On May 4, 2022, the Consumer Financial Protection Bureau issued a consent order regarding Bank of America’s garnishment practices whereby Bank of America agreed to:
- repay at least $592,000 to its clients for improperly assessed garnishment fees;
- Pay a civil fine of $10 million; and
- Submit a compliance plan to remedy unfair and deceptive acts in its processing of garnishment.
The order has significant implications for the banking industry and the processing of garnishments. Accordingly, it would be prudent for all banks to undertake an immediate review of the following.
The processing of certain “out-of-state” garnishments
The consent order finds that Bank of America engaged in an “unfair practice” in processing garnishments from Alabama, Arizona, California, Florida and Oregon ― Restricted states ― when the underlying account was located in another state. The order does not define the location of the account, but refers to Bank of America’s depositary agreement, which in turn states that the accounts are “located” in the state in which the customer opened the account.
The most conservative interpretation of the order is that Bank of America should not have processed garnishments from restriction states where the account opening documents showed the customer opened the account in another state. By way of illustration:
- A client opens an account in New Jersey.
- A judgment creditor serves Bank of America with a writ of garnishment in Florida.
- Bank of America should refuse to process the writ of garnishment because it is “out of state” because the account is “located” in New Jersey.
The order further suggests that Bank of America should have alerted the issuing party and the court to the fact that the funds sought were in another state. Accordingly, banks should review:
- Their processes for responding to garnishments to determine whether they distinguish between the state from which the judgment creditor issued the notice and the state where the account is “located”; and
- Their depository agreements to determine how account locations are defined.
At a minimum, it would be best to review the current processes for responding to garnishments in Alabama, Arizona, California, Florida and Oregon.
Application of the exemptions of the State of issuance and not of the State of residence of the customer
The consent order finds that Bank of America engaged in an “unfair practice” when it processed out-of-state garnishments from unrestricted states by applying the exemption laws of the Issuing state (where the notice of garnishment originated) instead of the exemption laws of the state where the customer resided. Thus, according to the order, if a Bank of America customer resided in California and a judgment creditor served Bank of America with a notice of garnishment from New Jersey, Bank of America should have applied the California exemptions to the account when of his response.
Accordingly, it would be preferable for banks to review their treatment of state exemptions where the customer resides in a different state than where the judgment creditor issued the notice of garnishment. Unfortunately, the order offers no clarity on how to determine an account holder’s current state of residence, which could potentially be different from the state where the customer opened the account. A good starting point is to research where the client opened the account, but as it is possible that a client resides in a different jurisdiction than where they opened their account, it is recommended to verify all information current residential properties available to make this decision. .
Misleading and unfair clauses in the deposit agreement
The consent order concludes that it was an “unfair” and “deceptive” practice for Bank of America to include in its deposit agreement language purporting to be an instruction from the customer to the bank not to dispute any legal proceedings and which waived all claims. against Bank of America for improper handling of garnishments.
Accordingly, it would be preferable for banks to review their current custody agreements to analyze the language regarding legal process and limitations of liability against this framework and, if necessary, consider language revisions.