By Mary Beth Guard
Appraisals: What’s Changed
By John S. Burnett
- New Federal Reg to Protect Direct Deposit Benefits Recipients
- Fed Publishes Final HPML Escrow Rules
- Fed Announces Another Reg Z Proposal
- Proposed Reg CC Overhaul Would Mean Shorter Holds, Less Paper
- Credit Card Rules "Clarification" Published
By Pauli Loeffler
- The Times They are a-Changin’: How to Deal with Garnishments in Oklahoma after May 1, 2011
By Mary Beth Guard
Appraisals: What’s Changed
April 1, 2011 ushered in a new set of requirements for appraisals on closed end consumer credit transactions secured by the consumer’s principal dwelling. We detailed some of the changes in last month’s Legal Briefs. This time, we will focus specifically on the conflicts of interest provisions.
The first thing to remember is that these restrictions only apply if the loan is otherwise covered by Reg Z (which means it has to be to a natural person, primarily for a personal, family, or household purpose) and the loan is secured by the consumer’s principal dwelling. If the collateral is not the consumer’s principal dwelling, or if the loan has a business purpose or is made to an entity, it falls outside the scope of coverage of these new provisions. Both closed-end and open end credit are covered.
The rule prohibits conflicts of interest. The foundation for the conflicts of interest provision is a statement that no person who is either preparing a valuation or performing valuation management functions for a covered transaction may have a direct or indirect interest, financial or otherwise, in the property or transaction for which the valuation is or will be performed.
There are so many elements to the test that it’s difficult to stay awake from one end of the sentence to the other. Let’s break it down.
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By John S. Burnett
New Federal Reg to Protect Direct Deposit Benefits Recipients
They are known by many names across the country. Whether you refer to them as executions, levies, attachments or garnishments or use some other label, the U.S. Treasury Department will change the way your bank processes them beginning on May 1, 2011. Theoretically, at least, that’s the day that all recipients of certain federal payments by direct deposit will be afforded the same protection from judicial seizure of their bank balances, regardless of variations of local laws or court practice.
Certain federal benefits payments are protected by law from seizure by legal process. Examples are Social Security benefits, Supplemental Security Income, Railroad Retirement, VA benefits or insurance payments, Civil Service Retirement benefits and Federal Employee Retirement benefits (other federal payments may be added to the list in the future). In many states, however, recipients of those benefits can be forced to pursue those protections in court after their funds have been seized under a creditor’s legal process, leaving the recipient without funds until a claim of federal protection is recognized by the court.
Treasury’s new regulation on Garnishment of Accounts Containing Federal Benefit Payments, 31 CFR Part 212 (published as an interim final rule at 76 FR 9939, 2/23/11) is designed to enforce a uniform practice by depository institutions that will insulate up to two months of protected benefits payments from seizure, in most cases. It does not affect the legal protections afforded the benefits payments under federal laws. The rule simply helps keep the funds from being removed from the recipient’s account. Ideally, it can help keep banks from having to balance their depositors’ rights against those of a judgment creditor.
The devil is in the details
Let’s start by defining the focus of the new rule. Treasury has chosen to use the term “garnishment order,” which it defines as “a writ, order, notice, summons, judgment, or similar written instruction issued by a court or a State child support enforcement agency, including a lien arising by operation of law for overdue child support, to effect a garnishment against a debtor.” Key elements of that definition require that the order be issued by a court or child support enforcement agency. That excludes state and federal tax levies from the limitations of the rule, to the extent that no court order is involved.
Banks can be thankful for the second key definition, which is that of “benefit payment.” Rather than having to review each account for payments from a list of agencies, the rule defines “benefit payment” as a “Federal benefit payment paid by direct deposit to an account with the character ‘XX’ encoded in positions 54 and 55 of the Company Entry Description field of the Batch Header Record” of the ACH entry. That definition eliminates the guesswork, and allows Treasury to add other types of payments as it determines they are to be covered.
There are two types of garnishment orders that will be exempt from the protections of Treasury’s rule – orders obtained by the United States government or by a State child support enforcement agency. To enforce that exemption, the government or agency must attach a specified notice on official letterhead of its “Right to Garnish Federal Benefits.” Appendix B of the regulation includes a sample form of that notice. If the notice does not accompany the garnishment order, a bank must adhere to the rule and determine the “protected amount” in the account or accounts of the account holder. If the notice accompanies the order, there is no “protected amount.”
