Bank Warning: Don't Get Charged Millions For Processing Out-of-State Garnishments Improperly

• Published date: 09 March 2023
• Subject Matter: Finance and Banking, Fund Management/ REITs
• Law Firm: Dickinson Wright PLLC
• Author: Davina Bridges and Aimee R. Gibbs

I. Overview of Changes

On May 4, 2022, the Consumer Financial Protection Bureau (the "Bureau")¹ issued a Consent Order implicating how certain banking institutions must respond to Garnishment ² The Consent Order places the burden on banks that fall under the purview of the Bureau to determine whether a state restricts out-of-state garnishments, as well as to apply state-specific garnishment rules and exemptions from the applicable state. In the Consent Order, the Bureau found that the national bank at issue did not properly follow the applicable state garnishment-related laws.³ As a result, the Bureau ordered that the bank refund at least $592,000 to affected consumers and pay a $10 million civil penalty. To avoid liability and monetary penalties, banks under the jurisdiction of the Bureau should take a proactive approach to compliance.

This client alert provides an overview of certain key compliance requirements following the Consent Order, and addresses whether the State of Michigan prohibits garnishment of Out-of-State Accounts. It also discusses how Michigan defines the "location" of funds held in bank deposit accounts. Lastly, the alert identifies risks and sets forth recommendations regarding banks' response and handling of Garnishment Notices issued in Michigan.⁴

What information do banking institutions need to determine when they get a garnishment?

Under the Consent Order, when a bank receives a Garnishment Notice, it must first determine the "location" of the garnished bank account. If the Garnishment Notice concerns an Out-of-State Account, the bank must then determine whether the state from which the garnishment originates is a "Restriction State." A "Restriction State" is a state that prohibits or otherwise restricts garnishment of Out-of-State Accounts. "Non-Restriction States" permit garnishment of Out-of-State Accounts.

If the Issuing State is a "Restriction State" and the deposit accounts are located in other states, the bank must notify the creditor that the bank does not have garnishable assets located within the Issuing State. If the Garnishment Notice comes from a "Non-Restriction State," i.e., a state whose statutes or case law authorizes garnishment of accounts located in other states, the bank must then determine whether courts in the Issuing State have jurisdiction to reach the account.
Under the Bureau's Consent Order, "[t]o garnish a bank account lawfully, a state court must have jurisdiction over the garnishee (the bank that...