the 
rule, stating that the policy considerations behind

[[Page 9942]]

emergency and extraordinary legal process are different from those 
relevant to civil debt collection. One commenter, however, expressed 
concern that the definition of garnishment order in the proposed rule 
was too narrow and that it should be revised to include: Any order to 
freeze an account in anticipation of a further order to enforce a money 
judgment; any legal process issued as part of a civil proceeding but 
prior to entry of a money judgment; and any order of a State or local 
government or agency to freeze or pay funds in connection with an 
obligation owed to or collected by the State or local government or 
agency.
    The definition of ``garnish or garnishment'' has been revised to 
make it clear that pre-judgment garnishments are included within the 
definition. The proposed definition, which was ``execution, levy, 
attachment, garnishment, or other legal process to enforce a money 
judgment,'' has been revised by deleting the phrase ``to enforce a 
money judgment.'' With the deletion, the definition used in the rule is 
identical to the definition used in some of the Agencies anti-
garnishment statutes.

Definition of Lookback Period (Proposed Sec.  212.3)

    Many comments were received regarding the length of the lookback 
period. Individual benefit recipients and consumer groups generally 
commented that the 60 day lookback period should be extended, with most 
commenters suggesting a 65 day period in order to ensure that two 
months worth of payments are protected in all cases. Several consumer 
groups and individuals commented that the rule would not protect funds 
in an account that originated from a large back-payment of benefits, as 
could occur if a back-payment were credited to an account more than 60 
days prior to the receipt of a garnishment order. One consumer advocacy 
organization urged that the rule require banks to have an informal 
process in place to evaluate a claim by the debtor that the funds in 
excess of the two months are also protected under Federal garnishment 
rules in cases where a judgment creditor seeks more than two months of 
value of the debtor's protected income. The purpose of this informal 
process would be to protect beneficiaries with more than two months 
worth of Federal benefits in their financial institution and alleviate 
the burden of forcing them to go to court to protect exempt funds.
    Credit unions generally commented that, as creditors and potential 
garnishors, they felt it was inappropriate to shield 60 days of 
payments from garnishment, and that 30 days protection would be more 
appropriate. Some banks and credit unions stated that due to the way 
account history is archived, they could not easily comply with a 60 day 
lookback requirement and requested that the lookback period be limited 
to 45 days or one month. Most banks commented that they could comply 
with a 60 day lookback period, but some banks and bank trade groups 
commented that a two month lookback period would be easier to 
administer and less prone to potential errors. Using this two month 
definition, the lookback period would be measured not by counting back 
60 days, but rather by measuring a date-to-date period from a start 
date, for example September 15, and ending with the corresponding date 
of the month two months earlier, in this example July 15. In light of 
the comments, the Agencies have revised the lookback period. The 
interim final rule defines the lookback period as a two month period 
beginning on the date preceding the date of the account review. The two 
month lookback period will ensure that in almost all cases, the 
protected amount will include two benefit payments, as urged by 
consumers and consumer advocacy groups. The Agencies conducted research 
on Federal benefit payments covered by this rule over a 7 year period 
that showed that a 60 day lookback period will capture at least two 
payments in 95% of cases, whereas a two month lookback period measured 
date-to-date will capture at least two payments in 99% of cases. In 
addition, the two-month lookback period addresses financial 
institutions' request for a lookback period that is easier to 
administer and less error-prone.
    Moreover, in the proposed rule the lookback period began on the 
date preceding the date on which a financial institution is served a 
garnishment order. In the interim final rule, the lookback period 
begins on the date preceding the date of account review. This change 
reflects that the interim final rule allows two business days, and 
potentially additional time, to perform the account review after 
receipt of a garnishment order. By linking the lookback period to the 
date of account review and not the date an order is served, the rule 
ensures that the account review will better reflect the current state 
of an account and capture the most recent benefit payments that may be 
deposited on or after the day an order is served but before the account 
review is performed.

