Saturday, July 13, 2024

July 2017 Legal Briefs

  • “I received a garnishment…”
  • Are annual privacy notices still required?
  • Proposed changes to Prepaid Rule
  • CFPB “special edition” on complaints
  • Will the CFPB get SCRA enforcement authority?
  • “Debt collector” gets a refined definition

“I received a garnishment…”

By Pauli D. Loeffler

Receipt of a garnishment summons means the bank is potentially liable: a) to the customer if it freezes funds when it shouldn’t or b) to the creditor if it fails to freeze funds when it should. For that reason, I get a lot of calls and emails regarding garnishments, and it seems like I’m getting more of them lately, particularly ones with “problems.” The problems range from name or Tax Identification Number mismatches to receiving the wrong type of summons or not all of the forms, as well as when the bank has simply “dropped the ball.” This article will cover some of those situations on what to look for, ways to avoid problems, and how to fix what is fixable. Note that this article will not deal with the federal rule on Garnishment of Accounts Containing Federal Benefit Payments which has been covered in several prior OBA Legal Briefs.

First things first

What court issued the garnishment? If the garnishment came from a state court other than an Oklahoma one, and the bank does not have branches in that state, then the court of the other state has no jurisdiction over the bank even if the customer resides or is located in the other state. Do NOT freeze the funds! The creditor must file the judgment with an Oklahoma court and have the Oklahoma court issue the garnishment in order for there to be jurisdiction to enforce the garnishment. If the bank freezes the funds when there is no jurisdiction, it may be liable to its customer.

Who is the judgment debtor? Be sure and READ the garnishment Affidavit and Summons. Usually, the judgment debtor is the defendant, BUT this is NOT ALWAYS true. Sometimes the defendant has filed a counterclaim against the plaintiff and has prevailed against the plaintiff or has been awarded attorneys fees or costs owed to him. Or there may be multiple defendants, but the case caption reads Jerry Lewis v. Gracie Allen, et al. and George Burns is the judgment debtor named in the Affidavit and Summons. If the bank just assumes the judgment debtor is Gracie Allen since she is the named defendant without realizing that George Burns is one of the other defendants but included in et al. (Latin for “and others” – law uses a lot of Latin terms), and George has one or more accounts that aren’t frozen, the bank will be liable to the creditor for whatever funds were in the judgment debtor’s account at the time the garnishment was served.

What type of garnishment is it? The vast majority of garnishments received are general garnishments rather than garnishments on earnings. Generally, the bank is searching its records for accounts and safe deposit boxes (yes, a garnishment reaches safe deposit boxes which must be sealed for 30 days), and the occasional earnings garnishment summons may fall through the cracks or the answer may not be timely made with remittance since the time frame to answer and remit is different than that for a general garnishment.

Name issues

The basic rule is that if the bank has a reasonable belief that the person named in the Affidavit and Garnishment Summons are one and the same, it needs to freeze the funds. Misspellings and near misses (e.g., Kathie or Kathy instead of Cathy or Frank instead of Francis) are fairly common. Did the creditor provide a truncated SSN that matches? If so, you have a reasonable belief that the customer and the judgment debtor are one and the same persons, and the bank should freeze the funds

Let’s say you get a garnishment with the named judgment debtor as Robert Brown. You have an account styled Robert Brown d/b/a Bob’s Welding Service (a sole proprietorship). The garnishment reaches Robert’s sole proprietorship account. Why? “d/b/a Bob’s Welding Service” is a name and nothing more; it is NOT a separate legal entity and does not exist separate and apart from Robert Brown. On the other hand, if Robert was the sole and only member of Bob’s Welding Service, LLC and is able to use his SSN because he neither has employees nor pays excise taxes, the garnishment will NOT reach the account because it is owned by a separate legal entity (the LLC) even though it is using Robert’s SSN.

Another name problem occurs when the bank gets a garnishment summons and the judgment debtor is, let’s say, Tedine’s Fashion Sense, Inc. or Sammy’s Salon LLC, but bank records show Tedine Smith d/b/a Fashion Sense or Sam Jones d/b/a Sammy’s Salon. It is not unknown for a customer to incorporate or form an LLC and fail to update its records with the bank. The bank can check for the entity name on the Oklahoma Secretary of State’s website doing a business name search ( It is possible the judgment was rendered in the state where the entity was formed and filed with the Oklahoma court in order to issue the garnishment. It is also possible to do similar searches on the websites of other states, but you would need to know the state where the entity was formed. For some Oklahoma counties, you can ascertain this by viewing the actual court filings online, but in others, you would need to contact the creditor’s attorney/creditor in order to determine in which state the entity was formed. It is not uncommon for the bank to first learn that the form of the business has changed or is different from the one it has on it system. In most cases, the bank will need to freeze the funds and get the customer in with the required documents.

