Lenders' right to offset: What you need to know
Little-known clause allows funds to be pulled from your accounts to pay debts
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There may be months when you have to miss a payment on your car loan, mortgage or your credit card. If this continues, your bank or credit union has the right to offset your debt by tapping your other accounts to pay off what you owe.
“The right to offset is when financial institutions have the ability to grab money out of a deposit account, like your checking or savings, in order to satisfy an outstanding debt to the same institution.” says Joe Ridout, manager of consumer services at Consumer Action.
When the right to offset occurs, it can trigger a snowball effect on your finances, warns Kathryn Bossler, a financial counselor with GreenPath Financial Wellness in Detroit.
“If you’re already in a financial hardship, you don’t want to be surprised that the money you were counting on is not there,” she says. She adds she sees this a lot with credit unions: Her clients lose their month’s rent or cash for groceries because the right to offset was triggered without their knowledge.
The right to offset ‘can be purposely vague’
The right to offset is a murky clause. Banks and credit unions use the right to offset at their discretion, and how it’s applied varies by financial institution. Federal and state laws also add limitations to how much money can be taken from your accounts.
There also are some rigid restrictions covering the right to offset. The Federal Reserve Board’s Regulation Z, Section 226.12(d), bars financial institutions from applying the right to offset to credit card debts.
This is why you don’t see the right to offset in your terms and conditions for your credit card, says Betty Riess, a Bank of America spokeswoman.
Ridout says state laws add more limitations. In California, where he is based, financial institutions can’t deplete your accounts below $1,000. This measure is meant to protect low-income families from losing the income they have on hand.
In other instances, states protect against withdrawing funds from disability, unemployment or other Social Security benefits.
Carrie Hunt, executive vice president of government affairs and general counsel at the National Association of Federal Credit Unions (NAFCU), says the right to offset is covered in the Federal Credit Union Act’s Section 107(11).
“One significant exception to this rule is credit card accounts,” she says.
If it’s spelled out in the account agreement, the right to offset applies to credit unions’ mortgages, car loans, small-dollar loans and other signature loans, she said.
“It certainly is a tool, and it’s important for credit union members to be aware of it,” she says. “It’s not the preferred course of action. It’s the last resort.”
How to protect yourself from the right to offset
“It’s so rare for consumers to be aware that their financial institution has the right to offset until it’s already too late and their money has been snatched away to pay off the outstanding debt,” Ridout says.
“If they knew, they surely would have parked savings to a different institution where they didn’t have debt obligations.”
If you have debts you worry you may not be able to keep up with, set up a new account with another institution and update your employer and any other payees with the new information. This includes any government benefits you receive.
“If you really want peace of mind, read your contract and loan agreement to find out if the clause is in there,” Bossler says. If a “right to offset” clause is elusive, pick up the phone or visit your branch to understand the specifics, she says.
Talk to your bank or credit union
The experts agree the right to offset is often applied when all else fails, so if you foresee financial trouble, call your creditor.
Hunt says credit unions are often very understanding of financial issues.
Your bank may not know you’ve lost your job or had to pay for emergency expenses. Explain your problem, and your financial institution may come up with a solution, she says.
They could let you defer a payment to the end of your loan or change a due date, Bossler says.
“The biggest mistake people make during financial hardship is that they put their head in the sand and let things fall how they fall,” she says.
|How three big banks handle the right to offset|
Wells Fargo: “We have the right to apply funds in your accounts to any debt you owe us,” Wells Fargo’s consumer account agreement (updated April 24, 2017) states. “When we setoff a debt you owe us, we reduce the funds in your accounts by the amount of the debt. We are not required to give you any prior notice to exercise our right of setoff.
“A ‘debt’ includes any amount you owe individually or together with someone else both now or in the future. It includes any overdrafts and our fees. We may setoff for any debt you owe us that is due or past due as allowed by the laws governing your account. ... Our right to setoff extends to any federal or state benefit payments (including Social Security benefits) deposited to your account.”
SunTrust: “If you owe SunTrust money as a borrower, guarantor or otherwise, and it becomes due, the bank shall have the right under the law … to use the money from your account to pay the debt even if withdrawal results in an interest penalty, dishonor of checks or other unavailability of funds,” SunTrust’s rules and regulations state.
“You agree that such a right includes the bank’s right to use proceeds from government benefits, including Social Security, to pay such debts, including overdrafts and account fees.”
SunTrust spokeswoman Angela Amberg said in an email, “We review each situation individually taking into account the circumstances and type of loan or account” before the right to offset is typically triggered.
Bank of America: “We may take or setoff funds in any or all of your accounts with us and with our affiliates for direct, indirect and acquired obligations that you owe us, regardless of the source of funds in an account. This provision does not apply to IRA or tax-qualified retirement accounts, to consumer credit card obligations or where otherwise prohibited by law,” the deposit agreement terms state.
“Your accounts include both accounts you own individually and accounts you own jointly with others,” the agreement adds.
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