Definition of ``Protected Amount'' (Proposed Sec.  212.3)

    One bank questioned whether the ``balance on the day of the account 
review'' used in defining the protected amount refers to the beginning 
balance or ending balance on that day, and recommended that the rule be 
clarified by stating that financial institutions are to look at the 
beginning account balance. Another commenter asked whether items 
presented for payment against the debtor's account that arrive the same 
day as the garnishment are included in the protected amount and asked 
that the rule provide explicit guidance on whether the protected amount 
is calculated based on the account balance prior to or after posting of 
the debits or credits received on the same day as the garnishment.
    Some commenters urged the Agencies to define the protected amount 
as an aggregate across accounts, rather than applying a protected 
amount to each account separately. Under this proposed definition, the 
protected amount would be the lesser of (i) the sum of all benefit 
payments deposited ``into all accounts owned by the account holder'' 
during the lookback period or (ii) the ``aggregate balance in these 
accounts'' on the date of account review.
    Some commenters, including financial institutions, trade groups, 
and consumer advocacy groups, stated that protecting a flat dollar 
amount would promote certainty, clarity and administrative simplicity.
    The interim final rule refers specifically to beginning and ending 
balances in the definition of protected amount. Under the revised 
definition, items presented for payment against the account that arrive 
on the same day as the date of account review would not be included in 
the protected amount. The Agencies are not defining a flat dollar 
amount as the protected amount because the use of a flat dollar amount 
will invariably result in underprotecting some individuals and 
overprotecting others.
    The Agencies are not defining the protected amount based on the 
aggregate deposits and balances across all accounts, for several 
reasons. First, the Agencies believe the protection should be specific 
to the account(s) to which benefit payments are directly deposited, 
ensuring that a direct, verifiable connection exists between the 
protected amount and the evidence of an exempt Federal benefit payment. 
Second, defining the protected amount as an aggregate across all 
accounts assumes that amounts transferred between accounts must be 
exempt. As discussed

[[Page 9943]]

more fully in this preamble under the heading ``Protection for funds 
transferred to another account (Sec.  212.5),'' however, the Agencies 
do not believe the account review and the establishment of the 
protected amount can apply to funds transferred from one account to 
another. Third, an aggregated protected amount would introduce 
additional accounting complexities in different deposit and balance 
scenarios. For example, if the sum of benefit payments is less than the 
combined balance across accounts, but more than the balance in any 
individual account, the protected amount could cover only partial 
amounts in one or more accounts and would require a rule for allocating 
the protected amount across accounts.
    The interim final rule retains the subsection in the proposed rule 
that makes clear that a protected amount must be established separately 
for each account held in the name of the account holder.

U.S. Garnishment Orders (Proposed Sec.  212.4)

    Many commenters objected to excluding garnishment orders obtained 
by the United States from the protections of the rule. Legal aid 
organizations, consumer advocacy groups and individuals stated that 
these orders should not be excluded because doing so contradicts the 
goal of ensuring that beneficiaries retain their exempt benefits, and 
that no specific creditor should be treated differently from others. 
Financial institutions stated that the requirement in the proposed rule 
to treat garnishment orders where the United States is the garnishor 
differently from other garnishment orders adds an undesirable level of 
complexity to the garnishment process and raises compliance concerns. 
Some financial institutions expressed concerns that it may be difficult 
to determine whether the United States is the creditor is some cases.
    Financial institutions and financial institution trade groups 
requested that if the requirement to exclude orders obtained by the 
United States is retained, the final rule require that each order 
issued by the United States state on its face--preferably on the first 
page--that it is exempt from the requirements of 31 CFR 212.5 and 
212.6. Financial institutions argued that such a statement would 
provide certainty and allow for rapid decision-making and handling by 
the financial institution. Alternatively, financial institutions 
requested that each order issued by the United States be accompanied by 
a Notice of Garnishment as set forth in Appendix B of the rule so as to 
ensure that the initial examination is handled quickly and accurately.
    Financial institutions also requested confirmation that non-
garnishment forms of legal seizure issued by the United States are also 
excluded from the review/protection process. They explained that the 
term ``garnishment'' typically encompasses the orders used in the 
judicial collection of a civil money judgment, and indicated that they 
handle many non-garnishment legal orders that freeze customer funds on 
a continuing basis, such as temporary restraining orders, injunctions 
and seizure warrants. They recommended that all legal process issued by 
the United States be treated the same way, and be specifically excluded 
from the requirements of proposed Sec. Sec.  212.5 and 212.6.
    One commenter suggested that the rule be modified to require a 
financial institution receiving a garnishment order from the Federal 
government to screen the account for any of the types of benefits that 
are not exempt from collection by the Federal government. This 
commenter recommended the creation and use of a separate code for those 
Federal benefits that are not exempt from collection when the creditor 
is the Federal government, and that financial institutions be required 
to screen for this factor.
    The Agencies are retaining in the rule an exclusion for garnishment 
orders obtained by the United States. There are several Federal 
statutes that expressly permit the United States to garnish Federal 
benefit payments. See 18 U.S.C. 3613(a), 26 U.S.C. 6334(c), 31 U.S.C. 
3716(c)(3)(A)(i), and 42 U.S.C. 1320a-8(e)(1)(C). Absent a carve-out 
for all garnishment orders obtained by the United States, financial 
institutions would face uncertainty and the burden of determining on a 
case-by-case basis whether a particular order obtained by the United 
States was subject to the rule or not. Moreover, garnishments orders 
obtained by the United States are already governed by a comprehensive 
Federal statute, the Federal Debt Collection Procedures Act (FDCPA), 28 
U.S.C. 3001 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. While the rule is needed to 
address the problems of garnishing exempt funds, it would both overlap 
and conflict with the framework of the FDCPA unless garnishment orders 
obtained by the United States are excluded.
    In order to allow financial institutions to quickly identify 
whether a garnishment order was obtained by the United States, the rule 
requires that such orders have attached or included with them a 
standard Notice of Right to Garnish Federal Benefits.

