CUNA Regulatory Comment Call

October 3, 2007

EXECUTIVE SUMMARY

• The National Credit Union Administration, the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision have jointly issued proposed guidance on best practices regarding garnishment of exempt federal benefit payments, such as Social Security benefits, Supplemental Security Income benefits, Veterans’ benefits, Federal Civil Service retirement benefits, and Federal Railroad retirement benefits.

• The action was taken as a result of concerns raised by consumer groups and others that individuals’ government benefit funds had been illegally garnished or frozen by banks and that banks had been assessing sizeable fees when taking such actions. The Senate Finance Committee held a hearing on this issue September 20 and the issue of whether federal financial regulators should develop rules addressing such actions was discussed.

• However, concerns about the legality of such regulations were also addressed. Federal regulators do not have authority to implement such regulations as federal benefits are protected from garnishment under statutes such as the Social Security Act, which are not under the financial regulators’ purview. Also, state laws require institutions to comply with state court garnishment orders. In addition, it is often difficult for institutions to identify protected federal benefit funds from other deposits in a consumer’s account that could properly be subject to garnishment.

• Rather than issue a new rule to address these concerns, the regulators have instead issued the proposed guidance. While credit unions were not the subject of the hearing or of consumer complaints, NCUA determined that the proposed guidance will be useful for credit unions and that is appropriate that the proposal, which is far short of a new regulation, should apply to credit unions as well as to banks.

• Under the proposed guidance, the agencies have identified nine ‘best practices” to assist financial institutions in sorting through legal and other issues when the possibility of garnishment or freezing of government benefit funds arises. These include encouraging institutions to:

  • Promptly notify a consumer when a financial institution receives a garnishment order and places a freeze on the consumer’s account;

  • Provide the consumer with information about what types of federal benefit funds are exempt, including SSA and VA benefits, in order to aid the consumer in asserting Federal protections;

  • Promptly determine, as feasible, if an account contains only exempt federal benefit funds such as SSA or VA benefits;

  • Notify the creditor, collection agent, or relevant state court that the account contains exempt funds in cases in which the financial institution is aware that the account contains exempt funds;

  • If state law or the court order will permit a freeze not to be imposed if the account is determined to contain only exempt federal benefit funds, act accordingly if that determination is made;

  • Minimize the cost to a consumer when the consumer’s account containing exempt federal benefit funds is frozen, such as by refraining from imposing overdraft, NSF, or similar fees while the account is frozen or refunding such fees when the freeze has been lifted;

  • Allow the consumer access to a portion of the account equivalent to the documented amount of exempt federal benefit funds as soon as the financial institution determines that none of the exceptions to the federal protections against garnishment of exempt federal benefit funds are triggered by the garnishment order;

  • Offer consumers segregated accounts that contain only federal benefit funds without commingling of other funds; and

  • Lift the freeze on an account as soon as permissible under state law.

• CUNA’s Consumer Protection Subcommittee will be developing CUNA’s comments. Leagues and credit unions are encouraged to comment and may file their letters with NCUA using one of the following options:
  • NCUA Web Site:
    Follow the instructions for submitting comments.
  • E-mail: Address to regcomments@ncua.gov. Include ““[Your name] Comments on Proposed Guidance (Garnishment of Federal Benefit Payments)” in the e-mail subject line.
  • Fax: (703) 518-6319. Use the subject line described above for e-mail.
  • Mail: Address to Mary Rupp, Secretary of the Board, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428.

• Comments are due by November 27, 2007. Please sumbit your comments to CUNA by November 19, 2007.

Please feel free to also fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Deputy General Counsel Mary Dunn at mdunn@cuna.com and to Senior Assistant General Counsel Jeff Bloch at jbloch@cuna.com; or mail them to Mary and Jeff in c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, DC 20004-2601. You may also contact us at 800-356-9655, ext. 6032, if you would like a copy of the guidance, or you may access it here.

• Are there practices that would enable an institution to avoid freezing funds altogether by determining at the time of receipt of a garnishment order that the funds are federally protected and not subject to an exception?
  
  

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• Are there other permissible practices that would better serve the interests of consumers who have accounts containing federal benefit payments? Are there ways to provide consumers with reasonable access to their funds during the garnishment process?
  
  

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• Are customers adequately informed of their rights when a creditor attempts to garnish their funds? What could be done to provide consumers with better information?
  
  

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• Institutions often charge customers a fee for freezing an account. How do these fees compare to those charged separately when an account holds insufficient funds to cover a check presented for payment? Are there operational justifications for both types of fees to be assessed?
  
  

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• Other comments?
  
  

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