The Treasury Department and other federal agencies have finalized rules designed to protect federal benefit payments that will require banks and other depository institutions to revised their procedures for dealing with garnishment orders, levies, and similar legal orders.The Treasury Department published an Interim Rule that went into effect over two years ago, so most financial institutions should already have procedures in place to prevent the freezing or taking of covered federal benefits from customers' accounts. Only minor changes to existing procedures should be required in order for institutions to comply with the changes in the Final Rule.
|The U.S Treasury and a $10 bill. Photo by zieak / Foter|
Covered Orders. The Final Rule is designed to protect federal benefit payments which are directly deposited into customers' accounts from being seized by third parties. Although the Final Rule uses the term "garnishment order," the intent is more broad. The Final Rule explains this better than the Interim Rule did by defining the term "garnishment order" to cover essentially any legal process that demands the payment of deposited funds belonging to another, including orders or levies issued by a state, a state agency, or a municipality, as well as "an order to freeze an account," which includes a restraining order. The "garnishment order" may be issued by someone other than a court, including a clerk of a court, an attorney acting in his or her capacity as an officer of a court. However, if the order comes from a child support agency, the funds are not protected and the depository institution must comply with the order.
Determination of Protected Funds. The Final Rule covers only directly deposited funds that are coded to indicate they are protected. These include social security payments, VA benefits, and certain federal pensions. A depository institution must look back at the two prior months for direct deposits of covered federal benefits, and may not freeze or turn over those funds. The institution is instructed under the Final Rule to use the account balance at the time the account review is performed, rather than at the start of business, as was the case under the Interim Rule.
Fee. An institution may charge a customary garnishment fee, if the deposit account agreement with the customer and state law permit it, but only if there are non-protected funds available. A fee cannot be deducted from the protected funds. Under the revisions in the Final Rule, if non-protected funds are not available at the time of the account review, but are subsequently deposited within five business days, the institution may collect its fee from the subsequently-deposited funds.
What Should Your Institution Do?
There are a few things that institutions should do immediately to address the changes reflected in the Final Rule:
- Revise internal procedures to reflect the specific requirements described above and alert deposit operations personnel to the changes.
- This is a good time to review deposit account agreements to ensure that garnishment fees are specifically permitted by the agreement. If they are not, consider adding this to your list of changes for the next time you revise those agreements.
- Begin requiring all new deposit account customers to complete a short form (i) disclosing whether or not they receive any type of protected benefit income and (ii) requiring the accountholder to notify the institution if they begin receiving covered benefits after opening the account. (This does not eliminate the need to check accounts for direct deposits with the appropriate coding, but serves as a belt-and-suspenders approach.)
The final rule became effective June 28, 2013, so compliance is already mandatory.
(You can read the entire Final Rule, which contains more detail than is discussed above, by clicking here for the HTML version or here for the PDF version.)