Child Support Orders (Proposed Sec.  212.4)

    Several State child support enforcement agencies argued that 
garnishment orders for purposes of child support should be treated in 
Sec.  212.4 in the same way as orders obtained by the United States. 
These agencies expressed concerns regarding the legality and equity of 
protecting benefit payments from garnishment for child support. State 
child support agencies pointed out that Federal law and administrative 
regulation not only allow but encourage child support enforcement 
programs to take enforcement action against most funds identified as 
``protected'' in the proposed rule in order to satisfy court ordered 
support requirements. They noted that an obligation to support children 
and family is not characteristically similar to other debts and that 
child support obligations are not treated like other debts in contexts 
of many Federal statutes, such as the Bankruptcy Code, the Fair Debt 
Collections Practices Act, and the Consumer Credit Protection Act.
    State child support enforcement agencies also pointed out that 
while SSA benefit programs participate with the Federal Office of Child 
Support Enforcement (OCSE) in data matching programs that allow child 
support programs to collect child support from Social Security Title II 
benefits, this is not the case for VA programs. There is no proactive 
matching that provides viable useful information on VA benefits, and 
there is not an effective program that efficiently allows for 
collection of child support from any VA benefits.
    Child support enforcement agencies argued that the proposed rule 
would diminish their powers in direct contravention of the rights and 
responsibilities assigned to the child support enforcement program by 
Federal law and regulation. In view of these concerns, commenters 
requested that a provision be added to the rule to require a financial 
institution to make a determination if an order was issued by a Child 
Support program under Title IV-D of the Social Security Act, in the 
same way that financial institutions are required to make as to whether 
a garnishment order was obtained by the United States. These agencies 
argued

[[Page 9944]]

that an exemption for child support orders would be consistent with the 
clear Congressional intent to require all persons to support their 
families. Commenters argued that such an exemption would not be 
burdensome for financial institutions to comply with because child 
support garnishment orders are distinctive and easily identifiable by 
financial institutions.
    The interim final rule contains an exclusion for garnishment orders 
issued by a State child support enforcement agency that administers a 
child support program under Title IV-D of the Social Security Act. 
These orders are treated in the same way as orders obtained by the 
United States. Under the rule, a financial institution must determine 
whether an order was obtained by the United States or issued by a State 
child support enforcement agency. In making this determination, a 
financial institution may rely on the presence of a Notice of Right to 
Garnish Federal Benefits, which must be attached or included with the 
order. If the notice is present, a financial institution is not 
required to perform an account review or take actions otherwise 
required by the rule. Rather, the financial institution follows its 
customary procedures for garnishment orders and treats the relevant 
account(s) as if no Federal benefit payment were present. However, the 
Agencies note that this exclusion does not alter an individual's right 
to assert any protections for benefit funds that may exist under 
applicable Federal law.

