Credit Card Offset

Posted By: M&M

Credit Card Offset - 09/30/20 04:26 PM

I've read the below in the 1026.12, but even after reading the commentary, I'm struggling to understand what this means and allows:

(2) Rights of the card issuer. This paragraph (d) does not alter or affect the right of a card issuer acting under state or Federal law to do any of the following with regard to funds of a cardholder held on deposit with the card issuer if the same procedure is constitutionally available to creditors generally: Obtain or enforce a consensual security interest in the funds; attach or otherwise levy upon the funds; or obtain or enforce a court order relating to the funds.

The commentary clarifies what an Issuer has to do to qualify for the exemption, and when I read the two sections in red below, they seem to contradict each other. But the specific criteria outlined seem to say that as long as we have it outlined in our agreement and draw distinction to it, it's ok to offset. Am I understanding that correctly?

Paragraph 12(d)(2)
1. Security interest—limitations. In order to qualify for the exception stated in §1026.12(d)(2), a security interest must be affirmatively agreed to by the consumer and must be disclosed in the issuer's account-opening disclosures under §1026.6. 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 §1026.12(d)(2). For a security interest to qualify for the exception under §1026.12(d)(2) the following conditions must be met:

i. 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 include at least one of the following (or a substantially similar procedure that evidences the consumer's awareness and intent):

A. Separate signature or initials on the agreement indicating that a security interest is being given.

B. Placement of the security agreement on a separate page, or otherwise separating the security interest provisions from other contract and disclosure provisions.

C. Reference to a specific amount of deposited funds or to a specific deposit account number.
Posted By: rlcarey

Re: Credit Card Offset - 09/30/20 04:55 PM

What is the conflict?? Your first highlighted section indicates that such a statement in the contract does not qualify for the exception. The second indicates it has to be a separate document.
Posted By: M&M

Re: Credit Card Offset - 09/30/20 06:42 PM

Does the second mean it has to be a separate document? I didn't read it that way since there is "or otherwise separating .." Does having it in a bold black box in the middle of the agreement satisfy the requirement?

However we outline it, if I'm understanding this correctly, if we give them a disclosure that says we will attach a "lien" to the deposit account, we can practice offset. Is that correct?
Posted By: rainman

Re: Credit Card Offset - 09/30/20 06:55 PM

This is a question you should run by your compliance attorney. I don't see that it requires a separate document; it lays out 3 options and also says that there are others.

ii. With respect to a credit card account other than a covered separate credit feature accessible by a hybrid prepaid-credit card as defined in § 1026.61, indicia of the consumer’s awareness and intent to grant a security interest in a deposit account include at least one of the following (or a substantially similar procedure that evidences the consumer’s awareness and intent):

A. Separate signature or initials on the agreement indicating that a security interest is being given.

B. Placement of the security agreement on a separate page, or otherwise separating the security interest provisions from other contract and disclosure provisions.

C. Reference to a specific amount of deposited funds or to a specific deposit account number.

It's not precisely the same language but Section 1026.17 requires that the fed box disclosures for closed end loans be "segregated" from "everything else." The Official Staff Comments to that section list a number of ways that the disclosures can be segregated even if they are part of the same document. Food for thought.
Posted By: rlcarey

Re: Credit Card Offset - 09/30/20 07:11 PM

Yes - sorry - I agree - you will also need to make sure that you comply with UCC Article 9 in your State.
Posted By: M&M

Re: Credit Card Offset - 10/01/20 12:11 AM

Back to my confusion, isn't the exception limited to a secured credit card product only?
Posted By: rainman

Re: Credit Card Offset - 10/01/20 12:41 AM

Define "secured credit card product." You can have a security interest (thus a "secured" product) without having a specific amount frozen to cover the card.*


*Subject to state law. Restrictions apply. See your dealer for details. Side effects include nausea, headaches, flatulence, and unsightly rash.**

**Sorry, got carried away.
Posted By: rlcarey

Re: Credit Card Offset - 10/01/20 11:16 AM

That is only addressing when you would ever be allowed to offset a deposit account for an amount due under the credit card agreement. You could secure the credit card by a any other sort of collateral, if that is what you are asking.
Posted By: M&M

Re: Credit Card Offset - 10/01/20 04:33 PM

From Rainman's comment- You can have a security interest (thus a "secured" product) without having a specific amount frozen to cover the card. I've always understood the "security interest" provision to be in reference to a credit card secured by funds in a deposit account, where there is an agreement at the onset that we will hold funds to cover the maximum credit limit.

But the card holder would have to agree to this. Without the cardholder's awareness and agreement, you couldn't just have a blanket statement plopped into the middle of your agreement that says we can take funds from your deposit account to pay outstanding credit card balances. Otherwise, it's the functional equivalent of a right of offset, which is prohibited. Correct?

My apologies- not trying to beat a dead horse here, but I'm just trying to discern between a true secured product vs a blanket disclosure without other measures to address the "security interest".

Thanks for your assistance!
Posted By: rlcarey

Re: Credit Card Offset - 10/01/20 05:37 PM

I have no idea what you are trying to accomplish.

You issue a credit for $1,000 and a condition of the card is that you require the person to establish a deposit account for $1,000. You then executed a security agreement for $1,000 pledging at least the $1,000 to the credit card account as collateral. Whether you allow them to deposit additional funds to that account and withdraw them is up to you.

Are you saying you plan on letting the customer withdraw the $1,000 and you do not care whether a balance is maintained?
Posted By: Dan Persfull

Re: Credit Card Offset - 10/01/20 05:58 PM

Without the cardholder's awareness and agreement, you couldn't just have a blanket statement plopped into the middle of your agreement that says we can take funds from your deposit account to pay outstanding credit card balances.

I would have to opine since no specific collateral is identified it would still be an equivalent of right of offset even with the cardholders acknowledgement.

A security agreement identifies what collateral is being taken. Such as XYZ Bank Savings Account 123456 in the amount of $X,XXX.

IMHO any blanket statement that refers to "deposit account" without specifically identifying the account and the amount of the hold would be the functional equivalent of the right of offset.
Posted By: rainman

Re: Credit Card Offset - 10/01/20 08:02 PM

Again, you really should be checking with the bank's counsel - what constitutes a security interest in your state may be different than others.

I will simply say that whether someone specifically agrees to a security interest (as required by Reg. Z) is a different question than the scope of that security interest or what the parties agree the borrower can do with the collateral.

Article 9 doesn't cover consumer deposit account security interest in most states (there are exceptions) but 9-104 expressly says that the creditor can have "control" (and thus a perfected security interest) in a deposit account even if the depositor is allowed to do transactions on the account. There's no reason that same concept can't apply in consumer transactions not covered by Article 9. But your state may have specific statutes or cases that address the issue. Check with counsel.
Posted By: rlcarey

Re: Credit Card Offset - 10/01/20 08:45 PM

I am not aware of any State in which you can have a secured interest in a deposit account - control or no control - without an executed security agreement.
Posted By: rainman

Re: Credit Card Offset - 10/02/20 12:29 AM

Nor am I. I was not implying that you don't need a security agreement. The question is what your security agreement says. 9-107 says you can allow the borrower to have transaction access to the account and still have "control" that perfects your security interest. 9-203 generally requires the security agreement to have a description of the collateral, but does not require the collateral description of the creditor has control pursuant to the security agreement under 9-107.

In other words, if the transaction is subject to article 9, the bank's security agreement can provide for a security interest in deposit accounts, and if those accounts are held with the bank, the security agreement does not have to specify a particular amount to be held as collateral, and the bank can allow the borrower to freely make deposits and withdrawals and still be perfected.
Posted By: rlcarey

Re: Credit Card Offset - 10/02/20 10:55 AM

I am not in disagreement, but if you have a legitimate security agreement, but do not mention and hold a specific amount in the account, then that arrangement is nothing but a sham right of offset and it really is not a secured credit card as contemplated in the regulation..
Posted By: rainman

Re: Credit Card Offset - 10/02/20 03:21 PM

That is a legitimate view. Another is that the regulation's focus (including the language around "functional right of offset") is on consumer awareness and intent, not on how the security interest operates.
Posted By: M&M

Re: Credit Card Offset - 10/02/20 05:18 PM

Thanks to all who weighed in on this. We don't have any type of agreement that is signed or acknowledged, thus my concern with trying to assert any type of claim against the funds in the deposit account.