Topic: Right of Setoff
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We have a customer who opened a safe deposit box in 2002 and stopped paying the rent in 2012, after which we had no more contact. The lease on the box expired in 2013. However, we have exercised a right of setoff in the customer’s deposit account to pay some of the past-due rental fees. Can we drill the box and remit the contents as unclaimed property?
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Yes, we believe that your bank may (and should) report and remit the safe deposit box property to the Treasurer’s office under the Illinois Revised Uniform Unclaimed Property Act (Illinois RUUPA). Generally, the Illinois RUUPA provides that safe deposit box property is considered unclaimed five years after the expiration of the lease or rental period…
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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.
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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…
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If we have charged off and closed an account, can we re-open the account to use a direct deposit (a non-government deposit) to offset the amount of the charge off?
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No, we do not believe that your bank may re-open the account to 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…
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A former business customer has a loan that has been charged off. An ACH credit transaction came in this morning to the customer’s old business checking account, which is now closed. Can we use the ACH payment to offset the charged off loan? Or do we have to return the payment? The transaction was a corporate credit entry (“CCD”). The business customer’s checking account was closed at our request as part of the workout regarding the overdue loan. The business customer has been dissolved and no longer exists.
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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 and your loan agreement likely both provided for a right of setoff relative to funds your former customer had on deposit, that customer no longer has funds on deposit, precluding a right of…
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Is there a deadline for collecting on a charged off account? A customer whose overdrawn account was charged off ten years ago has now opened a new account. We never sent the old debt to a collection agency or obtained judgment against the debtor. Can we collect on it now?
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We recommend consulting with bank counsel, but in our view, any applicable statute of limitations governing your ability to collect the debt likely has expired or is about to expire. Under Illinois law, different statutes of limitations apply depending on the basis for collecting on the debt. For example, actions to collect debts based on…
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We sometimes have customers who want to add an older teenager who is a minor to an account. Can a minor have joint ownership in a joint account, such as with a parent? Could the bank exercise a right of setoff in the parent’s other accounts for the minor’s overdrafts on the joint account? What identification should we require from the minor establishing a joint account with their parent?
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Yes, a minor can hold an account in joint ownership with another party, such as a parent. The Illinois Banking Act permits banks to open accounts for minors, “and the rules and regulations of such bank . . . shall be as binding upon such minor as if such minor were of full age and…
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One of our customers had set up automatic transfers from his checking account at our bank to make loan payments (for non-credit card loans). The customer has died. Can we continue withdrawing loan payments? What other procedures should we follow?
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We recommend reviewing your bank’s agreement with the customer that authorizes the automatic loan payments. If it provides that the customer’s debit authorization expires when the customer dies, your bank should cease debiting the loan payments. If your agreement is silent on this issue, your bank may be able to continue debiting the loan payments.…
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We just started offering health savings accounts (HSAs). If a customer cashes a check (for any reason) using their HSA, and the check is returned, can we offset the returned check amount against the HSA funds? Would that be a nonqualified distribution? Our account agreement holds the customer responsible for checks deposited in the HSA that are returned unpaid, but we do not deposit these checks when cashing them. We use IRS form 5305-C for our HSAs, which are custodial accounts.
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No, in our view, your bank should not exercise a setoff against funds in an HSA account for a check that it cashed for its HSA customer which subsequently was returned for insufficient funds. In general, under Illinois law, the right of setoff can arise contractually when a deposit account or loan agreement provides for…
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An individual opened a personal checking account and a sole proprietor account. The personal checking account is overdrawn. Can our bank use the sole proprietor account to offset the overdrawn personal checking account?
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Yes, we believe that your bank may exercise a valid right of setoff with respect to the sole proprietor account. 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…
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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…