Provisions Which Should be in Your Deposit Account Agreement

Overview

There are lots of issues or topics that you could address in your deposit account agreement. Obviously, you cannot deal with all of them (nor would you necessarily want to—see the next section). Following is a list of the issues or topics we feel are important enough to include in your account agreement.

Don’t worry too much, though, if your account agreement does not contain some of the provisions we recommend. These are only suggestions, and the drafter of your agreement may have good reasons for including some provisions we don’t mention and leaving out some that we do.

Some of the items we list below are required disclosures under the federal Truth-in-Savings Act. For example, the Truth-in-Savings Act requires that you disclose, among other things, your fees and charges and your rules concerning payment of interest. Therefore, these items might appear in a separate disclosure rather than within the body of your account agreement. It is still important, however, for these items to be contractual terms and so your account agreement should cross-reference them. For example, your account agreement might have the depositor acknowledge receipt of and agree to the terms of the separate Truth-in-Savings disclosure.

These are the issues we feel are important enough to address in your deposit account agreement. You may think of others that are just as important or, perhaps, more important in your area of the country. As we said earlier, there are lots of issues that your agreement could address, and that brings us to our next topic, the dangers in trying to do too much with your account agreement.

Fees and Charges

You should state what your fees and charges are, along with an explanation of when they will be imposed if that is not readily apparent. (For example, a fee for a “stop-payment order” probably needs no explanation.) You should list all the charges that you impose with any frequency, especially those you impose by taking the amount of the charge directly out of the account balance. Charges for services which are not a part of the normal operation of the account—a fee for issuing a cashier’s or teller’s check, for example—probably do not need to be listed, although there is no harm in doing so. Here are some of the fees that we have included as standard language in our account agreement forms:

Don’t be afraid to state the amount of the fee in your contract even though the amount of your fees will undoubtedly change in the future. As we will see later, you should include in your contract a provision giving you the right to amend the terms of the contract. This will enable you to change the fee amounts.

Your contract should also include language by which the borrower promises to pay the fees and charges as they are earned and authorizes you to deduct the earned charges from the account balance.

Finally, you should confirm your legal authority for charging the fees you charge and determine whether state or federal law imposes any conditions on your ability to charge them. For example, federal credit unions are authorized under regulations of the National Credit Union Administration to allow a member to overdraw his/her account without the credit union having a credit application from the member on file. But, in order to have such authority, the credit union must have written policies that:

…set a cap on the total dollar amount of all overdrafts the credit union will honor consistent with the credit union’s ability to absorb losses; establish a time limit not to exceed forty-five calendar days for a member either to deposit funds or obtain an approved loan from the credit union to cover each overdraft; limit the dollar amount of overdrafts the credit union will honor per member; and establish the fee and interest rate, if any, the credit union will charge members for honoring overdrafts.

[12 CFR 701.21(c)(3), effective July 1, 2000, emphasis added.]

Rules concerning payment of interest

For interest-bearing accounts, your deposit account agreement should state the rules that will govern the computation of interest. These include the annual rate of interest, the compounding frequency, the resulting annual yield, how frequently interest is paid (which is not necessarily the same as the compounding frequency), and how many days are assumed to be in a year for purposes of calculating the interest (for example, a year might be assumed to have 360 days for interest calculation purposes, meaning that each day the account balance earns 1/360 of the annual rate of interest). If the interest rate is going to be variable, you should also state how frequently the rate will change, how new rates will be calculated (e.g., at your discretion or by adding a certain margin to a particular index rate), and whether there are any rate caps or floors (percentages above which and below which the annual interest rate will not go).

Form of ownership of the account

Withdrawal restrictions

Your deposit account agreement should include any restrictions on withdrawals, such as which of the account holders can make withdrawals, whether more than one signature is required for a withdrawal, etc. Including these restrictions in your account agreement will shield you from liability when you refuse to pay a check or allow a withdrawal when the proper conditions have not been met. For example, if the customers on a joint account want you to honor only checks and withdrawal requests with both account holders’ signatures on them, and this is stated in the account agreement, then neither of them can hold you liable for refusing to pay a check with only one of their signatures on it. It’s also a good idea to include a statement in your deposit account agreement saying that, unless indicated to the contrary somewhere on the form, any one of the account holders can make withdrawals or write checks on his or her own signature. Such a provision would be valuable should you forget to raise the issue of withdrawal restrictions with the customer. The effect is to authorize each account holder to write checks and make withdrawals on his or her own signature, thereby settling the issue in the way most convenient to you.