Summarizing the Process
The regulation establishes a series of actions that a depository institution must take when served with a garnishment order. Treasury’s Fiscal Management Service provides an excellent reference, Guidelines for Garnishment of Accounts Containing Federal Benefits Payments, that steps banks through the process. The following summary does not replace those Guidelines or the regulation.
1. No later than two business days after receipt of the order, examine the order to determine if the United States or a State child support enforcement agency has attached or included a Notice of Right to Garnish Federal Benefits. If the Notice is included or attached, the bank must follow the garnishment order without regard to whether the account contains protected benefit payments. If there is no Notice, the bank follows the remaining steps to determine if there are protected amounts.
2. Within two business days of receipt of the order (or a longer approved period if served a large number of orders by the same creditor) and information sufficient to determine whether the named debtor is an account holder, the institution must complete an account review covering the two month period immediately preceding the date of that review (the “lookback period”). If the account holder has more than one account, each account is reviewed separately.
3. The object of the account review is first to determine whether any protected benefit payment (with the “XX” identifier in the ACH record) was directly deposited during the lookback period. If no such payments were received during the period, the bank follows its customary procedures for handling the garnishment order.
4. If one or more protected payments (including those for account co-owners) were directly deposited to the account during the lookback period, the bank must determine the protected amount, which is the lesser of (i) the total of the benefit payments posted to the account during the lookback period, or (ii) the balance in the account at the opening of business on the date of the account review. Detailed examples of how to calculate the protected amount are included in the Guidelines and in Appendix C to the regulation. Funds exceeding the protected amount in each of the account holder’s accounts are subject to the garnishment order, and are remitted or frozen, depending on court instructions.
5. If there is a protected amount, the bank must send the account holder a notice that includes specified information prescribed in the regulation, within three business days from the date of the account review.
State and local laws and regulations are preempted to the extent they conflict with Treasury’s regulation. A law conflicts with the regulation if the bank cannot comply with both the State or local law and the regulation. Banks must comply with state and local rules that protect larger amounts, however.
The regulation permits only one account review and one determination of protected balances pursuant to a garnishment order, regardless of how many times the same order is received. If a new or different order against the same account holder is received, a separate and new account review is required.
Financial institutions may not charge or collect a garnishment fee against a protected amount at any time, and may not charge or collect a garnishment fee on funds in excess of the protected amount after the date of the account review.
Before the May 1 effective date of the regulation, financial institutions should carefully review the new regulation with legal counsel to devise specific procedures to comply with Treasury’s rule, including appropriate responses if their handling of a garnishment order is challenged. This short article cannot provide the thorough legal review your bank should require. Elsewhere in this issue of Legal Briefs Pauli Loeffler highlights the changes that Oklahoma bankers will have to make in their processing of garnishment orders.
Fed Publishes Final HPML Escrow Rules
On March 2, the Fed Board published a final rule amending Regulation Z’s higher-priced mortgage loan (HPML) escrow requirements. It will be effective for covered loans for which an application is received on or after April 1, 2011. The rule implements a Dodd-Frank provision setting a separate, higher rate threshold for determining when the escrow requirements apply to an HPML with a principal amount that is larger than the maximum amount eligible for purchase by Freddie Mac (a “jumbo” loan), as set by the Federal Housing Finance Agency. The requirements of § 226.35 generally apply to all HPMLs, which are consumer credit transactions secured by the consumer’s principal dwelling with an APR that exceeds the average prime offer rate (APOR) for a comparable transaction as of the date the rate is set by 1.5 or more percentage points for first-lien loans, or by 3.5 or more percentage points for subordinate lien loans. Escrow requirements in §226.35 apply only to first-lien loans, and under the new rule, will not apply to jumbo loans unless the APY exceeds that APOR by 2.5 or more percentage points. The jumbo loan exception only affects the escrow requirement, however; the rules on repayment ability and prepayment penalty restrictions are not affected.
Fed Announces Another Reg Z Escrow Proposal
The Fed has also announced yet another proposed escrow rule mandated by the Dodd-Frank Act. The proposal would lengthen the time for which a mandatory escrow account must be maintained on certain higher-priced mortgage loans (HPMLs) from the current one-year requirement to five years or longer, and add specific disclosure requirements relating to mortgage escrow accounts. The proposal would provide limited exceptions to the escrow requirement for creditors in certain rural or underserved areas that originate a limited number of mortgage loans and don’t maintain escrow accounts for any mortgages they service.
Comments on the proposal are being accepted through May 2, 2011.
