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49–927—PDF 2007

S. HRG. 110–853

FROZEN OUT: A REVIEW OF BANK TREATMENT

OF SOCIAL SECURITY BENEFITS

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

SEPTEMBER 20, 2007

(

Printed for the use of the Committee on Finance
COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

JOHN ENSIGN, Nevada

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)
C O N T E N T S

OPENING STATEMENTS

Page

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee

on Finance ............................................................................................................ 1

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 3

WITNESSES

Taliaferro, Waverly, Social Security beneficiary, New York, NY ........................ 4

Kelsey, Sara, General Counsel, Federal Deposit Insurance Corporation, Washington, DC ............................................................................................................. 6

Yakimov, Montrice Godard, Managing Director of Compliance and Consumer

Protection, Office of Thrift Supervision, Department of the Treasury, Washington, DC ............................................................................................................. 8

Williams, Julie L., First Senior Deputy Comptroller and Chief Counsel, Office

of the Comptroller of the Currency, Department of the Treasury, Washington, DC ............................................................................................................. 10

Saunders, Margot, counsel, National Consumer Law Center, Washington,

DC .......................................................................................................................... 11

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 1

Grassley, Hon. Chuck:

Opening statement ........................................................................................... 3

Kelsey, Sara:

Testimony .......................................................................................................... 6

Prepared statement .......................................................................................... 25

Response to a question from Senator Grassley .............................................. 38

Salazar, Hon. Ken:

Prepared statement .......................................................................................... 40

Saunders, Margot:

Testimony .......................................................................................................... 11

Prepared statement with attachments ........................................................... 41

Taliaferro, Waverly:

Testimony .......................................................................................................... 4

Prepared statement with attachment ............................................................. 90

Williams, Julie L.:

Testimony .......................................................................................................... 10

Prepared statement .......................................................................................... 97

Yakimov, Montrice Godard:

Testimony .......................................................................................................... 8

Prepared statement .......................................................................................... 110

COMMUNICATIONS

AARP ........................................................................................................................ 117

American Bankers Association ............................................................................... 119

(III)

(1)

FROZEN OUT: A REVIEW OF BANK

TREATMENT OF SOCIAL SECURITY BENEFITS

THURSDAY, SEPTEMBER 20, 2007

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:06 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus

(chairman of the committee) presiding.

Present: Senators Salazar and Grassley.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The hearing will come to order.

The book of Leviticus teaches, ‘‘You must not cheat your neighbor

or rob him. You must not keep a hired worker’s salary all night

until morning.’’

Our hearing today will look at a modern application to this ancient rule. We will examine the case where banks are keeping Social Security beneficiaries’ payments far longer than ‘‘all night,’’ far

longer than ‘‘until morning.’’

The Social Security law sets forth a rule much like that in Leviticus. The Social Security law says, ‘‘None of the monies paid under

this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal purposes.’’

In other words, Social Security benefits are protected. No one can

garnish your Social Security check. That goes for Social Security

benefits deposited electronically in bank accounts. Those benefits

are protected, too.

But here is what is happening. A creditor alleges that a Social

Security beneficiary owes the creditor money. The creditor goes to

court. Sometimes the beneficiary really owes the debt, sometimes

the beneficiary does not. But it is not always easy for old or disabled people to get to court to fight the creditor.

State courts routinely issue orders allowing creditors to freeze assets prior to garnishing funds to repay the alleged debt. The creditor then sends the court order to every bank in the State. The

order instructs the bank to freeze some or all of the beneficiary’s

bank deposits as a first step towards garnishing the funds at a

later date.

Generally, banks will not give the beneficiary a chance to prove

that the funds in the bank account are from Social Security or another protected benefit, so the bank freezes the money. To make
2

matters worse, the bank will often charge the beneficiary an extra

fee for the privilege of freezing the beneficiary’s money.

As a result, these beneficiaries cannot get their Social Security

benefits out of their accounts. These beneficiaries are often retirees

or individuals with disabilities who need every penny of each

month’s benefit, and these freezes and fees have devastating results.

Many Social Security beneficiaries rely on their Social Security

benefits to pay for their basic needs. Social Security is the only

source of income for 1 out of 5 people over age 65, and, for twothirds of people over age 65, Social Security is more than half of

their income.

The same thing is happening to recipients of Supplemental Security Income, or SSI. SSI is a means-tested program, therefore, all

of its beneficiaries are poor. They cannot afford to have any of their

benefits taken away. The same thing is happening to recipients of

Railroad Retirement benefits and veterans’ benefits. The recipients

of these benefits rely principally on these benefits, and they cannot

afford to lose them.

For beneficiaries to unfreeze funds in the account, they must go

to court. They usually need a lawyer. They have to prove that the

funds in the account are from one of the protected programs. They

have to get an order from the court to the bank to unfreeze the

money, and they have to take that order to the bank.

Accomplishing all these tasks can be very difficult. These tasks

take time. These tasks can prove all too much for many elderly or

disabled beneficiaries. To make matters worse, once the funds are

frozen, the bank often starts charging fees to the beneficiaries and

the bank takes the fees right out of the beneficiary’s account.

Banks often charge a $100 or $150 fee for having the account frozen and, once frozen, checks start bouncing. Banks charge $25 or

$35 for every check or debit received while the account is frozen.

Fees like that can add up. Even when the beneficiary gets the account unfrozen, the beneficiary will still have lost a significant portion of the Social Security benefits to the fees the bank charged.

I am not singling out any bank or financial institution for criticism. My concern about the banking system lies broadly across the

system. Five banking regulatory agencies regulate banks. These

agencies have been working together to come up with a common

guidance for their banks regarding freezes of Federal benefits.

I had high hopes for this effort, but I was disappointed yesterday

with the draft guidance that they released for public comment. The

fundamental question is, do banks have to follow court orders to

freeze Social Security and other benefits, even though Federal law

says that garnishment of such funds is not permitted?

The answer should be a resounding ‘‘no.’’ They do not have to follow those State court orders. But the answer in the guidance is, essentially, in many cases—most cases—go ahead and freeze the accounts.

The Supremacy Clause of the Constitution dictates that Federal

law trumps State law, trumps State courts. Even if a State court

wants a bank to freeze Social Security or other protected funds, the

bank should not do so because Federal law bans such garnish-
3

ments. That is what the guidance from the banking regulators

should have said.

I am going to explore this issue with several of our witnesses,

and I hope that the five agencies will change this guidance to recognize that the Federal law protecting Social Security benefits controls.

Banks must stop freezing the benefits of people who have limited

resources. Banks must stop charging fees as a result of these

freezes. Banks must stop depriving our neighbors of the Social Security and other benefits that they have earned.

Before I turn to Senator Grassley, I want to acknowledge the

help of Senator McCaskill from the State of Missouri. She has been

working with the Aging Committee leadership on this issue. She

and her staff helped us in many ways to prepare for today’s hearing, and I very much compliment and thank Senator McCaskill,

who would very much like to be here, but could not make it.

Senator Grassley?

OPENING STATEMENT OF HON. CHUCK GRASSLEY,

A U.S. SENATOR FROM IOWA

Senator GRASSLEY. Thank you very much.

Obviously with a large share of our seniors not having income

from anything but Social Security, this hearing brings up a problem that is very important that needs to be solved once and for all,

and we probably thought it was solved when these words were

written a long time ago: ‘‘None of the monies paid or payable under

this title shall be subject to execution, levy, attachment, garnishment, or other legal process, except by express reference to this section.’’

