Banking and thrift regulators issued proposed guidance on Wednesday on best practices for institutions for handling debt garnishment orders when a consumer also has protected Social Security wages.
In the guidance, which will be out for public comment for 60 days, the agencies advised banks to promptly notify a customer when a garnishment order is placed, disclose to what types of federal benefits are exempted, and promptly determine if an account contains exempted federal benefits and, if so, notify a creditor of state court. The guidance also tells banks that if a court order determines a freeze should not be imposed, the financial institution should act accordingly.
Though somewhat obscure, the issue is the topic of a Senate Finance Committee hearing Thursday at which witnesses from teh Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Office of Thrift Supervision are expected to testify.
Federal regulators said the proposed best practices would help clear up confusion among bankers and consumers.
"Consumers can face significant hardships when their federal benefits are frozen in response to a garnishment order," Federal Reserve Gov. Randall Kroszner said in a press release. "The proposed best practices can allow faster access to their funds while recognizing that banks are obligated to comply with relevant federal and state laws."
Federal law protects certain federal benefits, such as Social Security, veterans and federal civil service benefits, from being subject to creditor's garnishment orders. However, certain state laws require financial institutions to comply with garnishment orders, and in many states banks are liable for any funds that are withdrawn by a consumer after the bank has received a garnishment order.
Problems have arisen because of the discrepancies between state and federal laws. The Social Security Administration and the Department of Veterans Affairs have not outlined the scope of the federal benefits garnishment protection, but a number of courts have weighed in on the issues and cases are also pending.
Regulators said state garnishment orders sometimes do not provide enough information to allow banks to know if the garnishment order is subject to one of the federal benefits exemptions. Also, many consumers include both funds that are protected by federal law from garnishment in the same account as funds that are not protected, making it difficult to distinguish for garnishment.
The regulators' proposed guidance says banks should allow consumers access to a portion of their account equivalent to the documented exempted amount and encourages financial institutions to offer consumers segregated accounts that contain only federal benefit funds.
Banks have been criticized for fees that can pile up after a garnishment. In the proposed guidance, regulators advised banks to minimize the cost to a consumer when an account contains exempted federal funds, such as by refraining from imposing overdraft or similar fees while the account is frozen.
The regulators also asked for feedback on how to enable an institution to differentiate protected funds and those not exempted.
