Right of Setoff – Page 2 – IBA Compliance Connection

Does a payable on death (POD) beneficiary designation affect our contractual right of setoff with respect to a loan to the deceased party? In other words, can we still set off a customer’s account if the funds within the account immediately become the property of someone else after the customer’s death? We believe we can because our loan contracts identify “death” as a means of considering the loan in default for purposes of accelerating the balance due, and the relevant checking account is owned solely by the deceased borrower.

May 27, 2021

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We do not believe that your institution can assert a right of setoff against a deposit account with a POD designation after the account owner’s death. You may be able to assert a contractual right to the account funds if your deposit account or loan agreements specifically authorize your right of setoff in these circumstances,…

Is an account considered to be a minor account in Illinois if it is jointly owned by a legal guardian or parent over the age of majority? If it is not considered a minor account, can it be used for set off, overdraft privileges, and more? Also, is the age of majority in Illinois age 18 or age 16?

Apr 2, 2021

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We believe that you may treat an account that is jointly owned by a minor and an adult as you would any other account — including by enforcing your right of setoff, overdraft privileges, and other items addressed in the account agreement. The Illinois Joint Tenancy Act does not prevent a minor from jointly owning…

We received an Illinois Department of Revenue levy for a customer. This customer has a loan with our bank that is $1,000 past due and a deposit account with sufficient funds to pay both the levy and the past due amount. Our loan agreement provides for the right of setoff. Can we place a hold on the deposit account for the tax levy and offset $1,000 from the deposit account to pay the loan balance? Or, are we only allowed to offset the loan balance in the same amount as the tax levy?

Jan 3, 2020

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Since there are sufficient funds in the account, we believe that your bank may place a hold for the tax levy and exercise a contractual right of setoff under your loan agreement, provided that your loan agreement permits you to exercise a right of setoff before the loan has gone into default. Under Illinois law,…

If we exercise our right of setoff under the terms of a loan agreement and debit the funds from the borrower’s deposit account to pay a delinquent payment, are we required to provide written notice to the borrower each time a payment is debited?

Aug 1, 2019

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We are not aware of any federal or Illinois notice requirements when exercising a right of setoff, but we recommend reviewing your account agreements for any contractual notice requirements. However, if your account agreements are silent as to whether notice is required when exercising your right of setoff, your bank still may wish to consider…

We have an individual customer who would like to pledge a certificate of deposit (CD) issued by our bank as collateral for a commercial loan. The CD is held in joint tenancy. Do all of the CD’s owners need to sign a security agreement pledging the CD as collateral for the loan?

Jul 9, 2019

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Generally, the Illinois Supreme Court has held that a joint deposit account is subject to the provisions of the contract between the bank and its depositors, and one joint depositor may unilaterally pledge the interests of an entire joint account if allowed by the account agreement. Specifically, the Illinois Supreme Court has recognized that jointly…

Our bank received a notice of reclamation from the Treasury Department in October of 2017 regarding the death of a customer who died in June of 2017. The customer’s daughter, who is a joint owner on the account, did not notify us of the death. The account received supplemental security income (SSI) payments for July, August, and September of 2017. We returned the full SSI payments for July and August to the Treasury Department, and a partial payment for September due to insufficient funds remaining in the account. Last month, the Treasury Department debited the balance of the September payment from our bank. Are we liable for more than 45 days’ worth of benefit payments? If so, can we offset the funds from another joint account the daughter has with our bank?

Mar 28, 2019

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Yes, in these circumstances your bank is liable to the Treasury Department for more than 45 days’ worth of benefit payments. The Treasury is authorized to recover the post-death benefit payments from two sources: (1) from all post-death benefit payments in the recipient’s account, and (2) from the outstanding balance of any remaining post-death benefit…

One of our customers is a representative payee on two deposit accounts. Both accounts have the exact same ownership, showing the customer as representative payee for a social security beneficiary. However, only one of the accounts receives social security payments, and that account now is overdrawn. We have confirmed that the other account has not received any social security payments, although we know that the customer does move funds between the accounts. Do we have a right of setoff in the other account to cover the overdraft?

Jan 2, 2019

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Yes, we believe that your bank would have a valid right of setoff in the second account. From what you have told us, your deposit account agreement provides for a contractual right of setoff, and both accounts have identical ownership. We note that the second account may contain some social security benefit payments that have…

We are a national bank. We own an accounting firm; it is not a subsidiary. We would like to offset deposit accounts to pay matured and past-due tax preparation bills. Does the doctrine of mutuality exist between our deposit customers and the accounting firm when we own 100% of the accounting firm?

Dec 13, 2018

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Under Illinois law, the right of setoff can arise either contractually (when a loan agreement or deposit 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). In either scenario, your…

We received a child support payment for a customer whose deposit account was closed and charged off due to overdrafts. Can we apply the child support payment to offset the unpaid overdraft fees?

Dec 12, 2018

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No, we do not believe that your bank may exercise a right of setoff in this situation. While your deposit account agreement likely provided for a right of setoff relative to funds your former customer had on deposit, that customer no longer has a deposit account or funds on deposit, precluding a right of setoff.…

We have a loan that was charged off approximately thirty years ago. The bank never foreclosed on the property and the has borrower passed away. The borrower’s estate was not probated, and two of his four children were unwilling to quitclaim the property to the bank. We have been paying the taxes on the property and receive crop income from the person who leases and farms the property. All crop income received has been held in a separate escrow account, and we have used the bank’s own funds to pay the property taxes. What can we do with the escrowed income?

Nov 20, 2018

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We strongly recommend reviewing the loan documents with bank counsel to determine if the bank has a right of setoff in the crop income, based on the terms of those loan documents. The statute of limitations for enforcing a promissory note in court is ten years from the date a default occurred. However, each subsequent…

Topic: Right of Setoff