Topic: Right of Setoff
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Can we exercise a right of setoff in a customer’s IRA distribution check that was deposited into the customer’s checking account? The money will be applied to a past due loan payment for which the note creates a right of setoff in any deposit account.
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Yes, we believe that you may exercise a valid right of setoff of funds in a customer’s checking account, even if some of those funds are a deposit of a retirement account distribution. Under Illinois law, funds in IRA accounts typically are considered “special deposits” that are exempt from offset rights — the account creates…
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A customer passed away several months ago. She held a joint account with her son and also has an outstanding unsecured loan (not a credit card debt). Can we use the funds in the joint account to setoff the loan? Our loan agreement states that “all obligations of the Undersigned shall be binding upon Undersigned’s heirs, personal representatives, successors and assigns.” Our deposit account agreement permits us to “set-off funds in your account, held by you, jointly or individually to pay any debt you may owe us.”
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We believe that your bank may exercise a valid right of setoff in the joint account funds, even after the joint owner has died. 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…
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We have language in our note and customer deposit terms and conditions regarding setoff. Can we place a hold on a deposit account of a customer if their loan is in default? If so, what notice needs to be provided?
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Yes, we believe that your bank may place a hold on a deposit account when it has a valid right of setoff in the account funds. Under Illinois law, a valid right of setoff can arise contractually (when a note or deposit account agreement provides for a right of setoff) or under the common law…
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Do we have the authority to place holds on checking or savings accounts held by borrowers who are delinquent on loans held by our bank? Or do we have to remove funds from these accounts to exercise our setoff rights?
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Your bank likely has a valid right of setoff with respect to the deposit account, in which case the bank could place a hold on the account’s funds in the amount of the setoff. In our view, a valid right to setoff account funds encompasses the right to impose a temporary hold on the setoff…
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A consumer applied for a loan that is subject to the TILA-RESPA Integrated Disclosure (TRID) rules. The consumer indicated an intent to proceed with the loan, but we did not end up originating the loan. The consumer refuses to pay our appraisal fee. Can we pull the fee amount from the consumer’s checking account at our bank?
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Yes, we believe that your bank may exercise a valid right of setoff for the unpaid appraisal fee against the applicant’s checking account, provided that your bank properly disclosed the appraisal fee and that the applicant would be charged the fee to reimburse your bank for the cost of the appraisal (and the applicant had…
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We have several land trusts for which the bank is trustee. We charge nominal annual service fees, which many of the beneficiaries fail to pay. Can we exercise a right of setoff against the trust accounts? Or do you have any other suggestions for paying these fees? Our land trust agreements provide for an unsecured lien for unpaid annual trust fees. The land trusts do not hold any deposits at our bank.
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We do not believe that your bank may exercise a right of setoff in this situation. Setoff rights arise from mutual debts between parties, and in the bank context they apply primarily when a bank holds a borrower’s deposit, such as in the form of a checking account or certificate of deposit. Here, the land…
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A former customer presented an “on-us” check (drawn on our bank) payable to him for cashing. This customer had a charged off account with us, which now is closed. Our deposit account agreement did provide for a right of setoff. Can we withhold some of the check proceeds to offset the charged-off account?
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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 provides for a right of setoff relative to the deposit account, your former customer no longer has a deposit account or other funds held at your bank and is not attempting to…
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We originated a HELOC secured by the borrower’s primary residence. The same borrower also has an unsecured line of credit with us. The borrower recently passed away, and his home is being sold. We know that we can use the proceeds of the sale to pay off the HELOC, but can we also use the sale proceeds to pay off the unsecured line of credit? The unsecured line of credit agreement does not contain any setoff provisions, and the HELOC agreement does not contain a cross-collateralization clause. Also, while we already include cross-collateralization clauses in secured commercial loans, can we add these provisions to all secured consumer loans going forward? Would such a clause permit us to use the collateral to cover future unsecured loans?
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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…
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A few months ago, a tornado damaged a customer’s home, which secures a mortgage loan. The resulting insurance check was made payable to our bank and the customer. We required the customer to deposit the check in a savings account naming our bank as custodian (as required by Freddie Mac’s servicing guidelines). Can we use the money in that account to offset a charged-off farm loan?
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If the charged-off loan was made to your customer, then your bank may be able to exercise its setoff rights against the savings account. But first, we recommend reviewing Freddie Mac’s procedures for distributing insurance settlements. Freddie Mac’s procedures may require you to reserve the insurance funds for property repairs and related purposes. Under Illinois…
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If a customer owes us money (in the form of a charged off account or loan), are we required to cash a cashier’s check drawn on our bank and made payable to the customer? Can we keep the amount that the customer owes us from the cashier’s check?
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If your bank has a valid right of setoff against the customer, then you may exercise that right against a cashier’s check made payable to the customer — provided that the check is presented for payment at your bank by your customer. If instead the cashier’s check is presented by another party (for example, if…