Deadline for Account Review (Proposed Sec.  212.5(a))

    Most of the banks and bank trade groups that commented on the 
proposed rule stated that the requirement to perform an account review 
within one business day of receipt of a garnishment order is 
unrealistic. Commenters stated that garnishment orders can be delivered 
to any bank location and may not reach the designated processing 
department until after one day from ``receipt.'' They also pointed out 
that sometimes States bundle together large numbers of garnishment 
orders and deliver them in a batch. Financial institutions requested 
that the final rule recognize the delivery of bundled/batches of large 
numbers of garnishments delivered in one shipment and permit financial 
institutions to commence the account review (and accordingly, the 
lookback period) as permitted by the creditor. Financial institutions 
argued that they should be allowed leeway in this regard as it may be 
impossible to meet the one day review requirement.
    Some commenters, primarily credit unions, asked that the deadline 
be increased to a period ranging from two to five business days 
following receipt of the order. Other commenters, primarily banks, 
asked that the obligation to commence review begin only after the 
institution receives the information necessary to identify the property 
of the benefit recipient. Some commenters asked for a combination: the 
longer of two business days or the receipt of the information necessary 
to identify the property of the benefit recipient.
    A number of commenters suggested that the phrase ``a garnishment 
order issued against an account'' in proposed Sec.  212.5(a) be 
rewritten to refer to ``a garnishment order against a natural person.'' 
These commenters pointed out that a garnishment order must be directed 
against an individual rather than a deposit account, as a garnishment 
order is directed against a judgment debtor and his or her property, 
and rarely against a deposit account. Commenters indicated that this 
definition would be more accurate and also avoid capturing garnishment 
orders directed against organizations.
    The Agencies have extended the account review deadline from one 
business day to two business days. To address situations in which a 
financial institution receives a garnishment order that does not 
include sufficient information to identify whether the debtor is an 
account holder, the rule provides that in such a case the two business 
day deadline commences when the financial institution receives 
sufficient information to determine whether the debtor is an account 
holder. Based on comments submitted by a variety of financial 
institutions, the Agencies understand that when a financial institution 
receives a garnishment order with insufficient information to identify 
the debtor, it notifies the creditor or court that additional 
information is needed and and can take no action on the order until it 
receives such information. The rule does not affect this status quo 
process, and recognizes that action on an order, including the account 
review, can't begin until the debtor is identified as an account 
holder.
    In cases where a financial 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.
    Finally, the language in the interim final rule has been revised to 
reflect that garnishment orders are issued against debtors rather than 
accounts.

Protection for Funds Transferred to Another Account (Proposed Sec.  
212.5)

    Financial institutions broadly supported the proposal to exclude 
funds transferred to another account from the rule's protection, and 
requested that Sec.  212.5 explicitly state that transferred funds are 
not subject to protection.
    One consumer advocacy organization commented that exempt money that 
is transferred from one account to another should be protected under 
the rule. This organization commented that to preserve economic 
security, elders and younger adults living with disabilities are 
generally counseled to transfer incoming income into a safe savings 
account. The organization argued that transferring exempt money into a 
secondary account should not be seen as forfeiting the protection 
available for exempt funds and that, at the very least, beneficiaries 
should be notified by the financial institution before transferred 
funds are released under the garnishment order and allowed the 
opportunity to show the institution that the transferred funds are 
exempt Federal funds and therefore protected under the rule.
    The Agencies have revised Sec.  212.5 to state explicitly that 
funds transferred from one account to another are excluded from the 
account review and the establishment of the protected amount. Although 
the Agencies understand that exempt funds may be transferred to a 
savings or other secondary account following the initial deposit, it is 
not clear that transferred funds necessarily retain their exempt 
character in all cases, and, unlike a direct deposit payment, that 
transfer transactions will be readily identifiable as containing exempt 
funds.
    If the source account from which funds are transferred contains 
other deposits of non-exempt funds or withdrawals of exempt funds, or 
if the receiving account contains other credits or debits following the 
transfer of funds, there is no clear way to distinguish balances 
transferred into the receiving account as exempt. While the Agencies 
might develop a standard accounting convention to label and trace 
originally exempt funds transferred over time, doing so would likely 
generate inaccurate or inappropriate results given the uniqueness of 
transactions in a given case, and given the attenuated connection that 
may exist between the original deposit and subsequent transfer. 
Moreover, requiring the examination of all account transfers after a 
Federal benefit payment has been identified would impose a significant 
burden on financial institutions, since