There are similar protections applying to other Federal programs, including SSI, Civil Service retirement, Railroad Retirement, veterans’ benefits. These protections are designed to prevent

debt collectors from depriving beneficiaries of subsistence funds

necessary for daily living expenses.

Despite these protections, creditors are able to secure State court

judgments against Social Security beneficiaries in an effort to collect debts. In response to these judgments, financial institutions

place freezes on accounts.

State law requires, generally, the notification of account holders

who are subject to a freeze and provides them an opportunity to

seek redress. However, pending a successful court challenge, it is

obvious beneficiaries are denied access to their funds, resulting in

this financial hardship.

The purpose of today’s hearing is to examine how the protections

afforded under my quoted section of the code are being undermined

by current banking and legal procedures, and to determine what

steps can be taken to address the problem. Specifically, the committee will seek to ascertain whether it is possible to avoid placing

a freeze on protected Federal benefits, thereby avoiding harm rather than seeking to remove the freeze after the damages have already been done.

And, Mr. Chairman, if I could state orally a question that I

would ask the witnesses if I could stay here, and ask them to ei-
4

ther answer in writing or by voice for the record today, is that all

right?

The CHAIRMAN. Absolutely.

Senator GRASSLEY. This question would be for the FDIC, OTS,

and OCC, but I would also like to have Ms. Saunders’s thoughts

on it as well. In your written testimony and before the committee

this morning, you say this is a complicated issue, but, if you break

it down into the essential parts, I do not think it would be all that

difficult to resolve.

First, everyone agrees that certain Federal benefits are protected

from certain creditors. Second, everyone agrees that once a beneficiary has established his benefits are protected, banks are obligated to protect them. This is complicated only by the fact that

sometimes protected benefits are commingled with other funds.

However, as Ms. Saunders highlights in her testimony that I

have had a chance to look at, there are several methods to address

the problem. So, given the fact that banks can, and do, protect benefits after the beneficiary seeks redress through the courts, the

question is the same: can the same protections be provided before

a freeze is implemented and harm is done?

Some testimony suggests that, in order to accomplish this result,

Congress or the Social Security Administration must clarify section

207. However, section 207 states that benefits shall not be ‘‘subject’’

to garnishment. But a freeze is nothing more than a means by

which benefits are ‘‘subject’’ to garnishment. It should not be necessary to wait until benefits are frozen in order to protect them.

And, Mr. Chairman, if you need me, I will be right down the hall

at Judiciary. Thank you.

The CHAIRMAN. Thank you, Senator, very much.

Our first witness is Waverly Taliaferro, a consumer whose accounts were frozen, even though the account held only his Social

Security benefits. Then we have Ms. Sara Kelsey, who is the General Counsel for the Federal Deposit Insurance Corporation. Following her, Montrice Yakimov, who is the Managing Director of

Compliance and Consumer Protection from the Office of Thrift Supervision in the Department of the Treasury. Following her, Ms.

Julie Williams. She is the First Senior Deputy Comptroller and

Chief Counsel of the Office of the Comptroller of the Currency, also

under the Department of the Treasury. Finally, Margot Saunders,

who is counsel for the National Consumer Law Center and a nationally recognized expert on these issues.

Thank you all for coming. All of your statements will be automatically included in the record, but I would ask each of you

please, in your oral testimony, to restrict your remarks to 5 minutes.

Mr. Taliaferro?

STATEMENT OF WAVERLY TALIAFERRO,

SOCIAL SECURITY BENEFICIARY, NEW YORK, NY

Mr. TALIAFERRO. Thank you, Mr. Chairman.

Mr. Chairman and members of the Senate Finance Committee,

thank you for having me today to speak to you. My name is Waverly Taliaferro. I am 70 years old. I was born and raised in Virginia.
5

I served in the U.S. Army at the White Sands Proving Grounds

in New Mexico as a cinematographer. After leaving the Army, I

married my wife, Millie, and continued to work in the film industry

until I retired.

Since retiring in 2001, my only income is Social Security. It is now $1,508 a month. I have no nest egg. While my wife Millie recently started to work, her wages are not great.

Like others, Millie and I got credit cards while working. We always thought we could pay for them. However, life sometimes

throws you a curve ball. In 2003, Millie lost her job. After paying

rent, we had only $600 a month for food, medicine, utilities, and

other necessities. Consequently, Millie could not pay her credit card

bill.

On August 14, 2006, the credit card debt caught up with us. Our

Citibank account was frozen. Millie was not working. The account

had only $47 in it, all of which was left over from our direct-deposit

Social Security from July.

I learned of the freeze when my August check was electronically

deposited into the frozen account. Millie, through persistence and

luck, found a free lawyer. Our lawyer gathered papers from

Citibank and faxed a letter to the creditor. Our lawyer thought the

account would be opened in a week.

Of course, bills were coming due: ConEdison, cable, phone, the

rent. While we had family in Virginia, Millie and I thought we

could, and should, weather this on our own. Eleven days after the

account was frozen, the creditor wanted more information before it

would release the account.

On day 15, the creditor added a new condition. Millie had to

work out a payment plan before it would release the account. Since

Millie had no income, this meant my Social Security. After our lawyer threatened to sue them, the creditor unfroze the account on day

23 of the freeze. I then discovered that Citibank had taken $45 for

processing the restraint. While it was not a huge amount of money,

it seemed like Citibank owed me an apology, not a bank fee. Although my lawyer asked the bank to return the fee, it never did.

Getting by on no money for 23 days was quite difficult. We ate

all of our staples, spent the silver dollars I saved as keepsakes, and

then survived off of a 10-pound bag of brown rice. Eating brown

rice 3 times a day, Sunday through Saturday, is pretty tedious.

Amazingly, neither Millie nor I got sick. Rather, we lost weight. I

lost 40 pounds, Millie lost 3 dress sizes.

During those 23 days, we got used to being hungry. We got used

to having no entertainment other than walking to the library or

reading a book. We got used to the creditor’s delay tactics. But

what we could not, and have not, gotten used to was the fear that

this dehumanizing experience could happen again.

One morning, we could find ourselves eating rice, scrounging for

loose change in the sofa. Since August of 2006, I have gotten Social

Security checks in the mail. To cash it, I have to go to the CD

Check Cashing store on 9th Avenue. That is New York City, of

course.

It is slightly unnerving. A lot of unhappy poor people are loitering and waiting in line. I pay $23 to cash my check. Millie worries that somebody will mug me. What upsets me is my loss of dig-
6

nity. I worked all my life. I earned my Social Security. Each time

I enter the check cashing store I feel like a cheat or someone on

welfare.

In March of 2007, my lawyer called with good news. Chase Bank

would not restrain a bank account that contained only directdeposit Social Security. I even got a $100 signing bonus when I told

them I wanted direct deposit. I felt great. Sixteen days later, my

Chase account was frozen. I immediately went to Social Security,

but was too late.

A few days later, my March check sailed electronically into the

frozen account. My lawyer explained that Chase was legally correct

in restraining the account, as it contained $25 in leftover money

from the $100 signing bonus. Luckily, Millie was working this time,

and we could eat. Getting the Chase account released took a

month. I lost money in bank fees as well.

Millie and I are good people. We have worked all of our lives. We

are exploring options for dealing with our debts. Until then, we

need a safe place to deposit my check.

When I was in the New Mexico Proving Grounds 50 years ago,

I saw the government use its energy and intellect to create powerful weapons to keep us safe. Senator, please apply the same energy

and intellect to this simple problem. Thank you.