A unique situation recently encountered was a garnishment using the judgment debtor’s maiden name and a truncated SSN was provided. The name did not match any account holders, and this bank was unable to search by partial SSN. No funds were frozen. This was a very small bank, and when the garnishment was reviewed in an internal audit, the auditor knew the judgment debtor, who happened to be an employee of the bank, and had known her by her by her maiden name when she was hired some years earlier. Unfortunately, the person processing the garnishment apparently did not have the same knowledge and reported no accounts. Keep in mind that there is absolutely NO LEGAL REQUIREMENT that the garnishor/creditor even give the bank the judgment debtor’s SSN (or EIN) at all, and while credit card and other lenders will have this information, other judgment creditors will not. Should the bank have contacted the creditor for the full SSN or the address of the judgment debtor? Probably, but this is a topic that the bank needs to discuss with its attorney since s/he will be representing the bank if the creditor takes exception to the Garnishee’s Answer or issues interrogatories to the bank.

Before you start wondering whether your bank was involved in that sticky situation, relax. It was actually a bank in another state, but it could have happened here.

The TIN doesn’t match the one the bank has

Most of the time when the truncated Tax Identification Number doesn’t match, it is off by one number, or two of the numbers may have been transposed. In this situation, if the name matches, the bank needs to freeze the funds and should take steps to confirm that it has the correct number for its records by contacting the customer and requesting a copy of the Social Security card, the letter from the IRS assigning the EIN or a copy of the Form SS-4 used to apply for the EIN. If the customer applied online for the EIN and printed the page assigning the EIN, this can be used since I have never known the number to change between application and receipt of the letter from the IRS. The bank may wish to check information regarding the address where the judgment debtor was served with the petition in the law suit. In some counties, this is available online, or you can call the creditor’s attorney/the creditor for this information.

Another situation where this can occur is when a sole proprietor obtains an EIN because s/he has employees or is required to pay excise taxes, and the bank has the account under the EIN rather than the sole proprietor’s SSN, despite the fact the instructions to the Form W-9 specifically state the IRS prefers such account be under the SSN and the EIN used solely for making tax payments. The customer IS the named judgment debtor, and there is no excuse for not freezing the funds.

Other situations.

The creditor sent the wrong forms or did not include a required form. If the creditor sends an earnings garnishment summons, and the judgment debtor is not an employee or a contract worker (e.g., janitorial, landscaper/mowing, etc.), but has a deposit account or a lease on a safe deposit box with the bank, the bank should NOT freeze any deposited or report the safe deposit box. Conversely, if the bank is served with a general garnishment, and the judgment debtor does not have an account or a lease on a safe deposit box but is an employee or contract laborer, the bank should not withhold funds due to the employee/contract laborer. There are different forms for both general garnishment summonses and for earnings garnishment summonses, but unfortunately, the garnishee’s answer for general garnishment and for garnishment of earnings is combined in a single form promulgated by statute by the Oklahoma Administrator of the Courts. However, just because the garnishee’s answer form covers multiple types of summonses does not mean the bank should respond (and remit funds). The answer should ONLY be with regard to the specific summons served upon the bank.

Sometimes the garnishor will fail to include the garnishee’s answer form (or will send an outdated one) or fail to include the Claim for Exemption & Request for Hearing form (required to be attached to the summons by the court clerk and mailed or delivered to the judgment debtor by the garnishee per statute). If the answer form is not provided or is outdated, or the Claim for Exemption & Request for Hearing form is not provided, these are available for download in Word, WordPerfect and PDF formats at this site:

The garnishment summons was sent to a branch rather than the main bank. Most small banks process garnishments at only one location, generally at the main bank. There is no requirement under Oklahoma law that the garnishment summons be served at the main bank, and the bank must have procedures in place to quickly communicate receipt of the summons and freeze any accounts owned by the judgment debtor to prevent liability to the creditor.

The person who handles our garnishments was out or had left for the day. Just as serving the garnishment at a branch will not avoid liability to a creditor if the bank fails to promptly freeze funds of the judgment debtor, the fact that the employee who handles garnishments is gone at the time the garnishment is received is not an excuse. The bank needs to have one or more persons who are trained to handle garnishments when the employee who has primary responsibility is on vacation or otherwise unavailable.