Truth in Lending Exemption Threshold to be Increase
One of the most immutable Truth in Lending and Regulation Z provisions has been the exemption for extensions of credit over $25,000 that are not secured by real property or a dwelling, which has endured for over 40 years. Congress raised the threshold for the exemption to $50,000 in section 1100E of the Dodd-Frank Act, and made it subject to an annual review by the Consumer Financial Protection Bureau for an inflation adjustment. The Federal Reserve Board issued a proposed rule on December 16 that would implement the Dodd-Frank Act changes effective on July 21, 2011. Lenders should be working with vendors or systems support to make any necessary systems changes to comply with the new threshold for loans consummated on or after July 21, and not wait for issuance of a final rule.
Similar changes affecting consumer leases were proposed for Regulation M.
Credit Score Disclosure Rules Proposa
Dodd-Frank Act amendments to section 615(a) and (h) of the Fair Credit Reporting Act require disclosure of, and information about, credit scores if a credit score is used in taking adverse action. The Federal Reserve Board on March 15 published proposed rules that would amend Regulations B and V to provide for such disclosures, which would be separate from (and potentially in addition to) credit score disclosures related to risk-based pricing.
The Fed and the Federal Trade Commission (which issued a similar proposal to amend its rules in coordination with the Fed) expect to issue final rules to be effective by July 21, 2011. Comments on the proposals are due by April 14, 2011.
Proposed Reg CC Overhaul Would Mean Shorter Holds, Less Paper
Unlike several of the other regulatory changes being covered in this issue, the Dodd-Frank Act was only minimally involved in a Federal Reserve Board proposal announced on March 3 to amend Regulation CC. The real forces behind the Board’s proposed overhaul of the regulation are the Check 21 Act, the consolidation of the Fed’s check processing regions into a single region centered in Cleveland, an obvious preference by the Fed to eliminate the use of paper items, and other changes in the check processing environment.
The Dodd-Frank Act change, of course, is the doubling of the $100 next-day-availability amount and the inflation-indexing of that and other dollar values in the Expedited Funds Availability Act and Regulation CC. The Fed reminded banks in its proposal that this change will be effective on July 21, 2011, with or without a final rule from the Fed. Don’t forget that if your bank normally holds deposited checks to the statutory limit or imposes case-by-case holds and therefore has to comply with the $100 next-day-availability rule, the change to $200 will be a policy change that will require notice to affected consumer depositors within 30 days of the effective date (by August 20, if your policy changes on July 21).
The Fed is also cleaning up the detritus left behind after the check processing region consolidation that has negated any need for definitions of or references to “local” or “nonlocal” checks, which will also involve changing a number of its model forms and disclosures. The proposal would provide a facelift for most of the regulation’s model forms and disclosures (banks would be given a year from the final rule’s effective date to update their disclosures, other than the $100/$200 change described earlier), both to bring them current and to make them more consumer-friendly.
Are 4-Day Holds on the Horizon?
The major substantive change in the proposal, however, combines a drastic cutting of the “safe harbor” duration for exception holds. Funds currently held until the opening of business on the seventh business day would have to be made available by the fourth business day if the final rule follows the Fed’s proposal, and deposits made at nonproprietary ATMs would be available by the fourth, rather than today’s fifth, business day. The Fed even asked for comments concerning whether case-by-case holds should be eliminated since they only delay availability by one day.
A Push for Electronic Presentment and Returns
Other parts of the proposal quite aggressively encourage any remaining “hold-out” banks that require presentment of paper items or that insist on receiving paper return items to make operational changes to accept items electronically. For example, only banks that agree to accept electronic return items would be entitled to expeditious returns under the proposal, and the current two-day/four-day or forward presentment measures for determining whether a return is expeditious would be abandoned in favor of a single two-day standard. Here again, most of the changes would carry a compliance date delayed by one year.
The Fed’s proposal includes a number of other technical changes, such as those that would provide warranties covering certain “hybrids” like “electronically-created items” that appear to be electronic images of checks but no such paper check ever existed. Comments on the proposal are due by June 3.
Credit Card Rules “Clarification” Published
The Fed Board just keeps cranking out the rules, and on Friday, March 18, it produced another final rule amending Regulation Z. This rule, originally proposed in November 2010, was issued to clarify the final rules published in February and June of that year under the Credit CARD Act (those rules were effective in February, July and August of 2010). Specifically, the new rule addresses a number of questions raised about the applicability of the February and June 2010 rules, and makes several technical corrections. Key changes made under the Credit CARD Act included restrictions on rate and fee increases, requirements to review accounts subjected to rate increases, restrictions on payment allocation, ability-to-repay requirements, and several others.
