It seems second nature that when a bank has a loan secured by a deposit account, it checks the security interest field in the Fed box that a contractual right of setoff had been taken in the borrower's deposit accounts. But recently someone said that the right of offset is recognized by IL state law and does not create a disclosable security interest and therefore, should not be included in the Fed Box.

Putting it another way, IL state law does not consider right of setoff to be a "security interest" so therefore the disclosable security interest does not apply and it should not be included in the Fed Box.

I've been told that this interpretation has been mentioned by the FDIC to some IL banks. I've never heard of it.

We use LaserPro and it's apparent that LaserPro's take is that they are saying to check with your juridiction (the state?) to see if you should include the security interest disclosure in the Fed box.

This is the first that I've ever heard of this. Any input would be appreciated.

If it is true that it should not be included in the Fed Box for loans in IL, I'd appreciate a specific cite. (As documentation if any FDIC examiner questioned it.)

1) If you have taken an actual deposit account as security for a loan, it is not a right of offset issue. You are going to have a signed security interest document granting a specific interest in the deposit account in lieu of making the loan. That security interest in the deposit account has to be specifically disclosed and depending on the interest rate on the deposit account, the required deposit disclosure is also required.

2) What you are talking about is when you do not have a specific security interest in a deposit account, but State law may allow you a right to offset any past due debt against any asset account of the customer that you also might hold. This disclosure is most likely based on the Regulation Z commentary:

1026.2(a)(25) Security Interest

1. Threshold test. The threshold test is whether a particular interest in property is recognized as a security interest under applicable law. The regulation does not determine whether a particular interest is a security interest under applicable law. If the creditor is unsure whether a particular interest is a security interest under applicable law (for example, if statutes and case law are either silent or inconclusive on the issue), the creditor may at its option consider such interests as security interests for Truth in Lending purposes.

Thanks Randy for your response.

Here's the "offending" clause: SECURITY. I am giving a s security interest in our Certificate of Deposit. In addition, Lender has also reserved a contractual right of setoff in my accounts, including deposit accounts.

Apparently the "In addition" sentence is what's causing the issue. Are you saying that since we have a definite security interest, we cannot also have a right of set-off?

No, I am not saying that, unless your State law prohibits it. LaserPro, as far as I know, adds that last sentence to almost every security interest disclosure they print at most of the banks that I audit. This is regardless if it also involves a security interest in a deposit account, vehicle, etc. It also appears on unsecured loans. I think they put it on under the above Threshold Test so they don't have to make a determination whether it rises to the level of a security interest based on the State that you may be in.

My understanding of that, in the case where a CD is the collateral, is that you have a security interest in the CD, and in addition, you have set off rights against any other deposits.

I'm still researching it, but apparently the issue is that how the right of set off is handled is a State-level issue and that it should not be in the Fed box, since that's a Federal requirement.

I will let you know what I find out.

You need to reread the citation that I previously quoted. It allows it, I would not spend a lot of time nor lose any sleep over it. As I said, it appears in every Fed box that LaserPro produces and has never been criticized as far as I am aware and I have been in dozens of banks that use these forms. I looked at 30 consumer loans today that were either unsecured or secured by various collateral and it is on every one of them.

I'm taking your advice and not losing any sleep over it. I've got bigger fires to worry about!