[The prepared statement of Mr. Taliaferro appears in the appendix.]

The CHAIRMAN. Thank you very much, Mr. Taliaferro. I deeply

appreciate your testimony, and I regret the experience you have

had to go through. Thank you very much for taking the time to

come here.

Ms. Kelsey?

STATEMENT OF SARA KELSEY, GENERAL COUNSEL, FEDERAL

DEPOSIT INSURANCE CORPORATION, WASHINGTON, DC

Ms. KELSEY. Chairman Baucus, Ranking Member Grassley, and

members of the committee, I appreciate the opportunity to testify

on behalf of the Federal Deposit Insurance Corporation about garnishment of federally protected payments.

These payments are important and are often the sole source of

income for many Americans. The FDIC is committed to achieving

a solution to the garnishment issue. We are currently working hard

at the FDIC to promote economic inclusion in the banking system.

The adverse publicity and concerns about garnishment, as we

heard today, can undercut the attractiveness of an insured bank as

a place for people to utilize financial services such as checking and

savings accounts and direct deposit. The resolution of this issue is

important to the achievement of our broader efforts to encourage

consumers to be economically empowered through the banking system.

It is clear that Congress intended that Social Security and other

Federal benefits not be garnished except in certain specific circumstances. However, the garnishment process is primarily controlled by State law, as you have observed. In that process, a State

garnishment order is served on a bank, requiring that funds to a

customer can be frozen while the process sorts out who is entitled

to the money.
7

Freezing these funds is what harms the recipients of Federal

benefits the most. It cuts off their principal, if not exclusive, source

of income, and this can have, as we have heard, severe consequences. Beneficiaries may be unable to pay their monthly bills,

and they may be subject to a variety of, as we have heard, bank

fees and penalties for overdrafts and returned checks. These fees

and penalties can be substantial and can cause additional hardship.

Even when the garnishment is properly resolved, the beneficiaries’ accounts may be significantly depleted by fees and penalties. My written statement provides additional detail about the

garnishment process and the relationship between State and Federal law. Let me focus this morning on a few key points.

First, State garnishment laws generally put the burden on benefit recipients to claim exemptions; however, benefit recipients

often do not understand their rights under the Federal garnishment exemption, nor that they must mount a legal defense during

the garnishment process.

Second, even if they are aware of available exemptions, existing

garnishment procedures often provide inadequate protection for

benefit recipients. State laws put the burden on the beneficiaries

to defend themselves against the garnishment order. This defense

is much more difficult for beneficiaries when access to their money

is cut off by a freeze order.

Third, the Federal benefit agencies such as Social Security and

the Veterans Administration interpret the garnishment prohibition

as a defense to be asserted by a beneficiary after a freeze has been

placed on their funds, not as a bar to a bank freeze of their accounts. In addition, court decisions interpreting the Federal prohibition are conflicting.

Finally, without a Federal rule preempting State garnishment

orders, banks would be at significant legal risk if they refused to

comply with State orders. Achieving a comprehensive solution that

is needed to resolve these issues will require the active participation of a number of parties, including several not represented at today’s hearing.

To that end, let me make two suggestions. First, Congress could

directly address the situation by amending existing protections in

the Social Security Act and other laws. Such legislation could spell

out the extent to which such protections extend to freezes, as well

as garnishment, and whether they operate as a bar to bank freezes

or merely as a defense to be raised by benefit recipients.

Explicit language could preempt State laws or processes that operate contrary to this requirement. Legislation also could specifically address the fees and penalties currently associated with frozen accounts.

In the absence of legislative action, another option would be for

agencies like the Social Security Administration and the Veterans

Administration to issue regulations under their current statutory

authority.

As the agencies responsible for these Federal benefit programs,

they have the authority to set forth rules that detail how accounts

and financial institutions that hold protected Federal benefit payments should be treated if an attempt is made to freeze the funds.
8

The FDIC and other banking regulators would then be able to enforce these interpretations of law under our general enforcement

authority.

In conclusion, a comprehensive solution to the issues is important for beneficiaries and will require the participation of many

parties. The FDIC is committed to finding a solution and willing

to work with Congress and our colleagues at other agencies to

achieve that goal. The guidance that the banking regulators issued

for public comment yesterday is only a first step to help craft a

workable approach to this issue and should provide us with useful

information going forward.

This concludes my testimony. I would be happy to answer any

questions that the committee might have.

The CHAIRMAN. Thanks, Ms. Kelsey, very much.

[The prepared statement of Ms. Kelsey appears in the appendix.]

The CHAIRMAN. Ms. Yakimov?

STATEMENT OF MONTRICE GODARD YAKIMOV, MANAGING DIRECTOR OF COMPLIANCE AND CONSUMER PROTECTION,

OFFICE OF THRIFT SUPERVISION, DEPARTMENT OF THE

TREASURY, WASHINGTON, DC

Ms. YAKIMOV. Thank you. Chairman Baucus, Ranking Member

Grassley, and members of the committee, my name is Montrice

Godard Yakimov, and I am the Managing Director of Compliance

and Consumer Protection at the Office of Thrift Supervision, or

OTS.

Thank you for the opportunity to present the views of the OTS

on issues related to financial institutions’ treatment of garnishment

of Federal benefits.

Today’s hearing highlights several complex issues: the intersection of Federal law with State laws and court procedures; the role

and responsibilities of depository institutions that receive court orders to freeze accounts that may contain protected benefit payments; and the role of Federal bank regulators and other Federal

agencies that administer benefit payments.

In my statement, I will address these challenging issues, describe

the interagency guidance on garnishments recently released by the

Federal banking agencies, and I will discuss the OTS’s Advanced

Notice of Proposed Rulemaking on unfair and deceptive acts and

practices, through which we hope to collect substantive and instructive public comment on practices addressed by today’s hearing.

Federal benefits, including Social Security, Supplemental Security Income, veterans benefits, Federal Civil Service retirement,

and Federal Railroad Retirement benefits often constitute an important part, and sometimes all, of an individual’s income. Social

Security recipients are the largest group to receive government

payments. Currently, over 54 million beneficiaries receive Social

Security, Supplemental Security Income, or both. Nine out of 10 individuals aged 65 and older receive Social Security benefits, which

represents 41 percent of their total income.

Federal law currently provides that such benefits are exempt

from garnishment, apart from limited exceptions. However, State

court garnishment orders often provide that financial institutions
9

are liable for funds withdrawn by a customer after the institution

has received a garnishment order, and Federal laws that protect

Federal benefits do not specifically prohibit an institution from

freezing an individual’s account during the period when a garnishment order is challenged by the recipient of the Federal benefits.

As a result, financial institutions receiving these orders often place

holds on the account while the matter can be resolved.

In order to raise awareness of this important issue and promote

best practices, we have worked closely with the other Federal banking agencies to draft interagency guidance. The guidance advises

depository institutions that best practices include promptly determining, as feasible, that the account contains only exempt Federal

benefit funds; notifying the creditor, collection agent, or relevant

State court that the account contains exempt funds; avoiding placement of a freeze on an account that contains only exempt funds if

State law or the court order will permit it; minimizing the cost to

a consumer when an account containing exempt funds is frozen and

allowing consumers access to a portion of their account equal to the

documented amount of exempt Federal benefits when an institution determines that the funds are not subject to garnishment

under the court order; and, of course, lifting the freeze as soon as

possible.

It is important to note that the proposed best practices are a significant first step in addressing the numerous issues presented

with garnishments of protected Federal benefit payments.

