If a litigation or arbitration proceeding results in a judgment or award favoring the owner of the debt, the owner will then seek to collect on that judgment or award. In the case of an arbitration proceeding, the debt owner must then petition the court to enforce the award. 360. Id. at 5-6 (stating that consumer fee schedule, which is reduced relative to business fee schedule, is very
reasonable).
361. NAF Comment (Nov. 9, 2007) at 5 (“The relative simplicity of arbitration is a great benefit for consumers because it spares them the labyrinth of rules and procedures that must be followed in a court proceeding, even by parties who have no attorney. The complexity and rigidity of court rules can be a minefield for unwary consumers.”).
362. Id.
363. United States Chamber of Commerce, Elect Mediation and Arbitration, available at http://uschamber.com/sb/ business/p12/p12_8925.asp.
364. NAF Comment (Nov. 9, 2007) at 4. 365. NCLC-NACA Comment at 23.
366. The Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., actively promotes arbitration as a fair, quick, and useful alternative to the court system, and specifies that valid contracts providing that any disputes that ensue in the future must be resolved by arbitration generally are enforceable. The FAA limits the grounds on which courts can refuse to enforce an arbitration award. 9 U.S.C. §§ 9-11. In developing recommendations related to debt collection arbitration, the Commission will consider the implications of the FAA.
Frequently, debt collectors seek to collect by garnishing consumers’ wages or bank accounts. The Commission has stated that garnishment of wages generally is an appropriate means of collecting on a judgment or award.367
Consumer groups and others, however, assert that some collectors improperly garnish bank accounts containing federally-exempt funds such as Social Security benefits or disability funds.368 They further assert that garnishing these funds presents extraordinary difficulties for
consumers who subsist on them.369 Because the law requires consumers to receive many such
payments by direct deposit, consumers usually keep them in accounts in depository institutions. If a collector presents a financial institution (e.g., a bank) with a state court garnishment order, the institution sometimes freezes the funds in the account, including the exempt funds, to comply with the order. While these accounts are frozen, institutions often charge “NSF” (insufficient funds) fees to consumers whenever anyone attempts to draw on the account. According to NCLC and NACA, “The number of people who are being harmed by these practices has escalated significantly in recent years, largely due to the increase in the number of recipients whose benefits are electronically deposited into bank accounts.”370
At the workshop, participants agreed that garnishment of federally-exempt funds can cause hardship to consumers. Debt collector representatives asserted that it is unethical to garnish an account if it is known to contain only protected funds.371 Collector representatives reported,
however, that they only infrequently have knowledge that an account consists entirely of
protected funds, and that consumers rarely respond to requests for information about the contents of their bank accounts prior to a freeze.372 An FDIC representative, who generally urged debt
collectors to avoid freezing exempt funds, commented that there is uncertainty as to whether financial institutions are legally prohibited from garnishing an account containing only protected funds, or whether the protected status of the funds is merely an issue that a consumer may raise after garnishment to unfreeze the bank account and recover the funds.373
The federal banking regulators have initiated steps to address the problem of financial institutions garnishing federally-exempt funds. In September 2007, the Board of Governors 367. See, e.g., Statement of Basis and Purpose, FTC Credit Practices Rule, Final Rule, 49 Fed. Reg. 7740, 7744,
7755 (Mar. 1, 1984) (codified at 16 C.F.R. Part 444).
368. See, e.g, NCLC-NACA Comment at 18; Gina Calabrese Comment at 5; NEDAP Comment at 7-8. 369. See, e.g., NCLC-NACA Comment at 18; Calabrese Comment at 5.
370. NCLC-NACA Comment at 34.
371. See, e.g., Adam J. Olshan, Tr. II at 151, 154-55, 161-62; Lynn Drysdale, Tr. II at 152; Hobbs, Tr. II at 152-53; Steven D. Fritts, Tr. II at 158-59.
372. Olshan, Tr. II at 154-55; Fritts, Tr. II at 158-60. 373. Fritts, Tr. II at 160.
of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the National Credit Union Administration issued a joint request for public comment on proposed guidance seeking best practices for financial institutions to follow in protecting federally exempt funds.374 The
proposed guidance included nine “best practices,” including such features as: notifying the consumer; determining, as feasible, whether an account contains exempt funds; waiving NSF and other fees to the consumer while the account is frozen; and offering consumers segregated accounts that contain only federal benefit funds without commingling of other funds. The banking regulators received at least 22 comments on the proposed guidance from a variety of stakeholders.375 To date, the proposed guidance has not been finalized.
The Commission believes the federal banking agencies should address this issue in the first instance, as it involves compliance by regulated financial institutions with federal laws concerning exempt funds and state court orders. The FTC, however, has prepared consumer education materials advising federal benefit recipients how to keep their funds protected and avoid commingling protected funds with any other funds.376 In addition, the Commission will
continue to monitor federal and state developments377 related to garnishment of federally-exempt
funds to determine whether additional FTC action would benefit consumers.