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.