Banks that receive garnishment orders from debt collectors generally freeze customers' accounts. This triggers overdraft, bounced-check and other fees that the bank then withdraws from the customer accounts, which has included Social Security and veterans benefits.
Customers often don't know they can file a claim to get their funds released; even when they do, the process can take weeks or months. The practice has been the subject of articles in The Wall Street Journal.
"The rules address the increasing problem of account freezes and the hardships benefit recipients face when they cannot access life-line funds," an administration official says. "This provides financial institutions with clear, uniform sets of rules to follow when a garnishment order is received, and provides them with protection from liability."
The proposed new rules, to be published Wednesday in the Federal Register, will require banks that receive garnishment orders to review the accounts to see if they have received any direct deposits of federal benefits within the past 60 days.
If so, they must establish a protected amount equal to the sum of the benefits deposited. So, if the person had two deposits of $1,000 each, the protected amount is $2,000, even if the person had spent the benefits.
Under these rules, the banks and credit unions wouldn't have to worry about whether benefits money is co-mingled with other deposits, or if there is a co-owner on the account.
Any amount above the protected amount would be handled according to the garnishment rules of each state. The rule doesn't prohibit states from establishing a higher protected amount.
The new rule would help people like Kelly May, a 59 year-old disabled former genetic oncologist in Dothan, Ala. After Wachovia Bank froze her account in March 2009, it took Ms. May four months to get her money released.
The bank didn't return the $100 fee it took when it froze her account.
"That's a lot of money to me," said Dr. May, whose sole source of income is $1,400 a month in Social Security
A spokeswoman for Wells Fargo & Co., which owns Wachovia, says collecting the garnishment fee from the Social Security was standard procedure.
The rule "should protect most account holders," the administration official said. Financial institutions that follow these rules would be protected from lawsuits from creditors or account holders.
"This balances the interests of the account holder and the institutions," the administration official said.
The rule allows the financial institution to collect the customary garnishment fee, typically $100, but it can't take the fee from the protected amount. Banks can continue to take overdraft and other fees from the protected amounts, however.
The regulation would also require financial institutions to send a notice to the account holder detailing what happened, how much has been protected, and how much frozen, with information on how to contact the creditor, the court and the bank.
The rule would be jointly issued by the Treasury and the four major benefit agencies: the Social Security Administration, the U.S. Dept. of Veterans Affairs, the Office of Management and Budget, and the Railroad Retirement Board.
The new rules would protect Social Security benefits, Supplemental Security Income benefits, Veterans Administration benefits, Federal Railroad retirement benefits, Federal railroad unemployment and sickness benefits, Civil Service Retirement System benefits and Federal Employees Retirement System benefits.
After comment period, the rule could become law later this year.
"We view this as an important problem that needs to be rectified, and would issue a final rule as soon as possible," the administration official said. The National Consumer Law Center was the primary consumer group urging the Treasury to issue new rules.