By  Thu Feb 27, 2014

Simon Says: Why Your Bank Can Take Your Savings to Pay a Loan

James Cohen / Flickr | http://www.flickr.com/photos/jcohen97/7176803424/

James Cohen / Flickr source

Having all your money at a single financial institution can be a convenient setup, but many customers are wary of a bank’s ability to take money from one account to pay off another.

Q: I have my mortgage and a credit card with Bank of America. I also have a checking account with them. I hear that they can dip into my checking account if I miss a payment. Is this true? Isn’t there a law that forbids them from accessing my other accounts without my consent? Even though I’m on top of my finances now, I don’t like that they can do that. I might consider using another bank for my checking account.

- Christine B.

A: Christine, while it may seem unfair that your bank can touch your money without your permission, you gave them the right to do so when you signed up to be a customer. The legal clause that governs such a practice is called “right of setoff,” which is reserved by most financial institutions.

Here’s a part of the setoff section of Bank of America’s account agreement:

“We may take or setoff funds in any or all of your accounts with us and with our affiliates for direct, indirect and acquired obligations that you owe us, regardless of the source of funds in the account. This provision does not apply to IRA or tax-qualified retirement accounts, to consumer credit card obligations or where otherwise prohibited by law.”

In your case, Bank of America could use your checking account funds to make a payment toward your Bank of America mortgage. But, it cannot do this for your Bank of America credit card.

The terms may differ from bank to bank, but the right of setoff usually excludes retirement accounts and any personal credit cards. So, the bank cannot use retirements funds to settle a debt and the bank cannot use any funds to pay off a personal credit card account. Joint accounts and business credit cards are not excluded.

Another right-to-setoff scenario is when you have an overdrawn balance on your checking account and the bank reserves the right to close a certificate of deposit (that you have with the same bank) to correct the negative balance, even if it means that you’ll get hit with an early withdrawal penalty.

In Capital One’s setoff provision, the bank states, “We may exercise our right of set-off without liability to you even if it results in an interest penalty or dishonor of subsequent checks and other items with respect to your account.”

And, banks may use their right of setoff without any prior notice.

On paper, it does seem like an unjust practice. However, most bank customers do not have to worry about it as long as their accounts are kept current.

If your intention is to keep your accounts in good standing, don’t be too concerned. But, yes, switching to another bank for your checking account will prevent Bank of America from accessing your liquid funds through the right of setoff.

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