Claims for exemption on behalf of the judgment debtor — IRA. While protected federal benefits subject Garnishment of Accounts Containing Federal Benefit Payments federal rule requires the garnishee bank protect certain funds, Oklahoma law does not require the garnishee bank to claim an exemption on behalf of the customer. My advice is not to take on the responsibility and possible liability beyond the requirements under the federal rule. However, when an IRA is involved the bank may choose but is not required to respond noting the IRA and claiming the exemption in that the customer may incur a severe tax penalty if s/he fails to claim the exemption or fails to redeposit funds within the 60 (calendar) day period.

Are annual privacy notices still required?

By John S Burnett

We continue to get questions about the requirement for annual Privacy Policy notices under Regulation P. We’re pleased to say that, for many (if not most) banks, this annual exercise in wasted time, paper, ink and postage is over.

Yes, the CFPB has a pending amendment to Regulation P awaiting final action. It’s been stuck in “proposed” status for almost a year (final comments were due on August 10), but apparently the Bureau has had more pressing details to deal with, and a final rule hasn’t yet been issued.

The fact of the matter is, there’s no need to wait for the final rule. The annual notice requirement changed as a matter of law in December 2015, with the enactment of Title LXXV of the Fixing American’s Surface Transportation (FAST) Act of 2015 (Public Law 114-94) was enacted, amending section 503 of the Gramm-Leach-Bliley Act to create an exception to the annual privacy notice requirement.

The law has changed. That’s all that’s needed. We don’t need to wait for the regulation to be amended any more than we had to wait for Regulation CC to be updated to change the “$100 next day availability” requirement.

Does your bank qualify for the exception?

Ask yourself these two questions:

1. Does your institution share nonpublic personal information in any way that requires an opt-in under Regulation P? (Hint, if the only sharing it does is covered by the exceptions in §§ 1016.13, .14, and .15, the answer is “No.”)
2. Has your institution changed its policies and practices for sharing nonpublic personal information from the policies and procedures you routinely provide to new customers?

If the answer to both questions is “No,” your institution qualifies for the exception, andyou can stop sending annual notices. You don’t need to wait for the CFPB to issue a final rule.

The exception also eliminates the need for the “alternative method” for delivering annual notices that involves a short-form notice sent on or with account statements or coupon books.

When will you have to send an updated notice?

If your institution changes its policies and procedures for sharing nonpublic personal information from the policies and procedures most recently provided to consumers, you will need to revise your initial disclosures and deliver an updated copy to current customers. If your new policies and procedures are no longer covered by the exceptions in §§ 1016.13, .14, and .15, you will lose the exception from the annual notice requirement, and the annual notices will have to be resumed.

Proposed changes to Prepaid Rule

By John S Burnett

As we suggested in our May article on the Prepaid Accounts Rule, the Consumer Financial Protection Bureau had some changes in the works when it postponed the effective date of the rule from October 2017 to April 1, 2018. It didn’t take very long for the Bureau to release its proposal, which was announced in mid-June and published on June 29. Comments on the proposal will be accepted through August 14, 2017.

There are a number of changes in the Bureau’s proposal. The two major changes involve error resolution on unverified prepaid accounts, and a proposed limited exception to the credit-related provisions of the Prepaid Accounts Rule in Regulation Z for certain business arrangements between prepaid account issuers and credit card issuers that offer traditional credit card products. There are also clarifications and minor adjustments proposed for the provisions of the Prepaid Accounts Rule related to an exclusion from the definition of prepaid account, unsolicited issuances of access devices, several aspects of the rule’s pre-acquisition disclosure requirements, and submissions of prepaid account agreements to the Bureau.

The Bureau also asked for comment on whether a further delay of the Prepaid Account Rule’s effective date would be needed and appropriate given the amendments being proposed, and whether a provision allowing early compliance with the rule would be necessary for those who wish to comply sooner than the final effective date.