[[Page 9945]]

they would not be able to rely on a transaction indicator, like the ACH 
identifier, in searching account histories to determine whether 
transferred funds should be classified as exempt.
    While the interim final rule states that financial institutions 
should not attempt to trace the movement of funds between accounts in 
establishing a protected amount, the Agencies recognize that exempt 
funds may be transferred and note that nothing in the rule limits an 
individual's right to assert a further exemption for additional funds 
or to alter the exempt status of transferred funds that may be 
identifiable and traceable when the facts of a given case are reviewed.

Access to Protected Amount by Account Holder (Proposed Sec.  212.6(a))

    Consumer groups commented that the rule should make it clear that 
an account holder has ``full, unfettered and customary'' access to the 
protected amount, to prevent banks from improperly providing only 
limited access to account holders. One commenter urged that language be 
added to preclude any attempts by creditors to subsequently litigate 
whether the ``protected amount'' actually consists of exempt funds.
    The rule has been revised to state that a financial institution 
must ensure that the account holder has ``full and customary'' access 
to the protected amount. The Agencies intend by this language to ensure 
that after a garnishment order is received, the account holder 
continues to have the same degree of access to the protected funds that 
was provided prior to the receipt of the order. Additional language 
also has been added to make it clear that a financial institution's 
calculation of the protected amount is not subject to a legal action by 
a creditor challenging that determination.

One-Time Account Review (Proposed Sec.  212.6(d))

    One bank requested clarification on the requirement in proposed 
Sec.  212.6(d) to determine whether a garnishment order that is 
received was previously served on the bank. The bank commented that 
financial institutions often receive multiple orders from the same 
creditor for the same account holder, and that it is difficult to 
determine whether the receipt of a second order would be considered the 
same order, which would not require another account review; or a new or 
different order, which would require a new account review. The Agencies 
are not addressing in the final rule what process financial 
institutions should use to determine whether a garnishment order is a 
new order or an order that was previously received, as this is 
necessarily a fact-specific determination.

Continuing Garnishment Responsibilities (Proposed Sec.  212.6(e))

    One commenter requested that the language of proposed Sec.  
212.6(e) be revised. That section provides that a financial institution 
``shall have no continuing obligation to garnish'' amounts deposited or 
credited to the account following the account review. The commenter 
observed that this wording would allow a financial institution to 
decide whether to comply with the terms of a continuing garnishment 
order, rather than prohibiting a financial institution from complying 
with the terms of a continuing garnishment order. The interim final 
rule has been revised to make it clear that a financial institution is 
not permitted to give effect to a continuing garnishment order 
affecting an account containing a protected amount.

Deduction of Garnishment Fees (Proposed Sec.  212.6(f), (g))

