IBA Compliance Connection

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Illinois has issued income and property tax rebates to some of our consumer customers through ACH transfers. Some of the deposit accounts these ACH transfers have been directed to are already closed. Can we use these rebates to offset customers’ outstanding loan payments and overdraft fees? We assume we will need to return the payments for closed accounts but would like to confirm that we can use the rebate amounts for accounts that are open.

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We believe that rebates that have been credited to currently active consumer deposit accounts at your bank may be subject to your bank’s right of setoff. However, we do not believe your bank may exercise a right of setoff in funds directed to accounts that have been closed.

Under Illinois law, the right of setoff can arise either contractually (when a loan agreement or account agreement provides for a right of setoff) or under common law when there is “mutuality” of parties (the funds are owned by the same party that owes the matured debt to the bank). If your deposit account agreements or loan agreements provide for a valid right of setoff in your customers’ deposits, we believe that you may exercise a right of setoff in deposits that come in as ACH transfers for tax rebates.

However, customers who have already closed their accounts no longer have accounts or funds on deposit with your bank, and their account agreements are no longer enforceable (unless they include special language stating that your right of setoff survives the closure of the account). Additionally, the Nacha rules require your bank to return all entries that are not credited or otherwise made available to the intended recipient’s account using return code R02 – Account Closed. Consequently, we do not recommend accepting ACH transfers for closed accounts, nor do we recommend attempting to exercise a right of setoff in funds transferred by ACH to closed accounts.

For resources related to our guidance, please see:

  • Symanski v. First Nat. Bank of Danville, 242 Ill.App.3d 391, 396–397 (4th Dist. 1993) (“There are two bases on which defendant could assert a right of setoff . . . Under common law, a bank has the power to apply the deposit to the payment of such depositor’s indebtedness only when there are mutual demands and debts between the parties, and this right of setoff arises at the time the depositor’s indebtedness to the bank has matured. . . . As evidenced by our previous discussion, parties can contractually agree to a right to set off.”)
  • Nacha Rule 3.8.4 (“An RDFI must return all credit Entries that are not credited or otherwise made available to its Receivers’ accounts. The RDFI must Transmit such a Return Entry to its ACH Operator by the ACH Operator’s deposit deadline for the Return Entry to be made available to the ODFI no later than the opening of business on the second Banking Day following the Settlement Date of the original Entry.”)
  • Nacha Rules, Appendix Four – Return Entries (“R02 – Account Closed – A previously active account has been closed by action of the customer or the RDFI.”)