Another important initiative that we are pursuing is an ANPR

on unfair or deceptive acts or practices. The ANPR solicits comment on a wide variety of acts or practices that OTS could consider

prohibited under section 5 of the FTC Act. These include issues relating to the practice of freezing accounts upon receipt of court orders to garnish.

We plan to share comments on this subject, and others we receive in connection with the ANPR, with the other banking agencies toward the goal of achieving interagency consistency on these

issues.

In closing, the OTS strongly supports continued discussion by the

appropriate Federal agencies and clear guidance by agencies that

administer protected Federal benefits on interpreting statutes that

preclude garnishments, levies, and attachments.

It may also be appropriate to consider legislation to provide financial institutions with protections from liability for failing to

comply with a State court order if an institution acts responsibly

when trying to maximize access to federally protected funds for its

customers.

Please be assured that Director Reich and OTS stand ready to

discuss challenges, address questions, and identify other steps that

policymakers and regulators can take to better ensure that consumers who receive protected payments obtain the full benefit of

protections provided by Federal law.

Thank you, Mr. Chairman, Ranking Member Grassley, members

of the committee, for the opportunity to present the views of the

OTS. I look forward to your questions.

The CHAIRMAN. Thank you, Ms. Yakimov, very much.
10

[The prepared statement of Ms. Yakimov appears in the appendix.]

The CHAIRMAN. Ms. Williams?

STATEMENT OF JULIE L. WILLIAMS, FIRST SENIOR DEPUTY

COMPTROLLER AND CHIEF COUNSEL, OFFICE OF THE

COMPTROLLER OF THE CURRENCY, DEPARTMENT OF THE

TREASURY, WASHINGTON, DC

Ms. WILLIAMS. Thank you, Chairman Baucus. My name is Julie

Williams, and I am the Chief Counsel and First Senior Deputy

Comptroller of the Office of the Comptroller of the Currency.

Today’s hearing highlights the hardships faced by recipients of

Social Security, Veterans, and other Federal benefits when they are

unable to access funds in their deposit accounts to meet their dayto-day living expenses because the account has been frozen in response to a garnishment order.

The fundamentals of the problem are these: various Federal laws

exempt Federal benefits payments from garnishment, but these

laws do not exempt financial institutions from State judicial processes and court orders that require a freeze or hold to be placed

on funds in an account while the claim of the creditor, and the account holder’s defenses to that claim, are resolved, pursuant to

State law procedures.

Thus, even if funds in the account ultimately are established to

be Federal benefits payments that are exempt from garnishment,

until that occurs, the account holder loses access to some or all of

the funds in the account for a period of time. Obviously, for individuals who rely on these benefits for essential living expenses, this

is a significant hardship.

My written statement covers four points. First, we completely

agree that there is a problem here that needs to be addressed.

Second, this problem is complex. The issues presented include

unclear and undefined provisions of Federal law, State laws and judicial processes that may unintentionally produce results that conflict with Federal public policy objectives, and questionable practices by debt collectors. These issues also implicate important Federal policy objectives concerning how Federal benefit payments are

paid.

Third, there are certain things that the Federal banking agencies

can do, and we will do, to help. I will summarize those initiatives

in a moment. But the actions that we can take are not a complete

solution.

Finally, obtaining a comprehensive resolution of these issues will

require coordinated action by multiple parties on multiple fronts.

It could well require Congress to enact legislation to clarify intersections of Federal and State law unless agencies such as the Social Security Administration and the Department of Veterans Affairs conclude that, under the statutes they administer, current law

provides them sufficient authority to provide definitive answers to

key issues in this area. We defer to those agencies to advise the

committee on whether or not they have sufficient authority to address these concerns under existing law.

As I said, there are actions the OCC and the other Federal banking agencies can, and will, take consistent with our respective regu-
11

latory and supervisory authority to alleviate some of the hardships

associated with the process of garnishment of protected Federal

benefit funds. One step we can take is to provide supervisory guidance to our regulated institutions concerning these matters.

Yesterday the OCC and the other Federal banking agencies

issued for comment proposed guidance on practices by depository

institutions relating to the garnishment process as it affects accounts containing Federal benefits payments. The proposed guidance reflects, and it seeks comment on, many of the same concerns

contained in the questions posed in the committee’s letter of invitation.

Specifically, in order for institutions to minimize the hardship to

Federal benefits recipients and comply with State garnishment orders, the proposed guidance advises institutions to have policies

and procedures in place to expedite notice to the customer of the

garnishment process and the release of customer funds as quickly

as possible. The proposed guidance also recommends a number of

particular best practices that the agencies have seen among the institutions that we supervise.

The OCC is also taking steps to provide customers of national

banks with more information to help understand what their rights,

protections, and obligations are with respect to Federal benefits

payments and the garnishment process. We will be posting this information to www.helpwithmybank.gov, the financial consumer

website sponsored by the OCC, in the very near future.

In conclusion, Mr. Chairman, and as I summarized at the outset,

we recognize that there is a very real and important problem here.

The Federal banking agencies are addressing aspects of that issue

that are within our respective authorities, but a comprehensive resolution will require involvement by other key Federal agencies, and

ultimately Congress may have to act. We stand ready and willing

to participate in this effort. Thank you. I would be pleased to answer your questions.

The CHAIRMAN. Thank you very much.

[The prepared statement of Ms. Williams appears in the appendix.]

The CHAIRMAN. Ms. Saunders?

STATEMENT OF MARGOT SAUNDERS, COUNSEL,

NATIONAL CONSUMER LAW CENTER, WASHINGTON, DC

Ms. SAUNDERS. Chairman Baucus, Senator Grassley, members of

the committee, thank you very much for inviting the National Consumer Law Center to testify here today.

One of my most important functions, I think, is to try to illustrate for you the breadth and depth of this problem. As you can see

from the number of organizations—both national and State organizations—that have signed on to our testimony, this has become the

most alarming issue legal services programs deal with on a daily

basis, after predatory lending.

In the appendices attached to my testimony, there are summaries of dozens of cases from across the country in which we have

tried to illustrate the personal damage that has occurred when Social Security and other Federal benefits have been attached.
12

Because of the EFT ’99 (for ‘‘Electronic Funds Transfer’’), many

millions of low-income recipients of Federal benefits now have their

payments directly deposited into bank accounts where they had

previously received paper checks and had been completely protected from these garnishment activities. Yet, now we estimate

that, on a monthly basis, thousands of low-income recipients of Social Security, SSI, and other Federal payments whose benefits are

entirely exempt from claims of judgment creditors are left temporarily destitute when banks allow the attachments and the garnishments.

I would like to walk you through what exactly happens when an

account is frozen under State law. First of all, as you know, no

money is available to cover expenses for food, rent, or medical care.

Checks and debits previously drawn on the account, before the

recipient learned that the account was frozen, are returned unpaid.

Subsequent monthly deposits into the account will also be subject

to the freeze, and also inaccessible to the recipient. The funds will

remain frozen for a time period determined by State law before

being turned over to the creditor.

In order to unfreeze the account, the recipient must find an attorney or go to the local courthouse on their own, fill out a form

stating that the funds in the account are exempt, present the form

and the accompanying proof to the court. If the creditor voluntarily

agrees to release the funds, the creditor will send a release to the

bank. At this point, it may still take several days, or even weeks,

before the bank releases the funds.

But the creditor, under State law, does not have to release the

funds upon receiving this proof from the consumer. The creditor

can, and often does, request a hearing. When this occurs, the consumer almost always needs a lawyer. Lawyers are hard to find.