Error resolution and limited liability

On the of the significant changes in the current proposal would make several amendments to various sections of Regulation E to provide that Regulation E’s error resolution and limited liability requirements do not extend to prepaid accounts that have not successfully completed the financial institution’s consumer identification and verification process (i.e., accounts that have not concluded the process, accounts where the process is concluded but the consumer’s identity could not be verified, and accounts in programs for which there is no such process). However, for accounts where the consumer’s identity is later verified, financial institutions would be required to resolve errors and limit liability with regard to disputed transactions that occurred prior to verification, consistent with the general timing limitations in the Prepaid Accounts Rule. The Bureau is also proposing related changes to model language and to require that, for programs where there is no verification process, financial institutions explain in their initial disclosures their error resolution process and limitations on consumers’ liability for unauthorized transfers, or explain that there is none, and comply with the process (if any) that they disclose.

Credit card accounts linked to prepaid accounts.

You may recall that the Prepaid Accounts Rule included certain digital wallet accounts in the definition of prepaid accounts. The Bureau is now proposing to create a limited exception to the credit-related provisions of the Prepaid Accounts Rule in Regulation Z for certain business arrangements between prepaid account issuers and credit card issuers that offer traditional credit card products. This exception is designed to address certain complications in applying the credit provisions of the Prepaid Accounts Rule to credit card accounts linked to digital wallets that can store funds where the credit card accounts are already subject to Regulation Z’s open-end credit card rules. Under this proposed exception, the linked credit card account would still receive the protections in Regulation Z that generally apply to a credit card account under an open-end (not home-secured) consumer credit plan, but the tailored provisions in the Prepaid Accounts Rule for hybrid prepaid-credit cards would not apply.

Streamlining pre-acquisition disclosures

For issuers offering prepaid accounts that qualify for the retail location exception, a proposed change would be allowed to provide the long-form disclosure electronically without regard for E-SIGN demonstrable consent requirements if the disclosure isn’t in the prepaid account packaging materials and the financial institution is not otherwise mailing or delivering to the consumer written account-related communications within 30 days of obtaining the consumer’s contact information. Another proposed change would clarify that if a financial institution provides pre-acquisition disclosures in writing, and a consumer subsequently completes the acquisition process online or by telephone, the financial institution need not provide the disclosures again electronically or orally. Yet another change would permit financial institutions disclosing additional fee types with three or more fee variations to consolidate those variations into two categories and allow those two categories to be disclosed on the short form (thus providing issuers more flexibility in disclosing additional fee types.

Submission of agreements to Bureau

The Bureau has also proposed a number of changes to make more flexible the requirements for submitting prepaid account agreements and changes to those agreements to the Bureau.

Effective date and early compliance

Although the Bureau is not proposing a further extension of the effective date of the Prepaid Accounts Rule, the Bureau is soliciting comment on whether a further delay of the effective date would be needed in light of the specific amendments to the Prepaid Accounts Rule currently being proposed.

The CFPB has said it isn’t aware of any conflicts between the Prepaid Accounts Rule and current regulations covering prepaid accounts, and it is therefore not proposing a safe harbor rule for early compliance. However, the CFPB is asking for comments on whether there are, in fact, such conflicts, and whether a specific provision on early compliance with the Prepaid Accounts Rule would be appropriate.

We can expect this proposal to result in a final rule reasonably soon after the mid-August comment deadline, perhaps by late September.

CFPB “special edition” on complaints

By Andy Zavoina

We wrote a longer article in May on the complaints filed at the Consumer Financial Protection Bureau (CFPB), but in June the agency published a state-by-state snapshot that is worth reviewing. Personally, I dislike that the CFPB prefers to publish information from inception and not break it down by year, but this snapshot does include a comparison of the fourth quarter 2016 to the first of 2017.

To recap the snapshot since 2011 there have been 8,676 complaints against Oklahoma banks in the CFPB database. This report includes tables with totals and state-by-state analysis that include the complaints pertaining to Oklahoma customers by servicemembers (852) and older consumers (844).

Some items of interest include credit cards moving up and over bank accounts in the volume of complaints. The top five complaint categories are the same, but in a different order:

Category                                 No.         % US     % OK Common Issue                             

Debt collection     3,102          36            27         40% say the debt is not owed

Credit reporting   1,415           16            17         73% claim incorrect information

Mortgage             1,401           16             23        44% have problems making payments

Credit card             729             8             10        16% have billing disputes

Bank acct/service  615             7             10         45% have acct. management problems

Nationally, the top five categories are the same, but the order is different — debt collection, mortgage, credit reporting, credit cards and finally bank accounts.

