Written by JiJi Bahhur, Regulatory Compliance Counsel
Today, I’d like to share a real question we’ve seen a number of times and then provide an answer. The question stems from the final rule on Garnishment of Accounts Containing Federal Benefit Payments (final rule).
Question: In a garnishment situation where a protected amount exists, is it prohibited to assess a garnishment fee if it takes the account into a negative balance?
Answer: Although you may assess a garnishment fee where non-benefit deposited funds exist, it is prohibited to assess such a fee if it takes the account into a negative balance.
Section 212.6(h) states that a financial institution may not charge or collect a garnishment fee against a protected amount. The financial institution may charge or collect a garnishment fee up to five business days after the account review if funds other than a benefit payment are deposited to the account within this period, provided that the fee may not exceed the amount of the non-benefit deposited funds.
“The commenter also asked if a financial institution could collect a garnishment fee from an account that is not subject to the regulation after the account review by taking that account balance negative.” (Emphasis added.)
In response, the Agencies provide language in the Preamble that implies that taking the account into a negative balance does not support the imposition of a garnishment fee. The Agencies state that the fee can be collected from the additional unprotected funds that are already there or deposited within that 5-day window.
“In light of the comments received from financial institutions, the Agencies have decided to establish a procedure that financial institutions may follow, if they choose, for a limited time following the account review to determine whether nonprotected funds are available to support the imposition of a garnishment fee. If funds other than a benefit payment are deposited to an account during the 5 business days following the date of the account review, the financial institution may charge or collect a fee from the additional funds. In order to impose such a fee, a financial institution could choose to check the account at any time during the 5 days after the account review to determine if funds other than benefit payments were deposited.” (Emphasis added.)
Also, the Department of Treasury provides further clarification in its FAQs:
“After establishing a protected amount, can a financial institution deduct a garnishment fee from nonprotected funds?
Yes. The Agencies amended section 212.6(h) of the Final Rule to provide financial institutions with an opportunity for up to five business days after the account review is performed to impose a garnishment fee if non-benefit funds are deposited. Before charging a garnishment fee, financial institutions are required to determine that the garnishment fee does not exceed the amount of the non-benefit deposited funds.
The Agencies believe that financial institutions should not be permitted to collect a fee from the protected amount and, therefore, have not amended that provision of the Final Rule.” (Emphasis added.)
And last, NCUA’s Regulatory Alert (13-RA-04) provides even further clarification:
“Garnishment Fee. You may not charge or collect a garnishment fee from the protected amount. You may charge or collect a garnishment fee up to five business days after the account review, in the event that non-benefit funds become available. The fee may not exceed the amount of non-benefit deposited funds.” (Emphasis added).
In conclusion, the Agencies do not support the taking of an account into a negative balance to collect a garnishment fee. Therefore, a financial institution may only assess a garnishment fee up to the non-benefit deposited funds that exist within that 5-day window.
There is additional information and guidance in NCUA’s Regulatory Alert so be sure to take a look.