Transportation to the courthouse, multiple trips to the courthouse,

are difficult and expensive for people who are, by definition, elderly

or disabled and often already impoverished.

The effect of the freezing of the exempt funds is, thus, a full taking of these funds for thousands of these recipients because rarely

does the recipient have the wherewithal to pursue the process of

claiming the exemptions.

The cases in this area have not yet caught up to the new reality

and the technology. We have one case, the Mayers v. New York

Community Bancorp case in New York, in which the court has recognized that, because of the electronic deposit of funds, the banks

can now clearly see which funds are exempt.

Because of the new technology and the reality of so many more

recipients being subject to attachment, this Federal district court

is at least willing to entertain the idea that the traditional way of

balancing the competing interests between the creditors and debtors may be switched, and that banks may have a constitutional requirement to look into the accounts before they freeze funds pursuant to an order for attachment or garnishment.

We may win the Mayers case, and we may win other cases across

the country. The reason we came to Congress is that we are hoping

that we do not have to take 10 or 15 years to litigate this throughout the courts of the country while thousands and thousands of
13

low-income recipients suffer the continued effects from attachment

of their exempt funds.

The Proposed Guidance issued yesterday by the Federal regulators, I am afraid, does not appear to require much that is new.

It looks like it is really only a reiteration of what some banks are

already doing. We had hoped, and still hope, that the Federal regulators, those who regulate this Nation’s banks, would take leadership on this issue, recognize that it is up to them to resolve the difference between Federal and State law and articulate that Federal

law should be followed, even when it might conflict with State law.

So far as we know, the Supremacy Clause still rules, and the

Federal law has always been found to preempt inconsistent State

laws. We do not quite understand the hesitation of so many of

these regulators to preempt State law. These regulators have preempted State laws regulating predatory mortgage lending, electronic deposits, and foreclosure protections. Why is there suddenly

a fear of preempting State law here?

I am happy to answer any questions.

[The prepared statement of Ms. Saunders appears in the appendix.]

The CHAIRMAN. Thank you, Ms. Saunders.

What do you suggest the Congress do? The regulators say they

are working on it. As I am reading between the lines, listening to

the music as the three of you have testified, I sense you are looking

for a little more guidance that results in greater protection of beneficiaries; whether the guidance is from SSA or from whomever, that

is what you are looking for. I do not know whether you are looking

for congressional action or not.

But let me ask you again, Ms. Saunders, what do you recommend here? Does Congress have to act and say there is a bar?

Should we wait for the financial regulatory agencies to issue

stronger guidance? I do not know whether they have the power,

frankly—you can answer that question too—to supersede State

law, or whether it takes an act of Congress. I do not know.

But I am going to ask, what do you recommend be done here to

protect beneficiaries?

Ms. SAUNDERS. Senator Baucus, if one of the results of today’s

hearing would be an acknowledgement that the regulators do not

have the power to supersede State law and that were to apply

across all State laws, I would say overall that would be a net benefit for consumers considering the vast amount of consumer protection State laws that these very regulators have preempted. But on

this particular question, I must answer that I do not see that congressional action should be necessary. The statute is as clear as it

could be. It says: ‘‘No funds paid or payable are subject to attachment or garnishment.’’

The CHAIRMAN. I will go down the line here. Ms. Kelsey, that is

what the statute says. It is a Federal statute.

Ms. KELSEY. The State process that results in the freeze is not

the same thing as garnishment. We are not hearing that there is

a problem in terms of banks turning over Social Security money to

creditors. The problem is in the freeze. What we would like to see

is either regulatory or statutory change. It is true that State laws

can be preempted by Federal laws, but the agencies that have the
14

authority to interpret the law here are not the banking agencies,

they are the benefit agencies who in fact have been treating the

provisions as if they are a defense to the borrower, to the account

holder, not as if they are a bar.

The CHAIRMAN. The question is, do you have to wait for the beneficiary agencies? Ms. Saunders, I will ask you, is it your view that

this Federal law is so clear that we do not have to wait for the

guidance from the beneficiary agencies? Is that true or not true, in

your view?

Ms. SAUNDERS. Senator Baucus, the Federal regulators of the

banking agencies regulate the activities of the banks.

The CHAIRMAN. Right.

Ms. SAUNDERS. And the distinction between a freeze and an attachment is hard for me to discern. The freeze is the first step of

an attachment and would not occur but for the attachment order.

So if money is exempt under Federal law, it is exempt from a

freeze.

The CHAIRMAN. Right. So Ms. Williams, what about that?

Ms. WILLIAMS. Mr. Chairman, I agree with the basics that Ms.

Kelsey has described. The Federal law here is the Social Security

Act. The Social Security Administration has not interpreted that

statute to work in the way that Ms. Saunders is suggesting. We

have asked. The law is just simply not currently read by the responsible agency to say what is being suggested.

The CHAIRMAN. Have you asked the agency?

Ms. WILLIAMS. Yes, we have.

The CHAIRMAN. What do they say?

Ms. WILLIAMS. They say what Ms. Kelsey has said.

The CHAIRMAN. Which is?

Ms. WILLIAMS. That the protection that the statute provides is an

affirmative defense that is available to be asserted by the benefit

recipient in the State court processes that have been described.

The CHAIRMAN. Have you asked whether, in their view, it is a

bar, an absolute bar?

Ms. WILLIAMS. They have told us that they have not addressed,

and they have not yet taken the position, that the Social Security

Act prevents or precludes the application of the State judicial processes to the banks. So our fundamental problem here is we have

a statute that is not a statute that we administer or interpret.

The CHAIRMAN. But the statute is a statute. It is a Federal law.

I can repeat what the law says. I mean, even though, in a sense,

you do administer it because you are a financial regulatory agency,

you are dealing with banks here.

Ms. WILLIAMS. We will absolutely apply it the way that it has

been construed by the agency, by the department.

The CHAIRMAN. Do you feel you have the power to interpret this

law differently? Do you have the power to say, wait a minute. I

misread the statute here. My gosh. These accounts cannot be garnished. There is no way in the world they can be hindered. Do you

have that power to make that determination?

Ms. WILLIAMS. We do not think we do, and particularly in the

face of contrary interpretations by the Social Security Administration.

The CHAIRMAN. What is your view, Ms. Yakimov?
15

Ms. YAKIMOV. Senator Baucus, I would note that I think it is a

positive step that the Social Security Administration, I believe, is

going to be part of a dialogue where this issue about the interpretation of the SSA, the Veterans Administration, is a bar to an institution placing a hold on an account. I think both agencies, SSA and

VA, are coming to the table to have the dialogue about their view,

along with the agencies. That is a positive step and additional clarity can come out of that.

The CHAIRMAN. Ms. Saunders, again, I am looking for guidance

from you. As you heard Ms. Williams say, she feels her agency does

not have the power to issue regulations along the lines that you are

suggesting.

Ms. SAUNDERS. I understand that the Social Security Administration may have said that the protection is only a defense. But the

courts, including the Supreme Court, have consistently said that

the exemption applies from before the time the money is payable

to after it is deposited in the bank account. The Supreme Court has

specifically made this rule applicable to veterans’ benefits and to

Social Security benefits, and numerous courts that are cited in the

voluminous end notes to my testimony have also said that repeatedly. So that is not a hard or new issue.

The CHAIRMAN. What about that, Ms. Williams? What about

those decisions Ms. Saunders is referring to?

Ms. WILLIAMS. Those decisions do not deal with the key issue

here of the freeze and the position that the financial institution is

put in where they are subject to State judicial freeze or hold processes.