The rule will be effective October 1, 2011, but creditors may, at their option, comply with it sooner.
• • •
By Pauli Loeffler
The Times They are a-Changin’: How to Deal with Garnishments in Oklahoma after May 1, 2011
I receive quite a large volume of calls and emails regarding garnishments and levies for advice on every aspect of these debt collection remedies. I actually enjoy these calls and emails, since the answers are generally very straight-forward. The creditor, usually the plaintiff in the lawsuit, is the garnishor. The bank as recipient of the garnishment summons is called the garnishee. The customer is the debtor and usually the defendant. Oklahoma statutes dictate the bank’s legal responsibilities when it receives a garnishment. Until the May 1, 2011, those responsibilities are: 1) immediately determine if there are accounts or property belonging to the defendant or judgment debtor named in the garnishment affidavit and summons, and if so freeze and segregate the funds up to the amount of judgment claimed, 2) claim any right of setoff, lien or claim to the property that the bank may have, 3) either mail the garnishment packet to the customer by first class mail to the last address the bank has or hand deliver the packet (Title 12 O.S. § 1178.2 (A.6.), and 4) file the answer and remit the funds as required by the Oklahoma statutes.
One question I get over and over regarding garnishments is: “The money in the account is Social Security. Aren’t these funds exempt? How should I answer the garnishment?” My response has been: Yes, these funds are exempt (with some exceptions depending upon the nature of the Social Security payment when the state is collecting child support), but the bank is not required to claim the exemption on behalf of its customer. Title 12 O.S. § 1178.2 provides:
A. [T]he garnishee shall, within ten (10) days from the service of the garnishee’s summons, file an affidavit with the clerk of the court…and deliver or mail a copy thereof to the judgment creditor’s attorney or to the judgment creditor if the there is no attorney. The affidavit shall state:
3. At the garnishee’s option, any claim of exemption from execution on the part of the defendant, or other objection known to the garnishee against the right of the judgment creditor to apply the indebtedness….
At the start of this piece, I indicated that I actually enjoy calls and emails about garnishments and levies but as the title of this suggests, all that is about to end. As John Burnett has so ably advised you in his portion of this Legal Brief, all of that has changed with regard to any accounts held by individuals, sole proprietorships and trusts may or might receive direct deposits of Social Security benefits, Veteran’s Administration benefits, Railroad Retirement and unemployment benefits, Civil Service Employees Retirement and Federal Employees Retirement benefits. Those accounts are subject to 31 CFR Part 212 for garnishments received on or after May 1, 2011. Please note that the Reg defines garnishment to mean execution, levy, attachment or other legal process.
The first thing the bank needs to do is determine who the garnishor is. If it is a federal government agency, then under the new regulation, the bank will have two business days after service of the garnishment on the bank (with longer periods under certain circumstances) to determine whether there is a Notice of Right to Garnish Federal Benefits attached or included. If there is, then the provisions under § 212.5 and § 212.6 will not come into play (nor will the Notice to Account Holder be required), but more on that later. If it is a federal government agency and there is no such Notice provided, then the bank must perform an account review to determine whether it has any accounts in the name of the debtor or the debtor as beneficiary (NOT a POD since the POD has no interest as long as the owner is still alive. The bank must determine whether or not there have been direct deposits of covered government benefits into the account or accounts during the two month lookback period. The bank cannot take action such as freezing the account or utilizing its right of offset pending the Account Review found in § 212.5:
(e) Priority of account review. The financial institution shall perform the account review prior to taking any other actions related to the garnishment order that may affect funds of the account. [emphasis added]
Safe Harbor Pending Account Review
Oklahoma statutes require that the bank immediately exercise any right of setoff, freeze and segregate the funds or be liable to the creditor. However, § 212.9 provides that state law provisions inconsistent with the Regulation are preempted, so the bank will no longer immediately freeze the accounts of the judgment debtor upon receipt of the garnishment. Further, the bank is provided a safe harbor under § 212.10. According to the Section-by-Section Analysis found in 76 FR 9939, at 9952, protects the bank if it:
[M]ade available to an account holder in accordance with the rule, the financial institution would not be liable even if the judgment creditor were able to establish that funds in the account at the time of the garnishment order was served were attributable to nonexempt deposits. In addition, if a financial institution performed an account review within the two business day deadline, and funds were withdrawn from the account during this time, the financial institution would not be liable to a creditor or a court for failure to preserve the funds in the account, even if there was no protected amount for the account. This protection exists for a financial institution despite a bona fide error or a settlement adjustment.
