A customer passed away who had a deposit account and a credit card account at our bank. Can we access the deposit account funds to pay off the customer’s outstanding credit card balance? We believe that our account agreements include generic setoff provisions. The customer had not set up an automatic credit card bill payment. We have not attached a levy on the funds or obtained a court order with respect to the debt.

Whether your bank may access the deposit account funds to pay the deceased customer’s credit card debt depends on a careful review of your account disclosures and agreements. Regulation Z generally prohibits banks from exercising setoff rights in deposit account funds with respect to consumer credit card debts. There is an exception for obtaining or enforcing a consensual security interest in the deposit account funds, but this exception would not apply to most generic setoff provisions.

Regulation Z’s Official Interpretations outline a number of specific requirements for creating a security interest under this exception, including disclosure in your account-opening disclosures and an indication (such as a separate signature or initials) that the borrower is aware of the security interest and specifically intends to grant it. Importantly, the security interest “must not be the functional equivalent of a right of offset,” and “routinely including in agreements contract language indicating that consumers are giving a security interest in any deposit accounts maintained with the issuer” does not suffice. We recommend reviewing your agreements and disclosures with bank counsel to determine whether they conform with the strict requirements for establishing a security interest. If not, we do not believe that your bank should use the deposit account funds to pay off the credit card debt.

Regulation Z also provides an exception to the setoff prohibition if the cardholder has agreed in writing to periodic deductions from their deposit account, but we believe that this exception would be inapplicable to a one-time setoff.

For resources related to our guidance, please see:

Regulation Z, 12 CFR 1026.12(d)(1) (“A card issuer may not take any action, either before or after termination of credit card privileges, to offset a cardholder’s indebtedness arising from a consumer credit transaction under the relevant credit card plan against funds of the cardholder held on deposit with the card issuer.”)

Regulation Z, 12 CFR 1026.12(d)(3) (“This paragraph does not prohibit a plan, if authorized in writing by the cardholder, under which the card issuer may periodically deduct all or part of the cardholder’s credit card debt from a deposit account held with the card issuer (subject to the limitations in § 1026.13(d)(1)) [billing error resolution requirements].”)

Regulation Z, 12 CFR 1026.12(d)(2) (“This paragraph does not alter or affect the right of a card issuer acting under state or Federal law to do any of the following with regard to funds of a cardholder held on deposit with the card issuer if the same procedure is constitutionally available to creditors generally: Obtain or enforce a consensual security interest in the funds; attach or otherwise levy upon the funds; or obtain or enforce a court order relating to the funds.”)

Official Interpretations, 12 CFR 1026, Paragraph 12(d)(2), Comment 1 (“In order to qualify for the exception stated in §1026.12(d)(2), a security interest must be affirmatively agreed to by the consumer and must be disclosed in the issuer’s account-opening disclosures under §1026.6. The security interest must not be the functional equivalent of a right of offset; as a result, routinely including in agreements contract language indicating that consumers are giving a security interest in any deposit accounts maintained with the issuer does not result in a security interest that falls within the exception in §1026.12(d)(2). For a security interest to qualify for the exception under §1026.12(d)(2) the following conditions must be met:

i. The consumer must be aware that granting a security interest is a condition for the credit card account (or for more favorable account terms) and must specifically intend to grant a security interest in a deposit account. Indicia of the consumer’s awareness and intent include at least one of the following (or a substantially similar procedure that evidences the consumer’s awareness and intent):

A. Separate signature or initials on the agreement indicating that a security interest is being given.

B. Placement of the security agreement on a separate page, or otherwise separating the security interest provisions from other contract and disclosure provisions.

C. Reference to a specific amount of deposited funds or to a specific deposit account number.

ii. The security interest must be obtainable and enforceable by creditors generally. If other creditors could not obtain a security interest in the consumer’s deposit accounts to the same extent as the card issuer, the security interest is prohibited by § 1026.12(d)(2).”)