The CHAIRMAN. Ms. Saunders?

Ms. SAUNDERS. That is true. There are only a few cases that deal

with the freeze. The cases I was referring to deal with the ultimate

question of whether the money is subject to attachment. But the

point is that the cases say the money is exempt from attachment.

All of these cases—all but a few, frankly—were decided before it

was so easy for the banks to identify which money was exempt. We

now have a very different technological situation where we have

millions of people who have their money electronically deposited.

The bank can see with a touch of a button which money is exempt and which is not. That is a different situation which requires

a different answer, a different response. It also requires a different

response if the regulators and this government want to continue

encouraging electronic deposit. Something needs to happen to protect these electronic deposits from these freezes.

The CHAIRMAN. Do any of these decisions deal directly with the

freeze?

Ms. SAUNDERS. Yes, sir. There have been a few decisions—all in

the Second Circuit so far as I understand—one that was back in

the 1980s that held that the banks did not have to look into the

account before freezing funds. But that was before this technological change. One, the Huggins case, I believe, held more recently

that the banks did not have to look. Most recently, the Mayers case

has come down from the Federal District Court in New York that

says that banks may have to look. It recognizes the change in times

and the new technologies.
16

But my point is, we should not have to litigate this in circuit

after circuit. The regulators can themselves recognize the new technologies and take leadership here. These are not hard questions,

except that it may be hard politically, because the banks do not

want to look. The banks are making a lot of money off of these

freezes.

In multiple States where the advocates have tried very hard to

change the State law or State practice so that there would not be

any conflict, the banks have rebuffed them. The banks have successfully turned back an effort where State law would have been

clear in Virginia. They successfully did the same in Maryland.

They are trying in New York. In Pennsylvania recently, the advocates had a success. We should not have to fight this issue State

by State where we have the banks on the opposite side saying, no,

we do not want to look. This is why the regulators should take

leadership on this issue.

The CHAIRMAN. What about that? Are the banks talking to any

of you, the regulators, about this issue? I will start with Ms.

Kelsey. Have banks communicated their views about this issue to

any of your agencies?

Ms. KELSEY. Do you mind if I answer the last question?

The CHAIRMAN. If you also answer the other question.

Ms. KELSEY. All right. Deal. All right. First of all, I agree with

Ms. Saunders that it would be very unfortunate for the beneficiaries of these benefits if we end up with State-by-State litigation

or State-by-State laws. There are some States that recognize that

the freeze is the problem. California has a State law which provides that a minimum amount of dollars in the account cannot be

frozen when an attachment order is sent to a bank. With a rule

like this, recipients would always be assured that some exempt

money would be available for necessities. They would thus be

spared the hardship that Mr. Taliaferro faced. So there are solutions.

But we believe that beneficiaries should not have to wait for a

State-by-State solution. We believe they need a Federal solution.

There are some State court cases, including in the Second Circuit

with the McCauley case, that indicate that the courts allow the

State process to trump the Federal exemption. These courts have

found that the due process rights of the benefit recipients are not

damaged by this freeze. Regardless of these State court decisions,

too many people are having severe problems with these freezes

that must be addressed.

The CHAIRMAN. The other question?

Ms. KELSEY. All right. We have heard from the banks that they

would be very happy also to have clarity and have this issue resolved. As Ms. Saunders has said, there is a lot of litigation going

on and everybody would like clarity.

The CHAIRMAN. But Ms. Saunders is suggesting—I do not want

to put words in her mouth—that banks are also suggesting some

solution that benefits them as opposed to the beneficiaries. After

all, that is the American way.

Ms. KELSEY. I think that the beneficiaries are customers of the

banks and that it is in the best interest of the customers and the

banks to have clarity in the law. What our guidance amounts to
17

is trying to get the banks more involved in getting the freeze lifted,

but we believe it would be far better if the freeze could not happen

in the first place.

The CHAIRMAN. And what is the best way to prevent the freeze

from happening in the first place?

Ms. KELSEY. Either through regulations issued by the benefit

agencies or by Federal law.

The CHAIRMAN. I am a little unclear on this. Again, Ms. Saunders, why do you think it is not necessary for the benefit agencies

to weigh in here?

Ms. SAUNDERS. I think it would be fine for the benefit agencies

to weigh in. However, it seems to me that this is an interpretation

of bank practice and that the Federal regulators of banking have

the authority to address this issue. They are simply choosing not

to use this authority because their constituents do not really want

them to use it.

The CHAIRMAN. Cutting through the court cases, forgetting all

that, what is the right public policy here? What is right? Irrespective of whether it is the benefit agencies that need to weigh in or

whether it is the financial agencies’ actions, or Congress, or whatnot, what is the right answer here?

Ms. KELSEY. I think Congress already has addressed its public

policy.

The CHAIRMAN. Again, what do you think the right answer is?

Ms. KELSEY. I think Congress wants the beneficiaries of Federal

benefits to be protected.

The CHAIRMAN. And that there be no freeze.

Ms. KELSEY. I think the problem is that the devil has been in

the details here. We would like to get those details——

The CHAIRMAN. And I am asking you, what is right with respect

to the details? What is the right policy here? If you were writing

the right answer here, what would that answer be?

Ms. KELSEY. The FDIC would like to see the depositors protected.

The CHAIRMAN. In all respects?

Ms. KELSEY. In all respects.

The CHAIRMAN. And there be a complete bar? That is, no State

court law or agency in any way could freeze a beneficiary’s checks?

Ms. KELSEY. I have trouble with absolute statements, but what

I will pledge is that we are all willing to work——

The CHAIRMAN. I know you are willing to work. That is not my

question. My question is, what is the right policy? Ms. Kelsey, irrespective of your agency, you are an American citizen. What is the

right thing to do here?

Ms. KELSEY. Well, I think that my views are not different from

my agency’s.

The CHAIRMAN. And again, the views are?

Ms. KELSEY. That the depositor should have access to their

funds.

The CHAIRMAN. And not an absolute, virtually absolute bar. Is

that is what is right here?

Ms. KELSEY. There is actually an exception in the Social Security

Act to certain types of things.

The CHAIRMAN. Like child support.
18

Ms. KELSEY. Yes.

The CHAIRMAN. All right. Child support. What else?

Ms. KELSEY. Alimony.

The CHAIRMAN. Alimony. What else besides those two? Any exceptions you think are good public policy?

Ms. KELSEY. I believe those are the two that I am aware of.

The CHAIRMAN. Taxes? All right.

Let me ask Ms. Yakimov the same question. What is the right

thing to do here?

Ms. YAKIMOV. Senator Baucus——

The CHAIRMAN. What is right? There is Mr. Taliaferro sitting

next to you, the people depending on this. Their banks, their creditors, all that. What is right here?

Ms. YAKIMOV. The right thing to do is to protect Federal benefits

to the full extent that is possible under the law. I think it would

be a great help if State court orders were clear about——

The CHAIRMAN. I am not asking what the law is or is not. I am

asking you what is right with respect to Social Security benefits.

Forget states, forget the law, forget everything. What is the right

thing to do here? What is right with respect to Social Security recipients’ benefits in a bank? Should they be frozen, not frozen?

Ms. YAKIMOV. I think the challenge—no. The public policy about

protecting Federal benefits is sound policy. It is something that I

think each of us supports. The question is how to achieve it, how

to ensure it, how to make sure it is implemented.

The CHAIRMAN. Why not just tell banks, sorry, you cannot freeze

Social Security benefits?

