Q: A customer deposited a check into a savings account, the funds from which were made available, and then transferred the funds into a savings account. The savings account receives social security benefits. The check is now being returned. Can the bank exercise the right of setoff against the savings account?
A: This is a fine-line question that has several moving parts. First, the bank potentially would be able to offset against funds in the savings account to the extent those funds are not protected under 31 CFR 212. This requires the bank to calculate the “protected amount,” in accordance with that section, with any remainder being available for setoff.
But when an account receives federally protected funds, like in this scenario, whether the bank can exercise the right of setoff against those funds as well has not been clearly established by courts or available regulatory guidance. While some jurisdictions appear to permit this practice, the law is not uniform. Therefore, unless the bank confirms the specific stance on the issue with the bank’s jurisdiction or further clarification is obtained, C/A advises not setting-off against federally protected funds.
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