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Effective May 1, 2011: New Garnishment Procedures for Federal Benefit Payments

Effective May 1, 2011, credit unions must implement new procedures for handling garnishments on accounts that receive federal benefit payments by direct deposit. This is the first time that federal agencies have imposed an affirmative duty on financial institutions to protect federal benefits from garnishment. Under these new procedures, the credit union first must determine if the United States or a State child support enforcement agency is the plaintiff that obtained the garnishment order. If yes, the credit union follows its customary procedures for handling garnishment orders. If no, the credit union must review the account history for the prior 2-month period to determine whether, during this “lookback period,” exempt federal benefit payments were directly deposited to the account. The credit union may rely on the presence of a certain ACH identifier to determine whether a payment is an exempt federal benefit payment for purposes of the rule. This identifier is an “XX” encoded in positions 54 and 55 of the “Company Entry Description” field of the ACH direct deposit entry.The credit union must ensure that the accountholder is given access to an amount equal to the lesser of: (i) the sum of the exempt payments directly deposited to the account during that 2-month lookback period, or (ii) the balance of the account on the date of the account review. This establishes the “protected amount.”Also, the credit union must notify the accountholder that the credit union has received a garnishment order. But, there is no requirement to send such notice if the balance in the account is zero or negative on the date of the account review. Attached to the new rules is a model notice that the credit union can use.If the account contains a protected amount, the credit union cannot collect a garnishment fee from the protected amount. The credit union may only charge a garnishment fee against funds in the account that are in excess of the protected amount.To summarize, the purpose of the new federal rules is to implement existing statutory provisions that protect certain federal benefits from garnishment, by establishing procedures that financial institutions must follow when served with a garnishment order against an accountholder into whose account an exempt federal benefit payment has been directly deposited by ACH. These new rules do not affect accounts that do not receive exempt federal benefit payments by direct deposit.