Federal agencies have issued an interim final rule that establishes procedures a financial institution (FI) must follow when it receives a garnishment order against an account holder who receives direct deposit payments of certain federal benefits.

Published in the Federal Register on February 23, 2011, the interim final rule becomes effective on May 1, 2011. The issuing agencies are the Departments of Treasury and Veterans Affairs, Social Security Administration, Railroad Retirement Board, and Office of Personnel Management (Benefit Agencies). All entities chartered under federal or state law to engage in the business of banking are subject to the rule, which covers benefits protected from garnishment paid by the Benefit Agencies. Comments on the rule must be filed by May 24, 2011.

The interim final rule applies to all consumer- and business-purpose accounts to which an electronic payment can be directly routed, including a master account or a sub account. Garnishment orders obtained by the United States or a state child support enforcement agency are exempt. Key requirements follow:

  • An FI has two business days following receipt of an order to determine whether it was obtained by the United States or a state child support enforcement agency. To make that determination, an FI can rely on whether a “Notice of Right to Garnish Federal Benefits,” as prescribed in a rule appendix, is attached to the order. If a Notice is attached or included, the FI may follow its customary procedures. Otherwise, the interim final rule procedures are triggered.
  • If the debtor is an account holder, an FI generally has two business days following receipt of the order to determine whether a Benefit Agency made deposits into the debtor’s account during the “lookback period.” A deposit constitutes a benefit payment for purposes of the lookback period only if the ACH batch header record contains a specified, unique garnishment exemption identifier. The “lookback period” is generally defined as the two months beginning on the date that precedes the account review date and ending on the corresponding date of the month two months earlier.
  • If a Benefit Agency deposited a benefit payment during the lookback period, the FI must calculate the “protected amount” and provide the debtor with “full and customary” access to it. That amount is the lesser of (i) the sum of all benefit payments posted to an account between close of business on the first date of the lookback period and open of business on the ending date of that period, or (ii) the account balance at open of business on the account review date. The FI’s determination of the protected amount is not subject to creditor challenge. The FI must send a notice to the debtor within three business days of the account review date that contains prescribed information, including the protected amount and any garnishment fee charged. Rule appendices contain a model form of such notice and examples for determining the lookback period and calculating the protected amount.
  • An FI may not charge a garnishment fee against a protected amount or after the account review date. However, the rule does not affect an FI’s ability to charge other account-related fees, such as overdraft fees, against federal benefits. In the Supplementary Information to the rule, the Benefit Agencies state that they “view garnishment processing fees as distinct from other account-related fees.” They also state that the “issue of setoff by [FIs] is outside the scope” of the rule, although the rule could be read to require an FI to provide for a right of setoff in the underlying account agreement if it wants to exercise that right against any protected amount.
  • The rule does not limit an individual’s rights under federal law to assert an exemption from garnishment, such as for protection of benefits deposited by check. It preempts state or local law only to the extent such law is inconsistent with the rule, and provides safe harbors to an FI that complies in good faith, including protection from liability to a creditor or a court for failing to honor a garnishment order based on account activity during the account review period.
  • FIs must retain records for at least two years to show compliance; federal banking agencies are charged with enforcement.