A Dubious Precedent — CFPB'S Consent Order to BofA Concerning Garnishment of "Out of State" Accounts Sows Confusion Amidst Complexity

What is a bank supposed to do when it receives notice of legal garnishment of a customer's deposit account?  If the notice derives from a local court and seeks to attach funds of a local customer, most banks know exactly what to do, having routinely processed such notices in the past.  But what if the bank has branches and customers in multiple states and receives a garnishment notice from a creditor or court, or that relates to a deposit account, that is "located" in another state? 

If you had asked these questions of most bank general counsels three months ago, they probably would have given you a uniform and simple answer — freeze any non-exempt funds, notify the sender and the depositor, and await further instructions as to payment.  

The answer may not be so simple anymore — not since the Consumer Financial Protection Bureau ("CFPB") issued its Consent Order to Bank of America, N.A. ("BofA") on May 4, 2022.  The CFPB's 47-page Order — issued and published without a hearing, public participation, or judicial review — adds regulatory risk and a heavy dose of confusion to an already complex equation.  The CFPB Order found (and BofA did not admit or deny) that BofA’s standard deposit account agreement and garnishment practices with respect to "out of State garnishment notices" violated the Consumer Financial Protection Act of 2010 (the "CFPA").  It thereby entangled garnishee bank procedures in Federal consumer protection law.

Under the CFPB's Consent Order, when a bank receives a garnishment notice, it must first determine the "location" of the garnished deposit account — not a rhetorical question in today's world of electronic banking.  If the garnishment notice comes from, or concerns an account "located" in another state, the bank must then determine whether the state from which the garnishment originates is a "Restriction State," i.e., a state whose statutes do not allow garnishment of out-of-state accounts.  If so, the bank must notify the issuer that the bank “does not have garnishable assets located within the [issuer's] state.”  If the notice comes from a "Non-Restriction State," i.e., a state whose statutes authorize garnishment of accounts located in other states, the bank must then determine whether courts in the issuer's state have jurisdiction to reach the account, and if so, which state's exemptions from garnishment to apply.  The bank must then determine how much, if any, of the funds in the account are exempt from garnishment under federal and applicable state law, and notify the depositor that his or her funds may be exempt from garnishment under the laws of multiple states, and that they may wish to consult an attorney to determine their rights. 

In its Consent Order, the CFPB found that Bank of America did not follow these procedures, and thus engaged in "unfair and deceptive acts and practices" from August 2011 through the issue date of the Order.  The CFPB also found that BofA's "standard" deposit agreement, by waiving in advance its depositors' right to contest all garnishment notices, violated the CFPA.  Waiving its due process rights to a hearing before an impartial decisionmaker and judicial review, BofA admitted the CFPB's jurisdiction to issue the Consent Order and agreed to pay a fine of $10 million.  BofA agreed also to pay total restitution of "not less than $592,000" — an astonishingly small consumer recovery given the size of the Bank and the duration of its alleged violations — in garnishment-related fees charged to affected consumers during an 11-year period. The Consent Order prohibits BofA and its officers, employees and attorneys from violating, "directly or indirectly," the CFPA in connection with processing garnishment notices, responding to out-of-state garnishment notices, freezing or holding depositors' accounts, turning funds over to creditors, or imposing garnishment-related fees on depositors.  The Order requires BofA to keep and maintain records of its processing of garnishment notices and to report on its compliance to the CFPB.

So, What Is A Garnishee Bank To Do ?

How should a bank process out-of-state garnishment notices it receives in the future?  Treating the BofA Consent Order as an aberration and continuing to process such notices as before is one option.  As a negotiated settlement of an agency enforcement proceeding, the Consent Order is legally binding on no one but BofA and the CFPB.  However, there is a risk that despite its non-precedential basis, the CFPB and other banking agency enforcers may treat the BofA Order as a regulatory template (a/k/a "Best Practices") to be applied to banks generally.  Since the CFPB applied a retrospective analysis to find that BofA's procedures over the preceding 11-year period violated the law, the longer a bank waits to implement responsive changes, the greater the liability it may accumulate and the more attractive an enforcement target it may become. 

For banks that favor a more proactive approach, it may be helpful to consider other possible responses to the CFPB Order. 

Option 1:  Strict Adherence to CFPB Consent Order Prescriptions

A bank choosing this option will need to keep careful track, on a case-by-case basis, of which states are and are not "Restriction States."  This may require up-to-date familiarity with the garnishment statutes, rules of procedure, and court decisions of states from which the bank receives garnishment notices.  For garnishment notices received from "Non-Restriction States" (the vast majority), the Bank will then need to determine which State's garnishment exemptions it is "appropriate" to apply — the state from which the notice originates, the state where the notice is received, or, if different, the state where the deposit account is "located." 

In its Consent Order, the CFPB asserts without, exception or authority, that applicable garnishment exemptions are normally determined by the state were the depositor resides.  This choice of governing law seems inconsistent with the choice of law rules applied by the courts in several states.  Adhering to the CFPB's choice of law may be difficult where determining a depositor's state of current residence depends on facts not available to the bank. A bank seeking to adhere to the BofA Consent Order's prescriptions will need to make these determinations on a case-by-case basis in real time, before freezing or turning over the depositor's funds. If during that time period, the depositor drains the account, the bank may be liable to the issuer of the garnishment notice for the amount of funds withdrawn.

Option 2:  Adapting the Bank-Depositor Agreement

An alternative approach may be to modify the bank’s deposit agreement to state that for purposes garnishment, a deposit account will be deemed to be "located" in every state in which the bank maintains a branch office. Because bank deposits are intangible assets having no fixed geographic location, this approach is consistent with how most banks actually process garnishment notices today.   Under this approach, garnishment notices received from other states must still satisfy issuing state jurisdiction requirements (i.e., personal jurisdiction over the garnishee bank and, in some states, over the deposit account as well).  This approach elides the "Restriction State/Non-Restriction State" distinction required by the CFPB Consent Order because a facially valid garnishment notice a bank receives will never relate to an “out-of-state” account.  However, contrary to the choice of law rule prescribed by the Consent Order, the applicable exemptions from garnishment will be determined by the law of the state where the notice is received rather than where the depositor resides.

Whatever the approach taken, every bank should review and update its garnishment procedures in light of the BofA Consent Order.  In many banks, garnishment processing has been treated as an ad hoc, ministerial, back-office function, often managed inconsistently from case to case, via spreadsheets, emails and homegrown systems.  As the BofA Consent Order illustrates, that approach will no longer suffice.  Garnishment processing is now a potential compliance target with the related risks of business disruption, financial liability, and negative publicity.  For many banks, a systems review and upgrade is now in order.

In its zeal to bring the CFPA to the aid of consumer-debtors, the CFPB's Consent Order makes a muddle of applicable state commercial law and civil procedure.   If, despite its non-precedential basis, the BofA Consent Order is applied and followed by state and federal bank examiners as a regulatory template, the effect will be to interpose depository banks as arbiters of the rights of consumer debtors and their creditors.  This is a function that state courts are established and expected to perform.

In the wake of the CFPB's Consent Order to Bank of America, whichever approach a garnishee bank adopts, it will be at risk — on the one hand, to its depositor and the CFPB, and on the other, to the depositor's judgment creditor — neither a comfortable place for a bank or its general counsel.