As Q4-16 and Q1-17 are compared, student loan complaints increased 154%, from 26 to 66. The percentage looks worse because the count is small but it must be noted the CFPB was actively seeking out complaints. That tends to draw an increase by itself. That is not to say the complaints are not valid. Those banks receiving the complaints will have to investigate them to determine the validity of each. Otherwise “Other financial service” increased from 3 to 5, credit cards increased from 32 to 46 and complaints about both payday loans and money transfers declined.

Whether your bank is regulated by the CFPB or not, it is easy to imagine that everyone from consumers to lawyers to other regulators are reviewing the state-by-state analysis and potentially how your bank compares to others. Just as you may review HMDA reports, you should review the CFPB complaint reports and compare them with your bank’s own numbers.

Will the CFPB get SCRA enforcement authority?

By Andy Zavoina

Generally, violations of the Servicemembers Civil Relief Act (SCRA) are referred to the Department of Justice (DOJ) for enforcement orders, even by the Consumer Financial Protection Bureau (CFPB). That could change if S. 1565 is passed. This bill would amend the Consumer Financial Protection Act to include sections of the SCRA, giving the CFPB direct authority under Section 1054 to bring civil actions against a person who violates a federal consumer financial law, which would then include the SCRA. The sections affected include:

• Section 107 – Waiver of rights pursuant to written agreement (except with respect to bailments)
• Section 108 – Exercise of rights under the SCRA not to affect certain future financial transactions (except with respect to insurance)
• Section 201 – Protection of servicemembers against default judgments, which excludes child custody proceedings
• Section 207 – Maximum rate of interest on debts incurred before military service
• Section 301 – Evictions and distress
• Section 302 – Protection under installment contracts for purchase or lease
• Section 303 – Mortgages and trust deeds
• Section 305 – Termination of residential or motor vehicle leases
• Section 305A – Termination of telephone service contracts

While many considered it a real possibility that the CFPB would be losing some of its authority under the Trump administration, this bill, which is far from law, demonstrates how some on Capitol Hill are seeking to provide it with more authority.

“Debt collector” gets a refined definition

by Andy Zavoina

The Fair Debt Collection Practices Act defines a “debt collector” (abbreviated here) as any person …in any business the principal purpose of which is the collection of any debts …owed or due another.

Debt buyers have been considered debt collectors in some circuit courts, but not in all. The original debt was due to another entity and some courts ignored this, especially if the new owner was a collector of debts. But on June 12, 2017, the Supreme Court has ruled in Henson v Santander Consumer USA Inc. that once the debt is purchased by a company, that company is collecting it for itself, and it is not a debt due “another.” The decision is narrow in that it does not impact debt buyers that service debts it does not own, or those engaged principally in debt collection.

This ruling likely will impact the rulemaking the Consumer Financial Protection Bureau (CFPB) has in progress on the FDCPA and those collecting debts owed them. In 2015 the CFPB entered into a consent order against Discover Bank where the bank was held liable for collection violations on student loans it had purchased. Under this new ruling, Discover Bank would not have been held to the FDCPA standard.

In this case, Santander purchased defaulted loans from CitiFinancial Auto. It was collecting those loans under its own name and the debts were now owed to Santander. It was asserted that Santander was a debt buyer and the FDCPA applied, but the Fourth Circuit Court of Appeals disagreed and interpreted the FDCPA’s requirement “owed another” literally. Since these debts were now owed to Santander, the FDCPA did not apply.

The Supreme Court only considered if the debt buyer was a debt collector. The court did not consider whether a purchaser of defaulted debt is engaged “in any business the principal purpose of which is the collection of any debts.” This means that “pure play” debt buyers, those who exclusively or for the most part buy debts to facilitate the collection are likely still subject to the FDCPA. According to Justice Gorsuch the court was focusing on the plain language of the Act and that is why the petitioner’s arguments were rejected. Justice Gorsuch wrote for the Court, “by defining debt collectors to include those who regularly seek to collect debts ‘owed . . . another,’ the statute’s plain language seems to focus on third party collection agents regularly collecting for a debt owner—not on a debt owner seeking to collect debts.”

The key here is the collection of the debt by a third party. This ruling should free a bank from any doubt when it acquires or sells debts that may be collected by the new owner. The court stated that “this language appears to suggest that we should care how a debt owner came to be a debt owner . . . [a]ll that matters is whether the target of the lawsuit regularly seeks to collect debts for its own account or does so for ‘another.’” The court held that ownership of the debt is only relevant at the time of collection, not at the time of acquisition. Because Santander owned the debt at the time it began collection activities, the debt was not owed to “another” and Santander was not a debt collector.