No, we do not recommend reopening the account for purposes of setting off the VA loan proceeds. Because the account is closed, we recommend returning the deposit for that reason.

When the deposit account closed, your account agreement with the customer expired. Because your right of setoff stemmed from the account agreement, it is likely that your right of setoff also expired when the account closed (unless your account agreement includes special provisions stating that your right of setoff survives the closure of the account). Without the customer’s consent, you should not reopen the account for purposes of exercising a contractual right of setoff — not least because of the CFPB’s recent enforcement action related to unauthorized account openings.

As an aside, we note that if the account had remained open, you likely would have been permitted to exercise your contractual right of setoff in the VA loan deposit. At least two courts, including an Illinois federal court, have confirmed that banks may exercise a contractual right of setoff in social security deposits — provided that the debt being set off is directly related to the deposit account, such as a debt for an overdraft or overdraft fee. We believe that the same reasoning would apply to deposits of VA loan proceeds. However, those court decisions relied on the bank’s contractual right of setoff, which very likely expired when your bank closed the deposit account.

For resources related to our guidance, please see:

• FRB Philadelphia, Compliance Corner, Compliance Alert: Attachment and Right of Setoff of a Bank Account Receiving Social Security Benefits (Fourth Quarter 2007) (“In light of recent court decisions, the answer appears to be that the bank can exercise the right of setoff against an account receiving social security benefits if the debt to the bank arises out of the account. For example, in the recent case of Wilson v. Harris Bank N.A., 2007 U.S. Dist. LEXIS 65345 (N.D. Ill. Sept. 4, 2007), a customer's checking account was overdrawn because of allegedly unauthorized debit card transactions. The bank also assessed overdraft fees because the transactions exceeded the balance in the account. . . . The United States Court of Appeals for the Ninth Circuit reached a similar conclusion in Lopez v. Washington Mutual Bank, 302 F.3d 900 (9th Cir. 2002). . . .”)

• Wilson v. Harris N.A., 2007 WL 2608521, *10 (N.D. Ill. 2007) (“Notably, other courts have concluded that § 407 [of the Social Security Act] does not prohibit a bank from using Social Security funds to pay overdraft fees pursuant to a voluntarily-entered account agreement.”)

• Lopez v. Washington Mutual Bank, 302 F.3d 900, 904 (9th Cir. 2002) (“Although Nelson was actually construing 38 U.S.C. § 5301(a), which protects veterans’ benefits from creditors, we expressly noted the similarity to Section 407(a) and relied upon Social Security cases to reach the result. Id. at 895. . . . However . . . we agree with the district court that no violation of Section 407(a) occurred in this case because there is simply no indication that the plaintiffs did not voluntarily agree to apply their SSI benefits in such a fashion.”)