Are Bank Freezes Thawing?

December 1, 2007

Author: Catherine M. Callery (Kate)| Louise M. Tarantino

Seizures of exempt funds in bank accounts continue to be in the news.  Both Tanya Douglas and Johnson Tyler of South Brooklyn Legal Services appeared on the CBS evening news last month, recounting the plights of clients who have had their accounts illegally frozen.  See the May 2007 edition of the Disability Law News for more background on bank accounts and exempt funds in the news.  While possible legislative fixes in response to the publicity slowly wend their way through various state and federal legislatures, a bevy of federal agencies has banded together to “protect” the accounts of bank depositors funded by exempt federal benefits.

The Department of Treasury Office of the Comptroller of the Currency and Office of Thrift   Supervision, The Federal Reserve System, The FDIC and The National Credit Union Administration have promulgated “Proposed Guidance on Garnishment of Exempt Federal Benefit Funds.”  See 72 Fed. Reg. 55273-55276 (September 28, 2007).

According to the announcement, “This proposed guidance has been developed to encourage financial institutions to have policies and procedures in place with respect to handling garnishment orders and sets forth best practices, including procedures designed to expedite notice to the consumer of the garnishment process and release of funds to the consumer as quickly as possible…The agencies have developed this proposed guidance to encourage financial institutions to minimize the hardships encountered by federal benefit funds recipients and to do so while remaining in compliance with applicable law…”

Advocates have questioned the efficacy of this “guidance,” which “encourages,” rather than requires financial institutions to have policies and procedures in place.  It seems to be a way to placate lawmakers, while adding little of substance.  Comments are due on or before November 27, 2007.

In the meantime, Johnson Tyler, expert defroster of frozen accounts, reports that one more bank has been added to his list of institutions that will not honor  restraints if there is no comingling.  According to Johnson, Citibank looks back two months to determine comingling.  Johnson has also learned that that any direct deposit of Social Security payments received by Citibank after a restraint is placed is available to the account holder and not to the creditor.  A caveat, however, seems to be that the debtor must request this, and may have go through the chain of command to have the request honored. 

Johnson previously reported that Banco Popular, New York Community Bank and Chase will also honor not restraints if the money in the account is clearly exempt under federal law.  He believes, however, that they will freeze accounts that appear to contain comingled funds and, unlike Citibank, will not protect the subsequent direct deposit check.

Samples of letters of letters that Johnson has successfully used to “unfreeze” accounts are available as DAP# 413 on the Online Resource Center.