Answer:
The two concepts are not related, unless I'm missing your question entirely.
The right of setoff is often not even mentioned in loan documents. In many states, it's a common law right of a creditor to apply its liabilities to an obligor to a loan in default.
- Borrower defaults on the note.
- Lender holds borrower's checking account balance.
- Lender takes funds from the checking account and applies them to the note.
Some states require notice by certified mail. Others might require other legal niceties, such as including blessed wording in the note. Right of setoff is not available (because of a provision of the Truth in Lending Act) for defaulted open-end credit accounts of consumers.
A due on sale clause, on the other hand, is wording that makes the entire balance of a note due and payable if the collateral securing the note is transferred to another owner (sold). This would effectively prevent the borrower from selling the property "subject to the mortgage." A related term is "assumption of the note and mortgage" which is what the borrower would like the buyer to be able to do, but the due on sale clause prevents this without written consent of the lender.
First published on BankersOnline.com 6/3/02
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