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.
How We Can Help
Holland & Knight's Consumer Protection Defense and Compliance Team includes a robust CFPB and Federal Trade Commission practice, with experienced attorneys who are recognized as thought leaders in the field. The firm has represented dozens of companies and individuals in federal and state investigations concerning advertising, marketing practices, privacy and data security, consumer credit, telemarketing and debt collection, saving clients from significant financial loss, public scrutiny and having to make changes to their core business operations.
For more information or questions about the specific impact of the CFPB's consent order, contact the authors.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.
