The CFPB recently ordered a bank to cancel garnishment fees, review its system for processing garnishment orders, cease using contracts which limit consumer rights, and pay a $10 million penalty to the CFPB’s Civil Penalty Fund.
The garnishment process is a method for creditors to recover amounts that a judgment debtor owes from a third party that holds the judgment debtor’s assets, such as a deposit account held by a bank. Typically garnishments follow a court order, and a bank, upon receipt of a garnishment notice, may freeze accounts, garnish funds, collect fees, and send payments to creditors. State and federal laws impose restrictions on the garnishment process, including exemptions for certain assets, such as benefit payments.
According to the CFPB, the bank committed UDAAP violations both in its garnishment procedures and by including certain waiver language in its deposit account agreements. The CFPB contends that the bank wrongly applied the garnishment exemption laws of the state that issued the order, rather than the consumer’s state of domicile. In addition, the CFPB claimed that the bank mishandled garnishment orders issued from states that prohibit garnishment of out-of-state accounts.
The CFPB also found violations based upon the bank’s inclusion in the account agreement of a waiver provision purporting to limit a consumer’s rights during the garnishment process. The CFPB claimed that the waiver was improper because under federal and state law certain exemption rights cannot be waived. Inclusion of the waiver language therefore constituted a deceptive practice that was likely to mislead consumers about their rights and potentially dissuade consumers from seeking available protections. The CFPB further claimed that the provision constituted an unfair practice by purportedly allowing the bank not to contest improper garnishment orders, thus preventing consumers from asserting their rights.
The Bureau’s action should cause banks to review their garnishment procedures and account agreements in light of the Bureau’s criticisms. Because state laws vary in this area, this may require a careful analysis of the bank’s practices. Ballard Spahr can help banks assess their garnishment procedures and understand the legal issues surrounding the domicile of bank accounts, extra-territorial garnishment orders, governing exemption rules, and the validity of waiver provisions in account agreements. Please reach out to us with questions about how the CFPB’s action impacts your institution.