    Many comments were received on the provisions in the proposed rule 
regarding the imposition of garnishment fees by financial institutions. 
Consumer advocacy groups opposed the language in the proposed rule at 
Sec.  212.6(f) that affirms the ability of a financial institution to 
charge a customary garnishment fee if the account contains an 
unprotected amount. They argued that if a garnishment fee is prohibited 
on exempt amounts, it should be prohibited regardless of whether the 
exempt funds fall into the artificially narrow scope of the protected 
amount. They commented that proposed Sec.  212.6(f) should be deleted 
because it may provide support for the imposition of excessive fees. 
Consumer advocacy groups further urged that the definition of 
``garnishment fee'' be amended to include not only a fee for imposing 
the garnishment, but rather any fee that arises as a result of a 
garnishment.
    Financial institutions, on the other hand, strongly objected to 
restricting the collection of a garnishment fee to cases in which there 
are funds in the account in excess of the protected amount. They 
challenged the legality of the restriction and argued that it is unfair 
both to the financial institution and to other account holders, to whom 
the costs for administering these accounts will be transferred. Some 
financial institutions commented that this restriction may lead them to 
close accounts that contain benefit payments if a garnishment order is 
received.
    Some financial institutions argued that the provisions of the rule 
on garnishment fees exceed the Agencies' statutory authority, stating 
that none of the statutes cited as authority for the regulation allow 
the Agencies to limit or prohibit any fee a financial institution 
charges for any service based on the source of funds in the account. 
One financial institution argued that the prohibition may amount to an 
unlawful taking, running afoul of the Fifth Amendment to the United 
States Constitution. Another financial institution commented that the 
proposed rule contravenes a bank's legal right to take a security 
interest in its deposit accounts and its common law right of offset. 
Many financial institutions argued that the imposition of garnishment 
fees is a matter of contract between financial institutions and their 
customer, and that customers agree to pay for fees and charges with the 
maintenance of their deposit accounts.
    Banks also opposed the garnishment fee restrictions as a matter of 
policy and equity. Some banks commented that they did not understand 
the distinction drawn by the Agencies between a garnishment fee and 
other fees and charges incurred by a customer. Many financial 
institutions commented that they incur significant costs in processing 
garnishment orders, and that garnishment fees should be permitted 
whether or not an account has excess funds beyond any protected 
amounts. Financial institutions also argued that there is no principled 
reason why benefit recipients should be allowed to contract or pay for 
needed banking services but be legally shielded from a garnishment fee. 
Some financial institutions went further and argued that in fairness to 
customers who do not receive Federal benefit payments, a separate 
garnishment fee should be allowable for those accounts with Federal 
benefit payments to help defray the extra costs to the bank imposed by 
this regulation and to recognize benefit received by the customer from 
the protections of this rule.
    Financial institutions also opposed the proposed restriction to 
permit assessing the fee only on the date of account review. One bank 
indicated that it saw no purpose in mandating the date on which the fee 
may be assessed and that if banks are afforded only a single, specific 
date to assess the garnishment processing fee, they may automatically 
elect to assess this fee without regard to whether the fee may be 
waived in certain instances.

[[Page 9946]]

    Other financial institutions indicated that if they could not 
recoup their costs for processing garnishment orders, there would be 
little incentive to allow the account to remain open. Rather than incur 
the risk of future garnishment expenses, some financial institutions 
indicated that they might choose to close accounts for this population. 
Commenters noted that Federal benefit payment accounts are often small-
balance, labor intensive accounts that can be unprofitable for banks to 
maintain, and that limitations in the proposed rules on the ability of 
banks to recover their costs for handling garnishments exacerbate this 
situation.
    Some legal aid organizations and consumer advocacy groups appeared 
to anticipate that financial institutions might respond to the rule by 
closing accounts held by benefit recipients if the accounts are 
garnished. These organizations indicated that this practice already 
occurs in some instances. Specifically, in some cases banks that 
receive a garnishment order for an account containing only exempt funds 
send the account holder a check for the exempt funds and close the 
account. Legal aid organizations requested that the final rule prohibit 
this practice, which causes hardship for benefit recipients.
    The interim final rule prohibits financial institutions from 
charging a garnishment fee against a protected amount, and also 
prohibits the charging of a garnishment fee after the date of the 
account review. The Agencies believe that the anti-garnishment statutes 
support a prohibition against the imposition of a garnishment fee if 
the account contains only a protected amount. Some cases have held that 
financial institutions may charge account-related fees against 
protected funds in an account, and that the charging of the fees does 
not constitute garnishment or other legal process. For example, courts 
have upheld a bank's right to charge overdraft fees from Social 
Security and Supplemental Security Income funds deposited to a bank 
account. See Lopez v. Washington Mutual Bank, 2002 U.S. App. LEXIS 
24344; see also Wilson v. Harris, 2007 U.S. Dist. LEXIS 65345. The 
Agencies view garnishment processing fees as distinct from other 
account-related fees. If funds in an account are protected from 
garnishment, the Agencies find it unreasonable to conclude that those 
same funds can be subjected to a fee for handling a garnishment order--
an order that itself cannot legally be processed against the funds.
    The rule prohibits a financial institution from charging a 
garnishment fee after the date of account review because otherwise the 
rule would need to prescribe procedures that financial institutions 
would follow to monitor accounts in real time to track deposits and 
withdrawals, determine whether new deposits are exempt or not, and 
determine whether a garnishment fee could be imposed. The Agencies 
believe that such an approach would be complex, confusing for account 
holders and at odds with the one-time review process established under 
the rule. Accordingly, the rule restricts the timing of garnishment 
fees.
    The Agencies do not believe that the anti-garnishment statutes 
support a general prohibition on imposing a garnishment fee against 
non-protected funds. In addition, the Agencies are not expanding the 
prohibition on garnishment fees to apply to ``any fee that arises as a 
result of a garnishment,'' because such a definition would be overly 
broad. The Agencies are not in this rulemaking addressing a financial 
institution's right to take a security interest in its deposit accounts 
or to exercise a contractual right to deduct fees or a common law right 
of offset against funds that are exempt from garnishment, except in the 
very narrow context of deducting a garnishment processing fee from an 
account containing a protected amount following receipt of a 
garnishment order.
    The interim final rule requires financial institutions to ensure 
that account holders have full and customary access to protected 
amounts. The rule does not address the conditions under which financial 
institutions may close accounts, which the Agencies believe is beyond 
the ambit of this rule.

