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CFPB Targets Garnishment Practices: Banks Need A Robust Compliance Plan – Financial Services

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  • The Consumer Financial Protection Bureau (CFPB) entered into a
    consent order against a large national bank regarding the
    bank’s garnishment-related practices.

  • The consent order places the burden on banks to determine
    whether a state restricts out-of-state garnishments, as well as to
    apply state-specific garnishment exemptions.

  • Therefore, banks need to develop a robust compliance plan,
    which may include a 50-state survey that informs the bank’s
    policies and procedures regarding processing of out-of-state
    garnishments.

When a consumer fails to pay a debt, the creditor may engage in
proceedings to collect, which may result in a court issuing a
garnishment notice directing a bank to freeze and turn over funds
in the consumer’s deposit account to satisfy the debt.

Up until now, it was standard practice for banks to respond to a
garnishment notice by freezing the funds and notifying both the
court and the consumer – regardless of the location of either the
issuing court or the deposit account. Not anymore. In light of a
recent consent order against a large national bank, banks need to
develop a robust garnishment compliance plan to avoid violations
and civil penalties under the Consumer Financial Protection Act of
2010 (CFPA).

Consent Order

In spring 2022, the Consumer Financial Protection Bureau (CFPB)
entered into a consent order against the bank for failure to comply
with out-of-state garnishment procedures. The Bureau found that the
bank’s garnishment practices were unfair and deceptive under
the CFPA.

Specifically, the CFPB found that the bank violated the law when
it improperly complied with garnishment notices that sought to
attach funds located in out-of-state accounts and that were
protected from out-of-state garnishments. Under the Bureau’s
new guidance, when a bank receives a garnishment notice that
concerns an account “located” in another state, the bank
must first determine whether the issuing court’s state is a
“Restriction State.”

A Restriction State is one that prohibits garnishment of
out-of-state accounts. The consent order identified some
Restriction States – Alabama, Arizona (before August 2019),
California, Florida (after August 2014) and Oregon – but signaled
that this was not an exhaustive list. According to the CFPB, the
bank largely failed to take into account Restriction States when
processing out-of-state garnishments. According to the consent
order, the bank improperly processed at least 3,700 out-of-state
garnishment notices from Restriction States without notifying the
issuing court that the deposit account was not located in the
issuing state and was therefore not garnishable. As a result,
affected consumers paid at least $592,000 in garnishment-related
fees to the bank.

The second big-ticket item in the consent order related to
garnishment exemptions. Even when a consumer’s deposit account
funds are garnishable due to nonpayment of debt, there are several
federal and state protections that prohibit garnishment of certain
funds. For example, federal law prohibits the garnishment of both
Social Security and veterans’ benefits. States have similar
protections for other types of funds, but there is wide variation
among states.

The CFPB found that, in several instances, the bank applied the
wrong state’s garnishment exemptions when processing
garnishment notices. The bank would follow the garnishment
exemptions applicable to the issuing court’s state, as opposed
to the garnishment exemptions applicable to the consumer’s own
state of residence. By way of example, if a garnishment notice was
issued by a Nevada court, the bank would apply Nevada’s
garnishment exemptions before freezing the funds – even if the
consumer resided in California. According to the consent order,
this is an improper garnishment procedure. Instead, the bank must
look to the consumer’ state of residence – in this example,
California – when determining which state garnishment exemptions to
apply.

Compliance

The Bureau found that the large national bank did not follow
these garnishment-related procedures. In addition, the consent
order required the bank to refund at least $592,000 to affected
consumers and pay a $10 million civil penalty. To avoid liability
and monetary penalties, banks should take a proactive approach to
compliance.

The consent order set out parameters for compliance with
out-of-state garnishment procedures. First, the CFPB required the
bank to “compile and maintain accurate up-to-date information
about the limits of Out-of-State Garnishment Notices issued by each
state where [the bank] processes such Notices … including
identifying all Restriction States.” Second, on the issue of
account “location” – a central issue to determine if a
garnishment notice seeks to attach funds in an out-of-state account
– the CFPB tacitly approved of the bank’s standard practice to
state the account location in its deposit agreement. Third, the
CFPB required the bank to “compile and maintain accurate
up-to-date information about state-specific garnishment
exemptions.”

The CFPB wants these directives reflected in every bank’s
policies and procedures regarding garnishment. Up until now, some
banks have taken an ad hoc and inconsistent approach to garnishment
processing. In light of the consent order, this approach will no
longer suffice. Because the CFPB requires “up-to-date
information” regarding both Restriction States and
state-specific garnishment exemptions, it is imperative that banks
consider developing a 50-state survey that outlines both whether a
state is restrictive, as well the garnishment exemptions applicable
to each state.

Some banks may wish to limit their garnishment policies and
procedures to those states in their footprint, but this approach
may not be enough to comply with the CFPB’s guidance. If a
court outside the bank’s footprint issues a garnishment notice,
the bank is responsible for determining whether that court’s
state is a Restriction State. Likewise, if a consumer opens an
account with a bank in one of its footprint states (or online), but
resides in another state, the CFPB expects the bank to apply the
garnishment exemptions of the consumer’s state of residence
before freezing the funds.

The Takeaway

The CFPB’s consent order sends a clear directive to banks:
Evaluate 1) the law of the issuing state to determine whether it is
a restrictive state, 2) where the account is located and 3) the law
of the state where the consumer resides to determine exemptions. In
addition, it should be noted that the CFPB employed a
“look-back” approach against the large national bank. The
CFPB analyzed and found garnishment-related violations over the
last 11 years. The longer that a bank waits to implement and update
its out-of-state garnishment procedures, the greater the liability
it will accumulate and the greater the likelihood that the bank
will become a target in the CFPB’s radar. Therefore, it is
imperative that banks comply with the CFPB’s guidance regarding
out-of-state garnishments.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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