Ms. YAKIMOV. Right. Some of the challenges that I think institutions face is when accounts are commingled, where there are two

people on the account. These are the details we are trying to work

through.

The CHAIRMAN. I understand that. Ms. Saunders talked about

electronic deposits. These days that usually can be determined

quite easily, those commingling questions.

Ms. YAKIMOV. Clarity on these issues for institutions so that they

can comply with the Federal law on these protections—that is the

right result.

The CHAIRMAN. Do not forget, though, we are not talking just

about financial institutions, we are talking about somebody’s Social

Security benefits.

Ms. YAKIMOV. Absolutely.

The CHAIRMAN. So we are not only worried about—you are talking about clarity for the banks. What about what is right for the

beneficiaries?

Ms. YAKIMOV. Clarity for the banks for the purpose of protecting

consumers who are relying on these benefit payments.

The CHAIRMAN. All right.

Ms. Williams, you have had a long time to think about this now.

[Laughter.]

Ms. WILLIAMS. Mr. Chairman, I think there are two things that

need to happen. There needs to be clarity so that some or all of the

funds in the account are not frozen. I say ‘‘some’’ because there are

models under State law that set a dollar amount, they say you can-
19

not freeze a certain amount in an account, you cannot garnish, you

cannot freeze.

The CHAIRMAN. Well, wait a minute. I thought the Federal statute says all these benefits are protected.

Ms. WILLIAMS. That would preclude a freeze being put on. So

prevent a freeze for some or all of the amounts in an account while

a garnishment process is taking place.

Second, clarify what the financial institution is expected to do,

exactly what inquiry you want the institution to undertake, to look

back for 60 days, 90 days, to ascertain whether there are exclusively Social Security funds coming into the account. Do you want

the financial institution to be tracing funds, trying to figure out

funds in the account, and, if it is commingled, how much is protected benefits?

So there are two things: to protect from the freeze aspect of a

garnishment process some or all of the funds in the account, and

then, second, to make very clear what the expectations are of the

financial institution and their inquiry into the nature of the funds

in the account, those two things.

The CHAIRMAN. You say ‘‘some or all.’’ I am a little bit confused

there. Why some? Why not all?

Ms. WILLIAMS. Well, again, an approach that has been employed

in California that Ms. Kelsey referred to, is a certain dollar amount

in an account is just simply not subject to garnishment, so you

would never get into the issue of whether you freeze that amount

in connection with the garnishment process that we have been describing.

The CHAIRMAN. That is California. I am not asking about California. But what is right? What about, none can be frozen?

Ms. WILLIAMS. That is the issue. I am just saying that the two

things that need to be done are, to clarify whether a freeze applies

to some or all of the funds in the account, and to clarify what the

obligation of the financial institution is in checking as to the nature

of the funds in the account.

The CHAIRMAN. All right. Now, with all due respect, you did not

really answer my question. So I am going to go back and ask you,

what is the right answer to each of the two questions you raised?

Ms. WILLIAMS. I think the right answer, first, is to clarify what

the obligations of the institutions are. Sir, I do not know what the

exact right answer is. There are some practices that we have identified in the proposed guidance where institutions look back for 60

or 90 days, and they can determine whether all of the funds that

have gone into the account are coming from protected Federal benefit sources, and then they do not freeze the account.

The CHAIRMAN. What is the right answer to your first question?

Ms. WILLIAMS. You can, as a policy matter, decide that you want

to protect everything in the account or some in the account.

The CHAIRMAN. You are not answering the question. What do

you think the right answer to that question is?

Ms. WILLIAMS. I think the right answer, in part, may depend on

feasibility. I think that we should be trying to find a way that protects, to the maximum extent that is practicable, the Federal benefits pays that are in the bank accounts of benefits recipients.
20

The CHAIRMAN. Well, Mr. Taliaferro, it is probably kind of interesting for you, sitting down there, to listen to all of this.

What thoughts do you have about all of this? Are they just kind

of all wrapped up in regulations or kind of missing the whole point

here, or do they maybe have a thing or two that is valid, maybe?

You have been through a wrenching experience, a really wrenching

experience. I am interested in your on-the-spot thoughts about

some of this.

Mr. TALIAFERRO. It seems they are circling the wagons around

the issue. I do not see any definitive results or answers.

The CHAIRMAN. I would agree with that. I think you are on the

right track.

Ms. Saunders, your reaction to all this again? I will give you another shot.

Ms. SAUNDERS. Senator, we would like to see the regulators—

these regulators—come out with a simple rule that says something

along the lines that banks should not freeze accounts which contain

electronically deposited funds, except to the extent certain exceptions are met. One exception might be if the State court order specifically identified the judgment as being for child support or alimony.

The other exception would be if the account includes commingled

funds, in which case we would ask the Federal regulators to take

a second step and come up with a uniform rule—and there are several to choose from that have been discussed here today—by which

the banks should determine which funds are exempt and which

funds are not exempt when they have been commingled.

The last thing that we would want, and I think that the regulators or Congress would want, would be a rule that comes out that

would encourage or discourage the use of these bank accounts for

any other purpose. We do not want Social Security recipients to

have second-class bank accounts. So, if they had protections from

exemptions so long as they had no other funds in the accounts, but,

if they added $1, the entire account would be subject to attachment, would be a very flawed response.

The CHAIRMAN. Ms. Kelsey, what do you think about that suggestion? Basically, with electronic accounts, I assume there is no

freeze or attachment or anything, except for those exceptions that

are under the law, like child support, alimony, and so forth, and

where there is commingling, there are ways to deal with it. If I understand her, that is her basic point. Does that make sense?

Ms. KELSEY. I think that the mechanism, tying a bar to the electronic deposit, is a good one. But the benefit agencies should be the

ones to say that is the bar, because they are the ones that possess

the authority to say that.

The CHAIRMAN. Ms. Yakimov?

Ms. YAKIMOV. I think the benefit agencies have to be a part of

the solution and we need them to come alongside us as we

identify——

The CHAIRMAN. Apart from that, I am asking your opinion

whether Ms. Saunders’ suggestion is on the right track, is a good

one.

Ms. YAKIMOV. I think it is a valid suggestion that we ought to

take back and we ought to explore. I guess one thing I would add
21

is the issue about these State court orders that subject institutions

to liability for failing to comply. I think that has to be——

The CHAIRMAN. I am sorry. I missed that. Say it again.

Ms. YAKIMOV. There are State laws, and in the State court order,

failing to comply subjects the institution to some real risk, some liability. I think that has to be a part of this conversation. So if we

were to come out with a rule that says you should not freeze except

in these circumstances, that has to be part of the dialogue.

The CHAIRMAN. Right.

Ms. YAKIMOV. But I do not disagree with Ms. Saunders’ suggestion. I think it is something we ought to take a look at. But again,

the benefit agencies have to be a part of the discussion and part

of the solution. The immunity, this liability issue, has to be part

of it as well.

Ms. WILLIAMS. Mr. Chairman, I think this is an area that cries

out for a clear, uniform solution, so I agree with what Ms. Saunders has said on that.

The CHAIRMAN. Does that sound like a good, uniform solution?

Ms. WILLIAMS. Some of the suggestions that she mentioned could

be.

The CHAIRMAN. The basic ones she said. I asked her what makes

sense.

Ms. WILLIAMS. I think where we disagree is how you get there.

The CHAIRMAN. And what is the disagreement on how you get

there? She thinks you could do it on your own.

Ms. WILLIAMS. On our own. I think we are saying——

The CHAIRMAN. You think you cannot?

