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Consumer Banking and Payments Law: 10.2.6.2 Debt Must Have Matured

A bank cannot exercise setoff unless both its debt and the consumer’s debt have matured. Maturity is not an issue with respect to the bank’s debt to the consumer, because the customer has a right to funds the bank holds in the consumer’s savings or checking account.

On the other hand, whether a consumer’s debt to the bank has matured will depend on the facts of the case. Ordinarily, the consumer’s debt to the bank matures on any of the following dates:

Consumer Banking and Payments Law: 10.2.7.1 Account Must Be in Debtor’s Name

The setoff must be exercised against the customer-debtor’s account, not against an account that belongs to another person—such as an account that is held in trust by the debtor or that is held by the debtor as agent of another88—unless the account owner is secondarily liable.89 Setoff is tortious if the bank knows or has reason to know that funds in the account belong to another.90 Moreover, setoff cannot be used if the b

Consumer Banking and Payments Law: 10.2.7.2 Special Purpose Accounts

Banks may not set off accounts if they know that the account was set up for a special purpose.93 For example, if the bank knows the funds in the debtor’s account are being held in trust for a third party, the bank is liable for its setoff against those funds.94 Individual retirement accounts (IRAs),95 payroll accounts,96 and escrow accounts97 are other examples of

Consumer Banking and Payments Law: 10.2.7.5 Convenience Accounts

Some banks advise older depositors to put an offspring’s name on a joint account to enable the offspring to write checks “in an emergency” and then provide the customers with a contract allowing the entire account to be set off for the debt of either co-tenant.

Consumer Banking and Payments Law: 10.2.8.1 Generally

Certain sources of funds—primarily federal and state benefits payments—are exempt from garnishment, even when deposited in a bank account. In other words, a judgment creditor cannot reach these funds in the debtor’s bank account even with a garnishment order. The question is whether these same funds are exempt from a bank’s right of setoff—that is, can the bank can seize otherwise exempt funds deposited in that bank account to offset amounts the debtor owes to that bank?

Consumer Banking and Payments Law: 10.2.8.4 Are Deposited Benefits That Are Exempt from Garnishment Also Exempt from Setoff?

Many courts hold that, if funds in a bank account are exempt from garnishment, they are also exempt from setoff.127 The leading case, a California Supreme Court decision, states the reasoning behind this rule: “The assertion of a banker’s setoff has exactly the same effect as a third party’s levy of execution on the account—it deprives the depositor of the income that the state provided him to meet subsistence expenses, compelling the state either to give him additional money or leave him without means of physical survival.”

Consumer Banking and Payments Law: 10.2.9 Remedies for Wrongful Setoff

When a bank wrongfully sets off funds in the consumer’s account, the consumer’s remedy is for breach of contract.157 The measure of damages is at least the amount of the funds the bank has set off.158 If the bank had actual knowledge that the funds belonged to another person, the bank may be liable for conversion.159 In cases of conduct the court finds egregious, the consumer may be awarded punitive damages.160

Consumer Banking and Payments Law: 10.3 Security Interest in Deposit Accounts

A bank that wishes to avoid restrictions on the right of setoff, or a creditor that wishes to avoid restrictions on garnishment, may attempt to perform an end-run by trying to take a security interest in the consumer’s bank account. The consumer’s bank would do this by seeking a security interest at the time an account is opened and then claiming that money in the account is collateral for obligations later incurred by the consumer.

Consumer Banking and Payments Law: 7.2.4.1 Overview

The Regulation Z provisions that apply to hybrid prepaid-credit cards are too numerous to summarize briefly. Effective April 1, 2019, the rules generally apply to any credit feature that is offered by the prepaid account issuer, its affiliate, or its business partner and can be accessed using the prepaid card.

The following are some of the more noteworthy protections that cover hybrid prepaid-credit cards:

Consumer Banking and Payments Law: 7.2.4.2.1 Prepaid cards that are credit cards: the “hybrid prepaid-credit card”

As part of the prepaid rule, the CFPB created a new category of prepaid cards offering certain types of credit. Called the “hybrid prepaid-credit card,” the term is extensively defined and explained in new section 1026.61 of Regulation Z, effective April 1, 2019. Hybrid prepaid-credit cards are covered by the Truth in Lending Act’s Regulation Z, including the credit card rules as modified slightly for these hybrid cards.

A prepaid card242 is a hybrid prepaid-credit card if it can access credit under the following conditions:

Consumer Banking and Payments Law: 7.2.4.2.2 “Prepaid card” and “prepaid card issuers”

To be a hybrid prepaid-credit card, there must be a “prepaid card.” Somewhat confusingly, Regulation Z has its own definition, separate from Regulation E, of what constitutes a prepaid card for purposes of section 1026.61: “prepaid card” is defined as “any card, code, or other device that can be used to access a prepaid account.”258 “Prepaid account” is defined the same as in Regulation E.259 Thus, a “prepaid card” can include payroll cards and certain government benefits cards.

Consumer Banking and Payments Law: 7.2.4.2.4 When is a “credit feature” considered “covered”?

In order to be considered a hybrid prepaid-credit card, the credit feature accessed by the prepaid card must be a “covered separate credit feature” that meets certain requirements. (Even if it is not “covered” under the special rules for hybrid prepaid-credit cards, the credit feature is still likely to be covered by Regulation Z). The following are elements of a “covered separate credit feature,” discussed in greater length in the sections that follow:

Consumer Banking and Payments Law: 7.2.4.2.6 Affiliate or business partner

In order to be considered a hybrid prepaid-credit card, the credit feature must be offered by the prepaid card issuer itself or the issuer’s affiliate or business partner.315 If the credit is offered by a creditor that is not an affiliate or business partner, then the credit feature is “non-covered” and the card is not considered a hybrid prepaid-credit card, although it is likely separately covered under Regulation Z.316

Consumer Banking and Payments Law: 7.2.4.3.2 Types of incidental overdrafts

With two narrow exceptions discussed below, in order for a credit extension to fall within the exception for incidental overdrafts, the issuer must have an established policy and practice of declining to authorize any transaction for which it reasonably believes there are insufficient funds at the time of authorization.350

Examples of situations in which an incidental overdraft could happen despite funds being sufficient at the time of authorization include the following: