Bank holding federal funds

If the bank receives an a levy or garnishment and the account has federal funds, those funds can't be touched (more or less). What if the bank itself is wanting to hold funds for back loan payments the customer has told us they have no intentions of paying. Wouldn't this situation be just like a garnishment or levy?

Exercising your right of offset under State law is one thing. There isn't a law in the land that would allow you to "hold" funds in the account without actually exercising that right.

I re-read my initial post I might not have been clear: What if the bank is wanting to hold federal funds to back loan payments? Would this be just like a garnishment or levy request?

My answer remains the same. Give me a citation in the law or your loan contract that would allow you to "hold" funds in a deposit account under those circumstances. You can either exercise your right of offset (which means you actually take the funds) or you don't. You can't hold funds. If someone at your institution thinks differently, you should double check with your legal counsel.

I agree with you, have a loan officer wanting to do this.

Hold funds, No.
Take funds and apply them to the loan, Yes (depending on contract language of course).

Hold funds, No.
Take funds and apply them to the loan, Yes (depending on contract language of course).

Even funds from Federal sources given to the customer.

Ask Navy Federal Credit Union if they still think it is a good idea to hold funds in checking accounts for past due loans.

"First in time, first in right." Remember that.

While "holding" the funds (federal or not) is a ridiculous idea, if your bank receives a levy or garnishment it cannot act to protect itself after that time if doing so would impede payment of the third party claim. If you do, now your bank owes the levy or garnishment regardless of whether you can extract the funds from the customer.

If state law doesn't prohibit and you spell it out in the promissory note, it's fine to maintain a reserve account from which matured payments can be deducted. Over a century ago, installment lending was born from this very idea. It was called the Morris Plan. Like any "plan", however, the bank can't create such an arrangement unilaterally and selectively on the fly...it must be approved in advance by the affected customer.

Offset (or, in some states, it's called "set off") may be the next move...or not. Get the bank's attorney involved now and you will improve the chances of working out of this loan without a loss. What's described in the OP is a substandard (or worse) loan and (unless the borrower's attitude and cooperation improves) you're probably headed to court for a judgement.

[This might be dumb, so forgive me] Tagging on to this - Where can I go to understand the issues with holding funds in a deposit account prior to set off for another deposit or loan account? This post appeared timely, as I just discovered this is a practice we have been doing. It apparently was at the request of someone who no longer works with us, and there is nothing in the departmental procedures documenting the reason.

It would relieve our staff many steps, so we're eager to make the change, but I wanted to ensure it was the direction to go prior to implementing it. I read the Navy Federal Credit Union consent order but it appears to only be discussing the freezing of electronic services, which isn't what we do.

Also wanted to note, our agreements provide we can offset/setoff - but don't specifically list how.

The right of set off or offset is controlled by:

*state statute and
*state court decisions.

It can be enhanced by contractual terms in the loan or the deposit agreement.

Start with the idea that your bank simply has no right to do it. The burden of proof should be on the person who thinks you have any such right because the odds are, you don't.

Even if you do have a right of setoff, you do not have a right to just put a "hold" on someone else's money. You either take the money or you leave it alone.

Thank you Ken!