To Levy Or Not To Levy, That Is The Question.

May 30, 2013 at 7:47 am 1 comment

It has taken three years, but regulations to impose federal restrictions on the garnishment of certain federal funds have finally been published.  The good news is that regulators listened to comments and calls for clarification, particularly from states like New York, which already exempts funds and needed guidance as to when state law applied or was preempted.  The bad news is that one of the compliance areas that credit unions already find the most challenging will be getting more, not less, complicated.  By the way, don’t consider this a comprehensive overview.  I don’t have the space and I don’t want to put any of you to sleep. But I strongly suggest you have whoever is in charge of levy and restraint read these regulations post haste.

First some background.  In 2011, the  Department of the Treasury, Social Security Administration (SSA); Department of Veterans Affairs (VA); Railroad Retirement Board and the Office of Personnel Management issued interim final rules establishing threshold exemptions when accounts that have had benefits from these agencies electronically deposited into them are served with a levy or restraint order.

Under these regulations, financial institutions that receive garnishment orders must determine the sum of such federal benefit payments deposited to the account during a two month period, and to ensure that the account holder has access to an amount equal to that sum or to the current balance of the account, whichever is lower.

Of course, New York already has state level statutes that exempt government benefits from creditors.  Specifically, state law creates an automatic exemption from garnishment for the first $2,625 in an account in which any payments reasonably identifiable as “statutorily exempt payments” were made electronically or by direct deposit during the 45-day period prior to service of a restraining notice or income execution.  In addition, New York’s exemption actually applies to more funds than the newer federal regulations.  “Statutorily exempt benefits” under Article 52 include funds from sources such as public assistance, workers’ compensation, unemployment insurance, public or private pensions and black lung benefits.  CPLR § 5205(l)(2).  Remember New York also exempts funds that aren’t electronically deposited but the federal regulations are only triggered by ACH transactions.

There were several key questions that needed to be resolved for the sake of clarity and yesterday’s final regulations and the accompanying preamble provided clear cut answers.

First some good news.  If you wouldn’t apply a levy or restraint under state law then you don’t have to worry about the federal regulations.   As explained in the preamble:  “It serves no useful purpose to follow the rule’s procedures in situations where a financial institution has made a determination not to take any action against an account on the basis of a garnishment order.”  If a financial institution will not act on a garnishment order due to the operation of State law, the financial institution need not examine the order to determine if a Notice of Right to Garnish Federal Benefits is attached or included or take any of the additional steps required under the (federal) rule.”

Another issue was whether the regulation’s definition of  garnishment and restraints was to be applied to those issued directly by lawyers. The final regulation clarifies that it applies in states like New York where  garnishment orders can be issued not only by courts, but also by attorneys acting on behalf of judgment creditors.

Now for the type of news that makes the compliance officer moan. State and municipal creditors are exempt from New York’s exemption requirements.  That is why currently if you get a levy from the State Tax Department you simply send the amount of the levy.

However, the clarifications released to the federal regulation states that levies and restraints issued by states and localities are subject to the federal exemption regulations.  This means that once these regulations take effect and you get a levy or restraint from the Tax Department, for example, state law still won’t apply but the federal regulations will.  You will have to do a two month look back to determine if there were electronic payments deposited into the account by the agencies that promulgated this regulation.  If there is then an amount equal to the lesser of the sum of such exempt payments or the balance of the account on the date of the account review are exempt from even a municipal tax collector.



Entry filed under: Compliance, New York State, Regulatory. Tags: , , , .

Happy Days Are Here Again? CFPB’s Dodd-Frank Exemptions Fall Short

1 Comment Add your own

  • […] I’ve said this before, but among the compliance challenges facing credit unions on a day-to-day basis none vexes them more than how to comply with levies and restraints.  This area has become even more complicated now that both state and federal law establish thresholds below which an account should not be frozen or garnished.  You can find out more about this in a previous post. […]


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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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