No Actions After the Date of Account Review (Proposed Sec.  212.6)

    The proposed rule was based on the principle that a financial 
institution's response to a garnishment order must be a one-time event, 
based on the status of an account on the date of account review, and it 
prohibited financial institutions from taking any action on the account 
in response to the garnishment order after the date of account review. 
The interim final rule adopts this principle, which applies to all 
actions that a financial institution may perform on an account, 
including examining deposits, freezing funds, protecting funds, and 
collecting garnishment fees. Accordingly, Sec.  212.6(f) of the interim 
final rule provides that a financial institution must perform the 
account review only one time and may not repeat the review 
subsequently, including in cases where the same garnishment order is 
served again on the financial institution. Similarly, Sec.  212.6(g) 
preempts State laws requiring continuing garnishments and prohibits a 
financial institution from freezing funds deposited after the one-time 
account review. Likewise, Sec.  212.6(h) provides that a financial 
institution may not collect a garnishment fee from unprotected funds 
after the date of account review.
    The Agencies have necessarily established these provisions to give 
proper effect to the anti-garnishment statutes, since it is not 
feasible to implement both a protected amount and to permit continuing 
actions related to the garnishment order. Because the status of an 
account will change with every transaction following the account 
review, requiring both protection for exempt funds and permitting other 
subsequent actions would necessitate the monitoring of transactions in 
real time to continually re-assess the account balance and determine 
which funds are exempt and which are not exempt from garnishment. As 
was discussed in the supplementary information to the proposed rule, 
the Agencies believe that any policies that would necessitate the on-
going monitoring of transactions would be neither operationally nor 
economically feasible. Therefore, the rule does not permit actions 
related to a garnishment order after the date of account review, and 
requires all permissible actions to be based on the balance in the 
account derived from transactions occurring at or before the open of 
business on the date of account review.

Financial Institution Right of Offset (Proposed Sec.  212.8)

    Consumer advocacy groups urged the Agencies to delete the language 
in Sec.  212.8(b) of the proposed rule stating that nothing in the rule 
shall be construed to invalidate any term or condition of an account 
agreement that is not inconsistent with the rule, on the basis that 
this provision tacitly supports setoffs from exempt funds. Consumer 
groups noted that the proposed rule is silent as to overdraft charges 
and other setoffs against exempt funds. These commenters supported 
prohibiting setoffs against exempt funds for all types of fees, arguing 
that there are some cases that have held it is not legal for financial 
institutions to seize exempt funds. Alternatively, they requested that 
the Agencies clarify that this provision should not be construed to 
validate account agreements that permit the seizure of exempt funds 
through setoff or any other means.

