IBA Compliance Connection

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An individual signed a security agreement pledging his certificate of deposit (CD) as collateral for his niece’s loan, which is now 45 days delinquent. Are there timing requirements before we can setoff the CD for the overdue loan? Do we have to notify the individual before we setoff his CD? Would it violate any privacy rules to send such a notification?

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We are not aware of any timing or notice requirements when exercising a right of setoff, but we recommend reviewing your loan agreement and security agreement for any contractual requirements with respect to timing and notice.

In addition, we do not believe that notifying the uncle of the loan delinquency and impending setoff would violate Illinois or federal financial privacy laws. First, Regulation P permits banks to disclose account information to “persons holding a legal or beneficial interest relating to the consumer.” In this case, we believe that the uncle who pledged his CD as collateral for his niece’s loan meets that criteria — he holds a legal interest relating to the consumer.

Second, both Regulation P and the Illinois Banking Act permit banks to disclose information “as necessary to effect, administer, or enforce a transaction” authorized by the customer or in connection with servicing a customer’s account. We believe that notifying the uncle about the setoff for the delinquent loan relates to these exceptions. The customer authorized the loan, and setting off the uncle’s account pursuant to the terms of the security agreement relates to servicing the loan.

For resources related to our guidance, please see:

  • Regulation P, 12 CFR 1016.15(2)(iv) (“The requirements for initial notice in § 1016.4(a)(2), for the opt out in §§ 1016.7 and 1016.10, and for service providers and joint marketing in § 1016.13 do not apply when you disclose nonpublic personal information: . . . To persons holding a legal or beneficial interest relating to the consumer . . .”)

  • Regulation P, 12 CFR 1016.14(a)(1) (“The requirements for initial notice in § 1016.4(a)(2), for the opt out in §§ 1016.7 and 1016.10, and for service providers and joint marketing in § 1016.13 do not apply if you disclose nonpublic personal information as necessary to effect, administer, or enforce a transaction that a consumer requests or authorizes, or in connection with: (1) Servicing or processing a financial product or service that a consumer requests or authorizes; . . .”)

  • Illinois Banking Act, 205 ILCS 5/48.1(b)(17) (“This Section does not prohibit: . . . (14) The disclosure of financial records or information as necessary to effect, administer, or enforce a transaction requested or authorized by the customer, or in connection with: (A) servicing or processing a financial product or service requested or authorized by the customer; (B) maintaining or servicing a customer’s account with the bank . . . .”)