Liability for account deficits

The agreement should include a statement that the depositor agrees to be liable for any account deficits (negative balances) as well as any costs you incur in collecting the account deficit, such as attorneys’ fees, court costs, etc., to the extent permitted by law. Account deficits could occur when the depositor overdraws the account or when you impose a fee against an account with a zero balance. The provision should say that if there is more than one depositor, the depositors agree to be “jointly and severally” (together and individually) liable for account deficits and collection costs, and that each agrees to be liable regardless of which account holder caused the account deficit

Provisional credit on noncurrency deposits

When a customer makes a deposit of something other than currency (such as a deposit of a check), you want the credit you make to the customer’s account to be only provisional, meaning that you can revoke the credit (charge back the account) if the item the customer deposited is returned unpaid. Your deposit account agreement should, therefore, state that these sorts of deposits will only be given provisional credit until they are finally paid, at which time the credit will be final.

Regulatory restrictions on certain types of accounts

Various regulations condition your ability to offer certain types of accounts upon your placing certain restrictions on the operation of the account. These restrictions should be included in your deposit account agreement.

First, we should mention a historical restriction that was repealed by the Dodd-Frank Act, effective July 21, 2011. Previously the regulations prohibited you from paying interest on “demand deposits,” or accounts where the balance is payable to the depositor on demand. [See the chapter in this manual entitled “Types of Deposit Accounts” for details on the prohibition against paying interest on demand deposits.] In order to pay interest on the account, the account had to be something other than a “demand deposit,” and to do that, according to the regulations, you had to reserve the right to require at least seven days’ written notice prior to a withdrawal. So, you should have included in your deposit account agreement a statement saying that on interest-bearing accounts you reserve the right to require at least seven days’ written notice prior to a withdrawal. Of course, you did not have to always exercise this right—you only had to reserve the right in your contract. You still need to reserve the right to at least seven days’ prior notice of withdrawal for savings accounts.

Second, Federal Reserve Board Regulation D (dealing with reserve requirements) says that in order for an account to be treated as something other than a “transaction account,” which is the sort of account subject to the highest reserve requirements, the institution must restrict the number of preauthorized, telephone transfers or transfers by check, draft, etc., that the depositor can make from the account in a single month. Money market deposit accounts (commonly called MMDAs) are limited to six such transfers per month. (Savings accounts fall within the regulatory category of MMDA.) Regulation D has rather lengthy provisions describing exactly the sorts of transfers it considers “preauthorized and telephone transfers” and there is no need to repeat those provisions in detail in your agreement. However, you should include a provision in your contract that limits an MMDA holder to six. The provision should authorize you to refuse transfer requests in excess of these limitations. [See the chapter in this manual entitled “Types of Deposit Accounts” for details on MMDAs and transfer restrictions.]

Authorization for joint account holders to indorse each other’s checks

If you occasionally allow a joint account holder to deposit (or cash) checks made payable to another joint account holder without the payee account holder’s indorsement, you need authority to do so. The situation commonly occurs when one spouse deposits the paycheck of the other spouse into their joint account. The paycheck lacks the indorsement of the payee spouse. The spouse making the deposit has the authority to make withdrawals from the account and uses that authority to withdraw cash from the deposit. If it turns out that the payee spouse did not want the other spouse to have access to the funds represented by the check, the payee spouse could have a claim against you for taking a check payable to him or her which did not have his or her indorsement. To avoid liability, you should have a provision in your deposit account agreement that says that each account holder authorizes all other account holders to indorse checks payable to him or her for purposes of depositing them, cashing them, or any other transaction.

