Banking Department's Response to Treasury's Proposed Rule on
Garnishment of Bank Accounts Containing Federal Benefit Payments,
RIN Nos. 3206-AM17, 3220-AB63, 0960-AH18, 1505-AC20 & 2900-AN67
June 18, 2010
Gail Grippo, Deputy Assistant Secretary
Fiscal Operations and Policy
U.S. Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220
RE: Proposed Rule on Garnishment of Bank Accounts Containing Federal Benefit Payments, RIN Nos. 3206-AM17, 3220-AB63, 0960-AH18, 1505-AC20 & 2900-AN67
Dear Sirs and Madams:
The New York State Banking Department is submitting this comment letter in support of your proposed rule regarding the garnishment of bank accounts containing federal benefit payments. The rule provides much needed consumer protections while providing needed clarity for financial institutions.
The Proposed Rule Will Ensure That Consumers Who Rely on Federal Benefits Have Sufficient Funds to Meet their Basic Needs
Although federal law expressly exempts Social Security, SSI, VA, Railroad Retirement and other federal benefits from execution, restraint, attachment or garnishment, these laws have not been self-executing. As a result, thousands of low-income, retired and disabled consumers who depend on government benefits have faced severe financial hardship when their bank accounts containing statutorily exempt funds have been restrained. For consumers whose primary source of income is statutorily exempt funds, a restraint on their bank account can have devastating consequences, leaving them without sufficient funds to pay rent or buy food or other basic necessities. In addition, allowing creditors to restrain exempt funds places the burden on vulnerable, and typically unsophisticated, consumers to challenge restraints in court, often without the assistance of counsel. Pursuing judicial recourse is a lengthy process. It can take weeks or even months to have funds released that should not have been restrained to begin with. Indeed, according to local consumer advocates, some creditors have refused to release the exempt funds of judgment proof pro se consumers unless the consumer entered into a payment plan.
As a result, in 2008, the New York State legislature enacted the Exempt Income Protection Act (EIPA). The law, which became effective January 1, 2009, amended Article 52 of the New York Civil Procedure Acts and Rules to provide an automatic exemption for the first $2,500 in a bank account where any payments “reasonably identifiable” as “statutorily exempt” were made electronically or by direct deposit during the 45-day period prior to service of a restraining notice or income execution. Judgment creditors are required to provide a banking institution with copies of the restraining notice, the exemption notice and the exemption claim form which the institution in turn serves on accountholders so that they understand their rights and the steps they must take to release exempt deposits above the statutory threshold and to protect future exempt deposits from restraint. An industry letter describing EIPA with a link to the actual law is available on the Banking Department’s website at http://www.banking.state.ny.us/il090120.htm. Feedback received since the law’s enactment indicates that it has been extremely effective and that local legal services organizations currently receive far fewer complaints from consumers whose accounts have been restrained.
The Proposed Rule Will Benefit Financial Institutions as well as Consumers
The proposed rule benefits financial institutions as well as consumers by establishing clear guidelines and protocols for handling accounts with exempt funds. For each restraining notice or garnishment order, a bank would simply be required to review the account history during the 60 day period prior to the bank’s receipt of the notice or order. While we recommend that this “look-back period” be expanded from 60 to 65 days to ensure that a full two months of federal statutory benefits would be protected, we fully support the proposed “snap-shot” approach. By creating a bright line for determining which funds to exempt from restraint, the snap-shot approach is easy to administer and will reduce confusion and administrative costs. Banks need only restrain or garnish those funds that exceed the total of statutorily exempt deposits within the look-back period. This approach avoids the problem of continuing garnishments which have created some uncertainty in jurisdictions like New York, where garnishments and restraining orders capture deposits received by the bank until the debt is paid, leaving banks unclear as to how they should treat funds deposited after the date the garnishment order or restraint is received. In contrast, the proposed rule makes clear that the bank only need look at the funds received as of the bank’s review of the account.
The proposed rule also provides other clear guidance that will facilitate financial institutions’ compliance with the rule and their ability to make exempt funds available to consumers. First, although the majority of directly deposited exempt funds are currently coded and identified by number and name (such as “Social Security” or “National Pension”), Treasury is proposing additional coding enhancements and updates that will assist institutions in identifying exempt deposits. Second, the proposed rule clarifies that it applies to multiple accounts at a financial institutions, requiring a separate review and establishment of a separate protected amount for each account. This is an issue which has generated confusion in New York, and is handled differently by different institutions. Third, the proposed rule provides a model consumer notice that institutions can use to notify accountholders that a garnishment order or restraining notice has been served on their account and that will facilitate accountholders’ understanding of their rights under law. This notice can be improved, however, by advising accountholders, as is currently required under the New York EIPA, that they have the right to contact an attorney and providing a contact number for free legal services. Finally, the rule provides financial institutions with a “safe harbor,” clarifying that institutions cannot be held in contempt of court or liable to judgment creditors for making protected funds available to accountholders.
The Proposed Rule Properly Recognizes the Important Role of State Law
We are also pleased that the proposed rule allows states to provide additional protections for consumers whose accounts are restrained or garnished. The proposed rule explicitly permits states to protect funds in an account from restraint or garnishment to a greater extent than is required by the proposed rule and requires institutions to comply with state laws unless compliance with those laws prevent an institution from complying with the requirements of the federal rule. EIPA provides New York consumers with important additional protections not found in the proposed rule by setting minimum amounts that cannot be restrained, i.e. $2500 in the case of directly deposited federal and state statutorily exempt funds and $1740 for all other bank accounts. Financial institutions can comply with both New York law and the federal rule and thereby the rule rightly preserves these state protections.
Recommendations for Improving the Rule
We have a few suggestions for strengthening the proposed rule, some of which have been noted above. These include:
Expanding the look-back period from 60 to 65 days to ensure a full two months worth of exempt deposits is considered in the bank’s review of funds to be exempted from restraint;
Including in the notice provided to consumers a notice advising the consumer of the right to consult with an attorney and providing contact information for free legal services;
Clarifying that consumers’ access to protected exempt funds should include customary and usual access to funds, including the ability to write checks and make ATM withdrawals. In New York, some institutions send consumers a check for the amount of the exempt funds or require consumers to withdraw all exempt funds after service of a restraining notice. This causes clear hardship to consumers who can no longer utilize their exempt funds to pay bills, write checks or withdraw cash.
In closing, we appreciate the opportunity to provide the comments on the proposed rule. It strikes the right balance between protecting consumers’ access to the funds they need for their daily existence without unduly burdening financial institutions. With the recommendations noted, we strongly support the rule’s adoption.
Please feel free to contact me if you have questions about these comments.
Very truly yours,
Jane M. Azia
Director of Non-Depository Institutions and Consumer Protection