Fundamentals of Set-off Rights

Banker Resource
December 14, 2012 — 1,087 views  
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The fundamentals of set-off rights refer to either a creditor's explicit right, or an agreement by parties to identify portions of a debt that could be offset with other amounts owed, should one of the interested parties default. This statute was instituted in order to facilitate reconciliation between defaulted loan amounts and any deposit, retainers or separate amounts or accounts that could be used to offset the remaining defaulted principal.

The basic tenant of the rights outline a firm’s ability to identify all accounts held by a customer and, where applicable, combine or “offset” those balances in order to bring a delinquent or defaulted loan current. Banks, for instance, can retain the legal right to seize a borrower’s account balance in the same bank, applying those amounts to any outstanding defaulted balance as it is not uncommon for customers to have multiple accounts with a single institution. It is worth noting that these offset rights are not applicable to credit cards or consumer loans.

Certain conditions must be met before a firm can proceed with offsetting debts. Once the following criterion has been met, measures can be taken to pursue accounts available for offset purposes.

• The accounts must be held by the same customer. You cannot pursue funds from joint accounts, or related accounts. The accounts available for offset must have identical account owners and registrations.
• The accounts must be with the same institution or firm. You cannot attach funds held by the same account owners at other institutions, even if those institutions are subsidiaries of the same company.
• The owners of all the accounts must act in the same capacity for each. For instance, if an individual is a trustee on one account, they must also be a trustee on the other account.
• The amount owed must be considered “due and payable.” For example, if only a single payment has been missed, then the firm cannot offset the full balance of the loan, only what is overdue.

Although set-off rights do not have to be explicitly agreed upon in advance by both parties and the firms have the legal rights to pursue the means to remedy delinquent debts, it is common practice that a firm would warn a customer prior to exercising the right. It is good customer service to provide ample opportunity for the debtor to either bring the account current, or transfer the funds themselves.

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