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As the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) is expected to go into effect, financial institutions should maintain an eye to the individual stimulus payments provided for by the Act and their impact on the handling of garnishments and other legal process relating to customer accounts.

Federal law protects certain Federal benefits from execution, levy, attachment, garnishment, or other legal process. Under existing Federal regulations, when a financial institution receives a garnishment order (defined to include any summons, order, or notice relating to any execution, levy, attachment, garnishment, or other legal process relative to a customer’s account), it is required to conduct a review of its customer account to determine if a Federal benefit agency has deposited a benefit payment into the account during a two-month “lookback period” and the amount of those benefit payments, which amounts are to be considered conclusively exempt from garnishment. Financial institutions are required to ensure that account holders have full and customary access to the protected amount and are prohibited from freezing such amounts in response to the garnishment.

The Federal regulations protecting Federal benefit payments from garnishment currently apply to benefit payments from the Social Security Administration, Department of Veterans Affairs, Railroad Retirement Board, and Office of Personnel Management, which are paid by direct deposit to an account with the character “XX” encoded in positions 54 and 55 of the Company Entry Description field and the number “2” encoded in the Originator Status Code field of the Batch Header Record of the direct deposit entry.

The CARES Act does not speak explicitly to whether individual stimulus payments will be treated as protected benefit payments. As the Act is drafted, its individual stimulus payments are to be issued as credits to federal income tax obligations for the taxable year beginning in 2020. However, the Act provides for individual stimulus payments to be made to taxpayers electronically and deposited in accounts authorized to receive tax refund payments or Federal benefits payments. It is anticipated that, once guidance is issued, many individual stimulus payments will be deposited in the same manner as protected Federal benefits.

As individual stimulus payments are made, issues are likely to arise regarding the extent to which such payments may be subject to garnishment or protected under Federal law. Financial institutions should evaluate now their processes for conducting its Federal benefit analysis and pay careful attention to their direct deposit entries to determine if stimulus payments are deposited with the same coding as protected Federal benefits. To the extent stimulus payments are deposited in the same manner, they are likely subject to the Federal regulations protecting Federal benefit payments from garnishment.

Our team will continue to share the latest developments and provide insights on the spread of coronavirus and its impact across sectors, including the financial services sector.