Garnishment Rules and Protections

Submit comments on the interim final rule by May 24.

May 18, 2011

The Office of Personnel Management, Railroad Retirement Board, Social Security Administration, U.S. Treasury Fiscal, and Department of Veterans Affairs (“the Agencies”) issued an interim final rule and request for comments on garnishment of accounts containing federal benefit payments.

The rule is effective May 1, 2011, but credit unions have until May 24, 2011, to submit comments. 

The interim final rule restricts the garnishment of certain federal benefit payments. Social Security and Supplemental Security Income benefits; veterans benefits; federal railroad retirement, unemployment, and sickness benefits;
and Civil Service Retirement System and Federal Employee Retirement System benefits have been identified as protected benefits.

All institutions that accept protected benefit payments via direct deposit must comply. The rule doesn’t apply to federal benefit payments received by check. 

When a credit union receives a garnishment order, it must first determine if that order was issued by the United States or by a state child support enforcement agency. If so, the protections benefit payments receive under this rule wouldn’t apply, and the credit union would complete its normal garnishment process. If not, then the credit union must follow the procedures set forth in the rule. 

Account review

After receiving a garnishment order, the credit union has two business days from the date of receipt to perform an account review. The rule provides additional time when a credit union receives a garnishment order with insufficient information or batched garnishment orders.
During the account review, the credit union
is required to review
two months of account activity (the “look-back period”) to determine if protected benefit payments have been deposited to the account(s). 

The “look-back period” begins on the date preceding the date of the account review and ends on a corresponding date of the month two months earlier. For example, if the credit union begins the account review on Sept. 15 it would review activity on the account back to July 15.

The Agencies revised this period under the interim final rule to ensure that in most cases, the protected amount would include two benefit payments. Consult Appendix C of the rule for an explanation of
how to calculate the “look-back period” and the protected amount.

Credit unions are required to maintain records of account activity and document actions taken when handling the garnishment orders for a period of two years from the date the institution receives the order. 

Institutions are only allowed to perform the account review once, even in instances where the same garnishment order has been served more than once on the institution. Also, the rule prohibits continual garnishment of an account. So where additional amounts have been deposited or credited to an account after a garnishment order has been processed, the credit union may not subsequently freeze those amounts unless it has been served with a new or different garnishment order. 

Credit unions are prohibited from charging a garnishment fee against protected funds and are prohibited from charging a fee after the date of the account review. Credit unions can process a garnishment fee against any unprotected funds in the account during the account review period.

If exempted benefit payments have been deposited to the account(s), the credit union must ensure that the accountholder has access to the sum of the payments or current balance on the account(s), whichever is lower. 

Required notice

The credit union is required to notify the accountholder when it receives an order of garnishment. The notice must be issued within three business days from the date of the account review.

The notice must be provided to the account-holder and can only include information
and/or documents pertaining to the order. If
the accountholder has multiple accounts, the credit union can opt to send one comprehensive notice that references the various accounts subject to the order. 

At minimum, the notice must advise the accountholder that the credit union has received the garnishment order, provide an explanation of what a garnishment order is, and provide information regarding the accountholder’s rights with regard to the order. 

In addition, the rule permits (but doesn’t require) institutions to include other information, such as free and local attorney or legal aid services; financial institution contacts; information about a state’s garnishment rules and protections; and a statement that the institution isn’t providing legal advice by issuing the notice.

Credit unions can opt to draft their own notice or use the model notice that’s provided with the rule. Credit unions that use the model notice will satisfy the notice content requirements. Find the notice in Appendix A of the rule.  

Identifying protected payments

At press time, the Agencies anticipated using certain automated clearinghouse (ACH) encoding so institutions could more easily identify exempt benefit payments.  The ACH Batch Header Record for the benefit payments will contain a unique garnishment exemption identifier.

The payments will be identified by the characters “XX” in positions 54 and 55 of the “Company Entry Description” field of the Batch Header Record of a direct deposit entry. For example, a Social Security payment would be encoded “XXSOC SEC”; a federal retirement payment would be encoded “XXFED ANN” and so on. All benefit payments subject to the interim final rule will be coded accordingly and the Agencies expected to have the payment encoding system in place by the May 1 effective date.

According to the Treasury Department’s Financial Management Service (FMS), applicable ACH payments were to be encoded on or about March 12, 2011, with the new “XX” characters. But institutions weren’t required to take action on the new encoding until May 1, 2011.

Find additional guidance in the FMS document “Guidelines for Garnishment of Accounts Containing Federal Benefit Payments.” It will eventually be published in the Treasury’s Green Book.

Safe harbor

The regulation also contains a safe harbor for credit unions that make a good faith effort to comply with the rule. The safe harbor is intended to shield a credit union that complies with the rule from liability to the creditor.

For example, if the credit union makes protected funds available to the accountholder in compliance with the rule, the credit union wouldn’t be liable to a judgment creditor.

That’s even if it’s later determined the funds provided to the account-holder at the time the order was served were actually nonexempt funds. Also, the rule doesn’t provide for a private right of action against institutions. 

NCUA and the federal banking agencies will enforce the rule. The interim final rule pre-empts any state or local government law or regulation that’s inconsistent with the rule. But the rule doesn’t pre-empt additional requirements under state or local law.

Visit (select “regulations & compliance,” and then “regulatory advocacy”) for an analysis of the final rule and comment call.

Find additional resources under “garnishments” in CUNA’s e-Guide to Federal Laws and Regulations.

NICHOLE SEABRON is CUNA’s federal compliance counsel. Send compliance questions to cucomply@