On May 4, the Consumer Financial Protection Bureau finalized an enforcement order against Bank of America. In its zeal to bring the Consumer Financial Protection Act to the aid of consumer-debtors, the CFPB makes a muddle of state commercial law and civil procedure.
The CFPB garnishment order, to which BofA consented, assessed a civil money penalty of $10 million and required BofA to refund $592,000 in garnishment-related fees charged to its depositors — an astonishingly small recovery for consumers, given the 11-year duration of the alleged violations. Certainly, neither the fine nor the reimbursement was a particularly big deal for BofA, or anything that would ordinarily concern the rest of the banking industry.
Of greater concern, however, is the remainder of the CFPB's 46-page garnishment order, and how it may be utilized by the CFPB and other bank regulators, and by attorneys for debtor-depositors, in the future. The order — issued without a hearing, public notice or opportunity for comment, and without any judicial involvement whatever — requires BofA to adhere to specific requirements in revamping its procedures for handling civil garnishment notices — notices from judgment creditors (and/or courts) to freeze and/or turn over some or all of a debtor’s deposit accounts at the bank.
The detailed prescriptions of the CFPB's garnishment order conflict in important respects with applicable state laws. For instance, the order asserts that law of the state where the depositor resides defines applicable garnishment exemptions, contradicting the usual rule that the law of the forum state governs the terms and availability of civil remedies. The order declares that to issue a “facially valid” garnishment, a court must have jurisdiction over both the garnishee bank and the specific deposit account. This contradicts the state common law rule that jurisdiction over the garnishee bank is all that is required.
In basing specific procedural requirements on the “applicable” state’s law, the CFPB fails to provide intelligible means of identifying such states and ignores important differences between different states’ methods and criteria for determining the “location” of a bank deposit account.
Despite the order’s many inconsistencies with applicable state law, in issuing its garnishment order, the CFPB made no apparent attempt to comply with either the letter or spirit of statutory procedures for federal agency preemption of conflicting state laws. Such steps might reasonably have included, for example, publishing notice of the state laws to be preempted and inviting input from the public and the states concerned.
The prescriptions of the CFPB’s garnishment order are inconsistent not only with BofA's (apparently deficient) garnishment procedures, but also with the prevailing practices of even the most conscientious U.S. banks. Upon receipt of a garnishment notice, most banks check to see whether the named debtor has a deposit account at the bank. If they do, the bank freezes the account, notifies the sender and accountholder and complies with the instructions received. They do not pause to compare the garnishment laws of various potentially relevant states or to determine which state’s garnishment law applies. Nor do they keep detailed records of their processing of every garnishment notice. Yet, the CFPB’s order requires BofA to do all of these things and more.
As a settlement of a specific regulatory enforcement proceeding brought against BofA, the CFPB order is legally binding on no one other than BofA (and, perhaps, the CFPB itself). Its sweeping and detailed prescriptions are not supported by a factual or evidentiary record, by hearing or trial testimony or exhibits, or by input from outside industry experts or other affected parties, and apparently, have not been subjected to independent third-party review. As a consensual settlement of a particular regulatory dispute, the CFPB’s BofA order is, as a technical legal matter, entitled to zero precedential weight.
However, as with any public bank regulatory pronouncement, there is a significant danger that federal and state bank examiners, as well as debtors’ class action counsel, may seek to apply the detailed prescriptions of the CFPB garnishment order far beyond its consensual limits in an attempt to reach and regulate the banking industry generally. (Last year’s grudging banking agency acceptance of the difference between regulatory “law” and “guidance” comes to mind.)
Such an expansive application to other banks of terms of an agency’s negotiated settlement with one targeted institution — sometimes referred to as “trickle down” or “best practices” regulation, or regulation “by example” — would be an evasion of the notice and comment rulemaking procedures required of the CFPB and other federal banking agencies for broad policy pronouncements. Nevertheless, that device is employed all too frequently to extend ever more intrusive (and often misguided) regulation to the nation’s banks. And, of course, when, as here, the Consumer Financial Protection Act is invoked, there is always the concern that litigious debtors’ counsel may take the CFPB's garnishment order as a road map for “strike suits” and recovery of class action settlements and attorneys’ fees.
If, despite its nonprecedential basis, the garnishment order is sought to be extended and applied by examiners or debtors’ counsel as a regulatory template, the effect will be to interpose depository banks as arbiters of the rights of consumer-debtors and their creditors, a function that state courts are established and expected to perform. Thus placed in the middle, banks will be doubly at risk — on the one hand, to their depositors and the CFPB, and on the other, to their depositors’ judgment creditors — not a comfortable place to be.