New Notice to Account Holder Requirement
Another change in procedure engendered by the Regulation is the requirement of Notice to Account holder under § 212.7 that must be provided whenever the bank determines that a benefit agency has made a direct deposit during the lookback period unless there is a zero balance for the account. This must be sent within three business days of the account review. This means that while you must file your answer and remit funds to the garnishor by the tenth day following service, the time period is effectively shortened by several days since you will send a copy of your answer as part of the packet along with the Notice to Account Holder.
Appendix A contains a Model Notice that meets the requirements of § 212.7. While the bank is not required to use this form, I would highly recommend that it do so. As previously indicated, the Notice will be sent to the debtor/customer WITH the garnishment packet as provided by Oklahoma statutes. I personally would not include any of the “optional” information allowed in the Notice.
Goodbye to Collecting Garnishment Fees
Title 12 O.S. § 1190 provides:
A. A garnishee may deduct a fee of Ten Dollars ($10.00) from the funds of the defendant in the garnishee’s possession as reimbursement for costs incurred in answering. If the garnishee is not indebted to the defendant and the garnishee’s answer evidencing that is filed and mailed or delivered to the judgment creditor or to the judgment creditor’s attorney of record, the garnishee may assess the judgment creditor a fee of Ten Dollars ($10.00) as reimbursement for such costs
As previously mentioned, state law provisions that are inconsistent with the Regulation are preempted. With regard to garnishment fees, § 212.6 provides:
(h) Impermissible garnishment fee. The financial institution may not charge or collect a garnishment fee against a protected amount, and may not charge or collect a garnishment fee after the date of account review.
The Comment and Analysis found in 76 FR 9939, at 9946, clearly states that the bank may not charge the garnishment fee against a protected amount nor may it collect it from unprotected funds. This means that except for those accounts that are held by separate legal entities such as partnerships, corporations, limited liability companies and the like, the bank will have to do an account analysis for protected funds for each and every garnishment against an account held by a natural person AND WILL BE UNABLE TO COLLECT EVEN THE $10.00 FEE UNLESS THE BANK IS NOT INDEBTED TO THE DEFENDANT (i.e., $0 or negative balance, or no account) and charge the fee to the creditor!
This prohibition on the collection of fees will also apply to grantor trusts. Generally, a garnishment naming John Doe as judgment debtor will also reach his grantor trust. Sec. 212.3 defines account holder as:
[A] natural person against whom a garnishment order is issued and whose name appears in a financial institution’s records as the direct or beneficial owner of an account.
Hence any accounts held by the grantor trust would also be subject to this Regulation where the debtor is the grantor and the beneficiary under the trust.
But There Is Some Good (?) News on Garnishment Fees:
If the garnishor is a federal agency AND the Notice of Right to Garnish Federal Benefits found in Appendix B of the Regulation is attached or provided, there is a glimmer of light. For instance, the definition of garnishment encompasses Financial Institution Deposit Match (FIDM) more commonly known as Child Support Levies. State child support enforcement agencies will attach the Notice of Right to Garnish Federal Benefits. When this notice is provided, the account review under § 212.5 is no longer required and, more importantly the ban against continuing garnishments and collection of garnishment fees under § 215.6 does not apply. This means that, at least with regard to these levies, the bank will be able to deduct the $20.00 fee before it remits any funds as provided in the Notice of Levy. Please note, that you CANNOT notify the account owner that you have received the child support levy prior to placing a freeze on the account, so if you do not do the review for the Notice of Right to Garnish Federal Benefits immediately upon receipt, find it and place the hold, you had better flag the account to prevent revealing this information prior to the hold.
Theoretically, the bank may assess whatever it has disclosed on its fee schedule as its garnishment fee against accounts that are not subject to review because of the Notice of Right to Garnish Federal Benefits. I say “theoretically” since these accounts generally have a zero or a negative balance, but in the case of an IRS levy, since there is no provision for the bank to deduct fees prior to remitting funds, this may be useful.
I have not addressed how to calculate the lookback period. There are several examples in Appendix C. I am sure that bankers will have some questions regarding the calculations of the lookback period as well as the effect of the timing requirement for sending the Notice of Account Holder on the filing the answer to the garnishment and remitting the funds.