[[Page 9947]]

    In contrast, some financial institutions commented that it is 
important that their existing rights of setoff be protected. Credit 
unions commented that currently there are two different mechanisms 
credit unions can employ in order to use members' funds on deposit to 
satisfy outstanding debts to the credit union. First, credit unions may 
create a contractual lien during the account opening and lending 
process that provides the credit union the right to use shares on 
deposit in the event an account holder becomes delinquent on a loan 
issued by the credit union. Additionally, the Federal Credit Union Act 
(FCUA) provides credit unions the statutory right to enforce a lien 
against a member's shares if the member is delinquent on a loan issued 
by the credit union. See 12 U.S.C. 1757(11). In order to take advantage 
of the statutory lien, a credit union must comply with 12 CFR 701.39 of 
the National Credit Union Administration's (NCUA) rules and 
regulations.
    The proposed rule did not address, nor did the Agencies intend to 
address, the right of financial institutions to set off obligations of 
an account holder against an account to which Federal benefit payments 
have been deposited. The rule is intended to protect account holders 
who receive directly deposited benefit payments from difficulties that 
may arise when a garnishment order against an account holder is served 
on a financial institution. Accordingly, the issue of setoff by 
financial institutions is outside the scope of the interim final rule.

Notice (Proposed Sec.  212.6(c), Sec.  212.7, Appendix A)

    Comments on the required notice to account holders were received 
from a broad array of commenters. The most frequent comment, which was 
received from all types of commenters, was that the model notice needs 
to be rewritten to be more easily understandable, and that the Agencies 
should have the notice revised by a literacy expert and tested. In 
addition, financial institutions commented broadly on a wide range of 
other issues relating to the notice. Many financial institutions 
objected to the requirement to send any notice, observing that this is 
outside the scope of a financial institution's responsibilities with 
respect to its customers, imposes considerable costs burdens on 
financial institutions, and likely will result in follow-up telephone 
calls which add to customer service burdens. Commenters argued that 
debtors who have protected Federal benefits deposited to their accounts 
will receive two notices from two different sources which is likely to 
generate additional confusion. Some commenters suggested that the rule 
provide, at least in the jurisdictions in which the creditor is 
required to send garnishment information to the debtor, that the 
creditor be required also to send a notice regarding Federal benefit 
payments to the debtor. Two State child support enforcement agencies 
objected to the requirement that any notice be sent, on the basis that 
the notice would lead to the withdrawal of funds and create the false 
impression that funds are protected from child support enforcement 
action.
    Many financial institutions also commented on specific aspects of 
the notice and notice requirement. Some financial institutions asked 
for longer periods of time ranging from 3 to 7 days to send the notice 
in light of the burden it imposes. One commenter noted that Sec.  212.7 
of the proposed rule does not indicate who is to receive the notice in 
cases where the account in question is held in the names of two or more 
persons, and recommended that in the case of multiple account holders, 
notice to any of the account holders should be sufficient, regardless 
of who is ultimately required to receive the notice. Some banks 
commented that if a customer has more than one account at a bank, the 
bank should have the option of sending one notice for all accounts or 
separate notices for each account. They stated that this would provide 
flexibility to design bank processes in the manner the bank deems most 
efficient while ensuring that the customer receives the information he 
or she needs.
    Financial institution trade groups recommended that the notice 
requirement not apply in situations where a financial institution finds 
when it conducts the account review that the account reflects an 
overdraft or zero balance, or where there are no funds in the 
customer's account that exceed the protected amount. They expressed 
substantial concerns that the requirement to provide notice in these 
cases would unnecessarily confuse the account holder, and that 
customers receiving this notice are likely to call the bank for an 
explanation, requiring additional resources to handle calls. They also 
indicated that requiring notice in these cases would be a significant 
burden for financial institutions. One bank estimated that 
approximately 60% of the orders it receives would involve accounts 
where no funds were frozen, either because there are no funds in the 
account or because the funds that are present are fully exempt.
    Some financial institutions commented that the list of benefits 
required under Sec.  212.7(a)(7) of the proposed rule to be included in 
the notice is confusing and misleading, both because account holders 
may construe it to mean that the funds should not have been held and 
because in many States these funds are not exempt once deposited in a 
bank account. Commenters requested that this requirement be amended to 
state simply that Federal or St