The CFPB recently issued a consent order against a major national bank for violations related to the processing of out-of-state garnishments and ordered the bank to pay a $10 million civil penalty. Bank account garnishments are governed by state law, including the court process by which a creditor can freeze or withhold and then seize money from a debtor’s deposit account in order to enforce a civil judgment. against the debtor.
The CFPB reviewed the Bank’s policies and found that it generally treats all garnishment notices the same, without distinguishing between out-of-state garnishments and without further distinguishing if an out-of-state garnishment had been issued in a state that has restrictions or limits on the garnishment of out-of-state accounts. When the Bank received a Notice of Out-of-State Garnishment, it frequently responded by identifying all deposit accounts held for the named consumer anywhere in the country – without disclosing to the court or issuing entity that the notice of garnishment relates to an out-of-state account – and froze or held funds in those accounts, returned the funds to the creditor, and imposed garnishment charges on the consumer. In addition, the Bank’s custodial agreements provided that consumers “direct” the bank, when served with legal process such as a writ of garnishment, to “not contest the legal process” and that the bank is not liable to the consumer if the bank accepts and complies with legal process as provided in the deposit agreement or by law. Consumers were reported to this waiver if they complained that their accounts were being frozen, held, or seized in response to an out-of-state garnishment notice. Federal law, such as the Federal Benefits Garnishment Rule, and many state laws prohibit banks from requiring consumers to waive certain exemption rights.
The CFPB concluded that the Bank’s response to out-of-state garnishment notices, its application of state law for garnishment exemptions, its misrepresentations to consumers about applicable state garnishment exemptions, its use of deposit agreements requiring consumers to direct the Bank not to challenge the Bank’s processes and exemption from liability, and the Bank’s communications to consumers regarding garnishments of consumer deposit accounts are considered unfair, deceptive or abusive acts or practices (UDAAP).
In addition to the $10 million civil penalty, the consent order also requires the Bank to create, implement and update policies and procedures relating to out-of-state garnishments and state exemption rights, including training staff on new policies, providing notice to consumers, and maintaining relevant records. The Bank should also amend the deposit agreement so that it no longer requires consumers to direct the Bank not to contest legal proceedings on behalf of the consumer or to waive their consumer protection rights. In addition, the Bank is required to reimburse all garnishment-related costs paid by affected consumers, totaling at least $592,000.