Industry Letter

New Interim Federal Rule Regarding the Garnishment of Bank Accounts Containing Federal Benefit Payments

April 29, 2011

This is to alert all banking institutions in New York of a new federal rule, 31 C.F.R. Part 212, regarding the handling of bank accounts subject to garnishment.1 The rule, which is effective May 1, 2011, establishes procedures banks must follow with respect to garnishments and limits the ability of banks to freeze or restrain bank accounts in which certain federal benefits have been paid by direct deposit. The covered federal benefits include Social Security, Supplemental Security Income, VA benefits, Federal Railroad retirement, unemployment and sickness benefits and Civil Service and Federal Employee Retirement System benefits. A full discussion of the rule can be found at 76 Fed. Reg. 9939 (Feb. 23, 2011).

The rule prohibits banking institutions from automatically placing a freeze on a bank account when they receive a garnishment order. The rule requires that within two business days of receiving a garnishment order, the bank conduct an account review of each account in the name of the account holder against whom the garnishment order was issued to determine the sum of any exempt federal benefit payments directly deposited to the account during the two month period preceding the date the review begins. If, during this ‘‘lookback period,’’ one or more exempt payments were directly deposited to the account, the bank must allow the account holder to have full and customary access to an amount equal to the lesser of the sum of such exempt payments or the balance of the account on the date of the account review (the federally ‘‘protected amount’’). The account review is to be performed only once and may not be repeated. The rule excludes garnishment orders obtained by the United States as well as garnishment orders issued by a State child support enforcement agency from this review.

Banking institutions must also notify account holders whose accounts contain covered federal benefits of the protections that apply to exempt funds within three business days of the completion of the account review. Banks can choose to use the model notice contained in the rule in order to be deemed to be in compliance with the notice content requirements.

Effect of Federal Rule on Application of New York Law

The New York Exempt Income Protection Act (“EIPA”), effective January 1, 2009, amended Article 52 of the New York Civil Practice Law and Rules (“CPLR”) to limit the ability of judgment creditors and others to restrain Social Security and other exempt funds. EIPA created an automatic exemption from garnishment for the first $2,500 in an account in which any payments reasonably identifiable as “statutorily exempt payments” were made electronically or by direct deposit during the 45-day period prior to service of a restraining notice or income execution. In addition to the specific federal benefits covered by the federal rule, “statutorily exempt benefits” under Article 52 include funds from other sources such as public assistance, workers" compensation, unemployment insurance, public or private pensions and black lung benefits. CPLR § 5205(l)(2). For individuals who don’t receive directly deposited statutorily exempt payments, EIPA prohibits banks from garnishing an amount equal to or less than 240 times the minimum wage (currently $1,740). See, e.g., CPLR § 5222(i). Industry letters discussing the requirements of EIPA can be found at http://www.banking.state.ny.us//legal/industry/il090120.htm and http://www.banking.state.ny.us//legal/industry/il090910.htm.

Banking organizations must be aware of the interplay between the new federal rule and existing New York law and must take steps to ensure compliance with both the rule and New York law. The rule makes clear that it preempts state law only to the extent that state law would prevent a bank from complying with the requirements of the rule. The rule does not exempt banking organizations from complying with state law requirements that are in addition to the rule’s requirements, that protect other types of funds or that protect a higher amount of benefit payments. In such cases, the financial institution will need to satisfy the rule’s requirements and then determine what, if any, additional obligations exist under state law.

The following are some examples that illustrate how banks should apply the federal rule in conjunction with New York law.

  1. Bank receives a restraining notice for $2500 for a bank account containing $2400. The bank’s account review for the two-month lookback period reveals that the account contains a federally protected amount of $1200. Because the federal benefit payments deposited into the account also qualify as “statutorily exempt” payments under CPLR Article 52, the account holder is entitled to the full state cushion of $2500. In addition, because the account contains an amount less than $2500, the restraining notice is void under CPLR § 5222(j).
  2. Bank receives a restraining notice for $2500 for a bank account containing $3000. The bank’s account review for the two-month lookback period reveals that the account contains a federally protected amount of $1200. Because the federal benefit payments also qualify as “statutorily exempt” payments under CPLR Article 52, the bank can only restrain funds in excess of the state cushion of $2500, or in this case, $500. The bank must also provide the account holder with the separate notices required under the federal rule and under CPLR § 5222-a.
  3. Bank receives a restraining notice for $2500 for a bank account containing $2400. Of this amount, none comes from federal benefits covered by the federal rule, while $1600 can be identified as workers’ compensation benefits directly deposited within the preceding 45 days. As a result, the bank’s account review does not identify any federally protected amount under the federal rule. The bank must next determine whether the account contains any statutorily exempt payments under New York law. Since the account contains workers’ compensation benefits that were directly deposited in the preceding 45 days and since the amount in the account is less than $2500 cushion provided by state law, the restraining notice is void under CPLR § 5222(j).
  4. Same scenario as Example 3 but the bank account contains $3000. The same analysis applies except that since the account contains more than $2500, the restraining notice is not void. The bank must make $2500 available to the account holder and would restrain $500 -- the amount above $2500. The bank must also must provide the account holder with the notice required under CPLR § 5222-a.
  5. Bank receives a restraining notice for $2500 for a bank account containing $2400. Because the bank’s account review does not uncover any exempt federal benefits payments deposited to the account within the two month lookback period, there is no federally protected amount under the federal rule. The bank must next determine whether the account contains any statutorily exempt payments under New York law. If the bank determines that the account does not contain any such statutorily exempt payments, the bank is required to leave the account holder with a cushion of 240 times the minimum wage (currently $1740). This amount is exempt from restraint and must be made available to the consumer. The bank restrains the remaining $660 and must send the account holder the notice required under CPLR § 5222-a.

1 As used in this letter and the federal rule, the terms “garnish or garnishment” and “garnishment order” are broadly defined. “Garnish or Garnishment” includes an “execution, levy, attachment, garnishment or other legal process.” “Garnishment order” includes any writ, order, notice, summons, judgment . . . to effect a garnishment.” 31.C.F.R. § 212.3. Both terms incorporate the procedures authorized under Article 52 of the New York Civil Practice Law and Rules (“CPLR”) for enforcing money judgments, including restraining notices and income executions.