Ms. WILLIAMS. We think we need to look to the benefit agencies

because they are the ones that administer and interpret the key

statutes.

The CHAIRMAN. So if the benefit agency were to say, all right, financial regulators, this is what it is, it is a bar when it is electronically deposited, except for the exceptions. That is it. Will you follow

that?

Ms. WILLIAMS. We would enforce that law.

The CHAIRMAN. You would enforce that.

Ms. WILLIAMS. Yes.

The CHAIRMAN. It would not be a law. It would not be a law. You

would enforce that advice?

Ms. WILLIAMS. That is correct.

The CHAIRMAN. All right.

Would you, Ms. Yakimov, your agency?

Ms. YAKIMOV. I think that is right, yes.

The CHAIRMAN. Ms. Kelsey, would you?

Ms. KELSEY. Yes.

The CHAIRMAN. What do you think?

Ms. SAUNDERS. Great.

The CHAIRMAN. Great.

What do you think, Mr. Taliaferro?

Mr. TALIAFERRO. Yes.

The CHAIRMAN. All right. So in effect, we are waiting for SSA

and the other benefit agencies.

Ms. SAUNDERS. Could I make one more comment, sir?

The CHAIRMAN. Yes.
22

Ms. SAUNDERS. We have asked all of our attorneys—and we have

many, many list serves, so probably thousands of attorneys have

been asked this across the country—if anybody has ever heard of

a bank who has refused an attachment order or dissolved an attachment order because it only is applicable to exempt funds which

has faced any potential legal liability, and nobody has ever heard

of such a situation.

So this is a straw man that is being put in front, as an excuse

for not going forward in this process. We think State law does not

really interfere.

I would like to make two other points. One is that, at least in

New York—and we have not looked in other States—it is clear that

no contempt of court action can be maintained against a bank for

the bank’s refusal to attach exempt funds. Second, it is specifically

a violation of State law, common law, unfair trade practice, and the

Fair Debt Collection Practices Act, for creditors to knowingly pursue exempt funds. So for a creditor to attack a bank for refusing

to freeze exempt funds would subject the creditor to legal liability

for doing that. This is why it is so unlikely that banks would be

subject to any legal risk for refusing to attach exempt funds.

The CHAIRMAN. There is one little problem here, as I see it. It

is usually a problem in life when you are waiting on somebody else

to do something that maybe you can do yourself. In this case, we

are in some sense kind of waiting on the benefit agencies. The

problem there is, they may not do what we are assuming they are

going to do. Why might they not? Because their recommendations

have to be cleared by the Office of Management and Budget.

The Office of Management and Budget notoriously restricts advice, the primary advice, that agencies have, or restricts actions

that the agencies might want to take. You cannot call OMB before

this committee. They do not go to anybody. It is just a very, very

difficult—potentially very difficult—problem.

I say that because I do not know whether any actions you take

might have to be cleared by OMB or not. My guess is that it is not

the case, it does not have to be cleared by OMB. If it does not have

to be cleared by OMB, the burden may fall on you to do what is

right because the benefit agencies may not be able to say what is

right because the Office of Management and Budget prevents them

from saying what is right here. That is a real possibility and, in

fact, a likely possibility, and almost a probability.

So I am going back to all of you. You may just have to do what

is right on your own and not have to wait, because the benefit

agencies may not be able to say what they think is right, because

the Office of Management and Budget may not let them. This Congress runs across that continually, time and time again. It is a

problem.

Ms. Kelsey?

Ms. KELSEY. If what you say is correct, doesn’t that point to the

need for congressional action?

The CHAIRMAN. Unless you, on your own, can stand up and issue

the regulations because you are interpreting the statute, a Federal

statute, under the Supremacy Clause of the Constitution, to prevail.

Ms. KELSEY. It is not our statute.
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The CHAIRMAN. We are all Americans. It is a Federal statute. It

is a Federal law. As I read the statute, it is basically that the benefits are protected.

Ms. KELSEY. The courts will look to the agency whose statute it

is, as we did. We consulted them and we got their interpretation.

If we were to come out with an interpretation of their law that is

different from their interpretation, it would not fare well in the

courts.

The CHAIRMAN. Ms. Saunders, your view of that? You may be

right, Ms. Kelsey. I am interested in Ms. Saunders’s reaction.

Ms. SAUNDERS. These agencies have regulatorily interpreted the

application of State laws, such as unfair trade practice laws, foreclosure laws, many State laws that are not strictly within these

agencies’ purview to interpret. I have been practicing consumer law

for several decades and have seen far too many instances where

these agencies are interpreting laws that were written by other entities outside of Congress to apply to consumer protections, and yet

those consumer protections are lifted by virtue of these agencies’

interpretation.

So, frankly, when I tell my colleagues that this is the reaction

on this situation, everybody laughs because there does not seem to

have been any inhibition of these agencies to interpret State laws

and other Federal laws that are not strictly under the National

Banking Act for the Comptroller of the Currency, or the Homeowners’ Loan Act for the Office of Thrift Supervision.

We are asking for an interpretation of banks’ activities under another law. It is not the interpretation of the Social Security Act, it

is the responsibility of how the banks should behave under this

other law.

Ms. WILLIAMS. Mr. Chairman, if I could just clarify one point of

the situations that Ms. Saunders referred to, because a number of

them involve my agency. They involve interpretations of the National Bank Act and the intersection of the National Bank Act with

various provisions of Federal law. It doesn’t involve situations that

are comparable to the one that we are grappling with here.

The CHAIRMAN. Ms. Saunders, I am just a little curious. I know

you are initially reluctant to have Congress solve this, thinking the

financial regulatory agencies can do it themselves. As I hear them,

I do not have a lot of confidence that they are going to do a lot

themselves. They should. It may require an act of Congress. Do you

think Congress should step in now or not?

Ms. SAUNDERS. If necessary, I would hope Congress would step

in. I am not sure that the law needs to be any clearer than it is,

but if that is what it takes——

The CHAIRMAN. All right. Well, I do not know if we are going to

get any further today at this point. It is my view that all of you,

your agencies, should go the extra mile to protect beneficiaries. The

law is pretty clear. Federal statute is pretty clear.

I know there are complexities in life, and there are other laws,

and all this and that, and it always happens. But I just think

sometimes it is right to just stand up and do what is right and find

a way to interpret those other laws, those other regulations, those

other agencies’ views, those other State decisions, whatever they

are, in a way that is consistent with primarily, if not totally, pro-
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tecting beneficiaries. I just urge you to find a way. Find a way to

do what is right.

Ms. YAKIMOV. Senator Baucus, I would add just two things. One

is, the guidance that we issued is out for public comment. It gives

us an opportunity to reflect on what we hear from consumer

groups, consumers, and the industry and to go from there.

And the other point I would make is, we do have an ANPR that

is out for public comment—public comment closes November 5—

specifically around freezing accounts with public benefits, with Federal protected benefits. So I do not think this is the end of the conversation. I think is one of several.

There is the dialogue on an interagency basis, there is a potential ANPR which we hope will work with other agencies, there is

the public comment on the guidance that we have issued. So I

think the agencies are very, very willing to continue to look at

these issues and to continue to work with you and others on identifying solutions.

The CHAIRMAN. All right. But there are two points here. Just

keep remembering Mr. Taliaferro in, one, driving toward the right

solution, and, two, doing it very quickly.

Thanks, everybody. Thanks for coming and testifying.

The hearing is adjourned.

[Whereupon, at 11:27 a.m., the hearing was concluded.]
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A P P E N D I X

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