On May 29, the Treasury Department, Social Security Administration, and certain other federal agencies issued a final rule amending the regulation1 governing the garnishment of federal benefit payments that are directly deposited to accounts at financial institutions. Financial institutions have been subject to the agencies’ interim final rule since May 1, 2011. The final rule adopts the interim final rule with certain changes that will impact how financial institutions handle garnishments under the regulation. A number of these changes are in response to concerns raised by financial institutions during the comment period established by the agencies with the release of the interim final rule. The final rule is effective June 28, 2013.

Here is a summary of the changes:

Definition of Garnishment Order

The final rule revises the definition of "garnishment order" to include orders or levies issued by a state, state agency, or municipality. The definition is important because the regulation’s requirements are triggered only by a financial institution’s receipt of a "garnishment order." Currently, the definition of "garnishment order" is limited to an order issued by a court or a state child support agency. The change to the definition means that a financial institution that receives a tax levy directed to a deposit account must now comply with the "account review" and other requirements of the regulation.

In addition, the final rule removes any doubt as to whether the regulation applies to restraining orders by amending the definition of garnishment order to include "an order to freeze assets in an account."

The final rule also clarifies that an order "issued by a court" includes an order issued by the clerk of the court or an attorney acting in his capacity as an officer of the court in accordance with state law. Finally, the phrase "to enforce a money judgment" has been removed from the definition of "garnishment" to ensure the regulation’s application is not limited to money judgments.

Definition of Benefit Payment

In order to help financial institutions properly identify a "benefit payment" under the regulation, the agencies have amended the definition of "benefit payment" to mean a direct deposit payment that not only includes an "XX" in positions 54 and 55 of the Company Entry Description field, but also includes the number "2" in the Originator Status Code field of the Batch Header Record of the direct deposit entry.

Definition of Lookback Period

Financial institutions have questioned how the account balance should be calculated when conducting an account review to determine the "protected amount." They have noted that the procedure for calculating the protected amount does not take into account intraday deposits and withdrawals. In this regard, the interim final rule defines "protected amount" as the lesser of: (i) the sum of all benefit payments posted to an 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, and (ii) the balance in an account at the open of business on the date of the account review. If the account review is performed in the afternoon, and items have been posted to the account during the day, the protected amount under clause (ii) (i.e., as of the open of business) will likely be different from the amount determined by the financial institution at the time of account review. To address this, the federal agencies have amended the definition of "protected amount" to refer to the balance in an account when the account review is performed.

Garnishment Fee

Currently, a financial institution may not charge or collect a garnishment fee against a protected amount, and may not charge or collect a garnishment fee after the date of account review. This means that a garnishment fee may be imposed only if non-exempt funds are in the account to cover such fee, and such fee is collected no later than the date of the account review.

In response to concerns raised by financial institutions regarding the time and expense of processing garnishment orders under the regulation, the federal agencies have amended the regulation to permit garnishment fees in certain additional circumstances. In particular, the rule has been amended to permit a financial institution to charge a garnishment fee for up to five business days after the account review if funds other than a benefit payment are deposited to the account within this period. Such fee may not exceed the amount of the non-benefit deposited funds.

Account Holder Notices

Currently, a financial institution must send an account holder named in garnishment order a notice if the balance in the account on the date of the account review is above zero dollars and the financial institution has established a protected amount.

A number of financial institutions pointed out that this meant that a financial institution would be required to send such notice for an account with exempt federal benefit funds even when no account funds are frozen (i.e., there are no non-exempt funds). Financial institutions noted that significant expenses are associated with preparing and mailing garnishment notices for accounts in which no funds are available for the creditor, and that customers may be confused by such notice and make inquiries with their financial institutions. Accordingly, the agencies have amended the rule to require a notice to the account holder only in cases where funds are in the account in excess of the protected amount.

Financial institutions will want to review and make adjustments to their procedures and systems to accommodate these changes by the June 28 effective date.