Question: A depositor presented our branch with something called a “DACA” and asked us to sign it. This is a really good customer, and we’d like to accommodate their request. What’s a DACA, and can we sign it?

Answer: Deposit Account Control Agreements (or “DACAs”) are not without their risks. Any bank agreeing to enter into one for the benefit of a depositor should understand what risks they’re signing up for, ensure they have proper systems in place to manage the agreement and confirm they are properly protected from legal liability under the agreement.

A DACA is the method by which a depositor grants a lender a security interest in its deposit account. If the lender is also the depository bank, it can automatically have its lien perfected by virtue of directly controlling the account.¹ However, if the lender is different than the depository institution, the lender must perfect that security interest by the “control” gained through a tri-party agreement with the borrower, lender and depository bank, commonly referred to as a DACA.² These can be in the form of a “blocked” DACA, where the customer’s access to an account is blocked; or they can be in the form of a “springing” DACA, where a customer’s access to the account is not cut off until the lender notifies the depository bank to do so.

This sounds simple enough – so what’s the risk?

Oftentimes banks fail to have proper operational protocols in place to deal with these agreements. The bank needs to conduct a check to ensure no existing loans are intended to be secured by the applicable deposit account. Not doing this can inadvertently leave the bank uncollateralized on a loan it intended to be cash-secured! The bank also needs to ensure it can track which accounts are subject to these agreements and when it needs to freeze access to the account. If the account isn’t frozen and a creditor wants to claim funds that should be in the deposit account, the depository bank could be liable to the lender for the account’s withdrawn funds.

Even if your bank handles all the operational risk perfectly, DACAs can still present risk to the bank. If the lender attempts to seize the account or have it blocked, litigation often arises between the lender and depositor, with your bank being drawn into a costly lawsuit. DACAs should properly indemnify the depository bank to protect them from the high costs of unwanted litigation.

Perhaps most importantly, many banks are unaware that they can (and should) charge for this service! They take on the operational risk of these agreements without being compensated in return. DACAs should include fee provisions for the depository bank.

If your bank decides it’s not interested in taking on the risk of entering into a DACA, Indiana law provides you with express protection and states that banks are not required to enter into DACAs, “even if its customer so requests or directs.”³

This information is provided for general education purposes and is not intended to be legal advice. Please consult legal counsel for specific guidance as to how this information applies to your institution’s circumstances or situation.