We have an overdraft line of credit for our checking accounts which has a Debit Card attached. Under Reg Z a debit card is conisdered a credit card and you are not allowed a right of setoff on accounts with a credit card attached. I was given the information that we are allowed to have a right of setoff on these overdraft LOC's as long as we have it spelled out in the contract. If we didn't have it in the contract than we would not be allowed to a right of setoff that we generally have for any account.

I didn't think we could have it at all but the fellow said as long as we have it in the contract we are O.K..

Thanks for the response.

I would ask for the info source. That contractual provision would appear to contradict the requirements of "Z".

You may have written authorization to debit an account for payments. That needs to be written. But I don't believe those agreements are meant to be ongoing for the life of the agreement.

Mickey - I would show the "fellow" the following information and ask him "How is that again?".

Refer to Reg Z commentary 226.12(d)(1) - Comment(3), it clearly would indicate that these plans are covered under the right of off-set prohibition:

"For example, if the consumer writes a check that accesses an overdraft line of credit, the resulting indebtedness is subject to the offset prohibition since it is incurred through a credit card plan, even though the consumer did not use an associated check guarantee or debit card."

If you read further under the commentary at 226.12.(d)(2), it also clearly indicates that a standard provision in the contract will not provide the necessary means to circumvent the prohibition:

1. Security interest--limitations. In order to qualify for the exception stated in Sec. 226.12(d)(2), a security interest must be affirmatively agreed to by the consumer and must be disclosed in the issuer's initial disclosures under Sec. 226.6. The security interest must not be the functional equivalent of a right of offset; as a result, routinely including in agreements contract language indicating that consumers are giving a security interest in any deposit accounts maintained with the issuer does not result in a security interest that falls within the exception in Sec. 226.12(d)(2). For a security interest to qualify for the exception under Sec. 226.12(d)(2) the following conditions must be met:

The consumer must be aware that granting a security interest is a condition for the credit card account (or for more favorable account terms) and must specifically intend to grant a security interest in a deposit account. Indicia of the consumer's awareness and intent could include, for example:

--Separate signature or initials on the agreement indicating that a security interest is being given
--Placement of the security agreement on a separate page, or otherwise separating the security interest provisions from other contract and disclosure provisions
--Reference to a specific amount of deposited funds or to a specific deposit account number

The security interest must be obtainable and enforceable by creditors generally. If other creditors could not obtain a security interest in the consumer's deposit accounts to the same extent as the card issuer, the security interest is prohibited by Sec. 226.12(d)(2).

And the short answer is "What part of NO do you not understand?"

It's amazing when folks think that they can bypass the law by writing a provision in the contract.

So my original conclusion that this is not allowed is the correct answer. Don't you hate when you research and make a conclusion and then people try and make you second guess yourself. That's why I post hear...usually you can get a pretty conclusive answer.

Thanks!

In reply to:

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The security interest must be obtainable and enforceable by creditors generally. If other creditors could not obtain a security interest in the consumer's deposit accounts to the same extent as the card issuer, the security interest is prohibited by Sec. 226.12(d)(2).

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This is where the Revised Article 9 may come into play. Under RA9, a creditor CANNOT perfect a security interest in a deposit account to secure a consumer loan. That would leave you with state or common law. If you can enforce a security interest under state or common law, then perhaps this separate provision would work. Otherwise it would seem you don't meet the test.

You may want to consult with appropriate legal counsel if your bank wants to be able to offset via this separate provision.