No, we do not believe that you can use the proceeds of the home sale to pay off the unsecured line of credit. However, you may have a right of setoff with respect to accounts or other monies the customer has at your bank. We note, though, that our guidance is based on your reading of your bank’s loan documents, and we strongly recommend consulting with your bank counsel to review the various loan agreements involved.

Illinois courts have held that cross-collateralization clauses (sometimes referred to as “dragnet” clauses) are permissible, provided they are clear and unambiguous. Here, however, the HELOC agreement did not cross-collateralize the borrower’s residence with other loans. In other words, the unsecured line of credit truly is unsecured.

However, if this unsecured line of credit does not arise from a credit card, your bank may be able to exercise setoff rights with respect to the unsecured debt against any other accounts that the deceased customer has with your bank. 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 account is owned by the same party that owes the matured debt to the bank). If the customer has any other accounts with your bank, you should review the account agreements to see if they authorize a setoff against the monies owed to your bank on the unsecured line of credit. Even if those agreements are silent on setoffs, you may be able to exercise your common law right of setoff, provided that the customer’s death triggered maturity under the line of credit agreement.  

Regarding future loan agreements, we are not aware of any law or case that prohibits the use of cross-collateralization clauses in consumer loans. However, we strongly caution against inserting cross-collateralization clauses into all of your consumer loan agreements, because doing so may cause you to inadvertently trigger and violate statutes and regulations that apply to residential real estate loans. For example, if your bank places a broad cross-collateralization clause in a mortgage document for a loan secured by residential real estate, any future loans made to the customer by your bank also would be secured by that residential real estate. Likewise, if your bank were to include a blanket cross-collateralization clause in a car loan, that loan also would be secured by the residential real estate. In either case, the cross-collateralization clause arguably would trigger the disclosures required by Truth-in-Lending Act and the Real Estate Settlement Procedures Act, as well as other applicable federal and state laws.

For resources related to our guidance, please see:

• Universal Guar. Life Ins. Co. v. Coughlin, 481 F.3d 458, 463 (7th Cir. 2007) (“Dragnet clauses are not favored in Illinois, but they are enforceable if they are clear and unambiguous.”)

• Fisher v. State Bank of Annawan, 163 Ill.2d 177, 181–182 (1994) (“. . . inquiry into equitable setoff is irrelevant where a contractual basis for a setoff exists.”)

• Selby v. DuQuoin State Bank, 223 Ill.App.3d 105, 107 (5th Dist. 1991) (“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.”)

• 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 1026.43(a) (Regulation Z applies to “any consumer credit transaction that is secured by a dwelling . . . .”)

• Regulation X, 12 CFR 1024.2 (RESPA applies to “any loan . . . that is secured by a first or subordinate lien on residential real property . . . designed principally for occupancy of from one to four families . . . .”)