First of all, is it correct that I cannot hold monies that come from Social Security or VA Benefits for a garnishment? If the customer has a CD, are these funds available? The funds in the CD came from the checking account.

This http://www.bankersonline.com/topstory/75fedreg/75FR20299.pdf provides a good summary of the law in this area.

Quick answer is that the deposit account is probably exempt and the CD is not but that is my off the cuff response.

Last I knew, CDs are deposit accounts. If funds are exempt they are exempt regardless of the type of deposit account that holds them.

That said, SSA and VA benefit payments are exempt from garnishment under most circumstances, but not all. The Federal Register document linked by SJB provides a good overview of the complexities of your question. But do be careful. Note that the agencies listed on that document have posted a PROPOSED rule, and you should not implement it until it's final.

You also need to pay attention to any state laws that expand on or otherwise affect what's exempt from garnishment, attachment or other legal process.

You may also want to check your state garnishment laws. The garnishment law in Oregon was changed the first of this year. Direct deposited funds for seven payment types are not subject to garnishment if they were received during the calendar month preceding the garnishment. Social Security and VA Benefits are among the seven listed in ORS 18.619. This should make things interesting out here if the Treasury's Proposed Rule becomes Final!

http://www.bankersonline.com/topstory/75fedreg/75FR20299.pdf

Does anyone know if this became law?

We operate under the plan that we inform the courts if the funds are exempt.

This makes it sound like we can hold and submit funds and let the customer challenge the exempt status with whoever is garnishing the funds. What are other banks doing?

It's a proposed regulation; it is not the law. It's likely that they will finalize a regulation, but there is no projected time frame as to 1) when it will be published or 2) when it would take effect.

As proposed, in response to a court order for garnishment your bank would be required to review the customer's account activity for certain protected federal payments. You would hold onto at least some of those amounts and not remit them in response to the garnishment. (It's a lot more complicated than that.)