Senate Finance Committee Holds Hearing on Bank Treatment of Social Security Benefits
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On September 20, 2007 the Senate Finance Committee held a hearing on the widespread practice of banks to freeze all funds in an account in response to a garnishment order even though they know some or all of those funds to be Social Security or SSI funds exempt from garnishment under 42 U.S.C. ยง 407(a). The problem has become more common now that judgment creditors are able to simultaneously and at virtually no cost serve a garnishment order on all banks in a state by electronic means. At the same time it has become increasingly easy for the banks to identify and protect these exempt funds now that the overwhelming majority of Social Security beneficiaries receive their benefits electronically via direct deposit from the Treasury with the funds clearly labeled as Social Security benefits. Nevertheless, in spite of the ease with which the exempt funds can be identified, most banks continue to freeze the whole account.
Committee Chairman Max Baucus (D-MT) and Ranking Member Chuck Grassley (R-IA), in their opening statements, both called attention to the financial hardship suffered when people have no access to their accounts especially when most elderly beneficiaries rely on Social Security for a majority of their income. Sen. Baucus also pointed out that banks often charge the account holder a fee of $100 or $150 for freezing the account on top of the bounced check charges that rapidly accumulate once the account is frozen and all checks start bouncing.
The first witness at the hearing was a 70-year-old retiree from New York City whose only income was from Social Security and whose account was frozen when Citibank received a garnishment order stemming from a credit card debt. He testified that during the period the account was frozen he had no money to buy food, was able to eat nothing but brown rice and lost 40 pounds in the process.
This was followed by testimony from the Federal Deposit Insurance Corp. (FDIC), Office of Thrift Supervision (OTS), and the Office of the Comptroller of the Currency which jointly released a proposed guidance on the morning of the hearing which contained recommended practices for banks, but no enforceable obligations. The recommended practices include: (1) notifying customers which funds are exempt; (2) notifying the creditor, collection agency or state court when the bank is aware that the account contains exempt funds; (3) if state law as determined by the bank will permit a freeze not to be imposed if the account contains only exempt funds, acting accordingly if that determination is made; (4) minimizing the cost to the customer if an account containing Social Security or VA benefits is frozen; and (5) granting the customer access to a portion of the account equivalent to the documented amount of SSA and VA benefits as soon as the bank determines that none of the exceptions to the federal protections apply (e.g., garnishing child support from Social Security Title II benefits.
The concluding testimony came from Margot Saunders of the National Consumer Law Center who testified on behalf of a host of national and local legal services organizations, including the National Senior Citizens Law Center. She stressed that, given the prevalence of direct deposit combined with available computer technology, it is relatively easy for banks to identify exempt funds even when the funds are co-mingled. This countered the contention of the banks and the regulatory agencies that identification of exempt funds would be a hopelessly complex undertaking. She also countered their argument that a failure to freeze accounts subject to a garnishment order would render the banks liable to the creditors and provided comprehensive documentation from almost all the states to demonstrate that the banks would have no liability for not freezing funds which are exempt by federal law.
Ms. Saunders recommended that financial institutions be required to identify electronically deposited exempt funds and freeze only non-exempt funds when they receive attachment or garnishment orders and that they be required to follow this requirement even when the funds are co-mingled. She also urged that banks should not be permitted to profit from garnishment orders by assessing high fees for freezing the account or for resulting overdrafts. She concludes that the regulatory agencies already have the authority to impose such requirements on financial institutions and need not wait for Congressional action. She also pointed out that any contrary state legislation or regulation would be pre-empted under the Supremacy Clause.
More information about the hearing is available on the Senate Finance Committee website.