Honoring of overdrafts not obligating you to do so in the future

When you repeatedly allow a customer to overdraw his or her account, you may create an expectation in that customer’s mind that you will continue to honor overdrafts. Should you dishonor a check rather than allow an overdraft, there is some risk the customer will claim that you have acted unreasonably and therefore should be liable to the customer for the damages caused by the dishonor. To avoid this problem, you can include a provision in your deposit account agreement to the effect that occasionally honoring overdrafts will not obligate you to do so in the future.

We caution you against drafting this provision to say that the customer is prohibited from overdrawing the account or that the customer promises not to overdraw the account. We are familiar with one case in which the depositor sued his bank arguing that the amount of an overdraft fee was excessive. The depositor argued (among other things) that the fee was actually a penalty for failing to keep his promise not to overdraw the account, and since the law generally treats penalties for breach of contract as unenforceable, the bank should not have been able to collect the fee. The court ruled that there was nothing in the deposit account agreement indicating that the depositor was not to overdraw the account, and that the parties actually anticipated an occasional overdraft. Therefore, when the customer overdrew his account, he did not breach his contract with the bank and the fee, therefore, could not be considered an improper penalty for breach of contract.

Federal credit unions also need to keep in mind that they are authorized to allow overdrafts without having on file a credit application from the member only if the credit union has a written policy on overdrafts. See 12 CFR 701.21(c)(3) for details on what the written policy must contain.

Authority to amend the contract

A deposit account agreement is different from the normal commercial contract. In a normal commercial contract, the parties agree to certain rights and duties and establish a time frame in which the parties must perform their duties. A deposit account agreement (other than one for a time deposit) does not have an overall time frame. Rather, it establishes an ongoing relationship between the institution and the customer that either party can terminate at any time. Because there is no set expiration for the contract, and because you do not want to be bound forever by the terms initially set out in your deposit account agreement, you need a provision authorizing you to change those terms from time to time.

A contractual term authorizing one of the parties to unilaterally change any of the other terms at the party’s discretion is likely to be ruled unreasonable by a court (or may even invalidate the contract for lack of “consideration.” Has a party who has the right to change any term of the contract actually promised anything?). So you need to qualify the provision to make it more fair to the depositor and make it something less than the right to change any term completely at your discretion. You can do this by stating that you will exercise your right to change the terms of the contract only after giving the depositor reasonable notice in advance of the change, so that if the depositor doesn’t like the change, he or she can close the account. You may even specify the form that the notice will take, such as mailing the notice with account statements, posting it in your lobby, etc. This means, of course, that if you amend the account agreement for new accounts, you will have to send notice to existing accounts or you will have to establish a policy for how you will manage accounts that are subject to different account agreements.

Be aware that some states have laws specifying how notice of a change in the terms of a deposit account agreement is to be made, so you should check your state laws before deciding how to give the notice. Also, the federal Truth-in-Savings regulations (Regulation DD, 12 CFR 230, for banks and savings associations and 12 CFR Part 707 for credit unions) require an institution to provide 30 days’ advance notice of any change in a term required to be disclosed under Truth in Savings if the change may reduce the annual percentage yield or adversely affect the depositor. See our chapters on Truth in Savings elsewhere in this manual for more details.

Elements necessary to an effective stop-payment request

The Uniform Commercial Code provides that, in order for a stop-payment request to be effective, the customer must provide the request “…at a time and in a manner that affords the bank a reasonable opportunity to act on it….” [UCC, Section 4-403(a)] If you want to impose more specific requirements, you should state them in your deposit account agreement. For example, if it is necessary for you to know the exact amount or date or number of the check for which payment is to be stopped, your deposit account agreement should specify that. Including these requirements in your deposit account agreement will decrease the likelihood of your liability in the event you fail to stop payment of a check for which the customer requested payment be stopped but for which the customer failed to supply a needed piece of information.

Some institutions put these requirements on their stop-payment forms, the forms the customers fill out when they actually want to stop payment on a check. While this is a good idea in that it serves as a reminder of the information needed to stop payment, we believe, for two reasons, that the requirements should also be in the deposit account agreement. First, if you allow the customer to make stop-payment requests by phone, the customer will not see the request form until you mail it to him or her to confirm the request. By that time, the customer will have already made the stop-payment request without having seen or agreed to your specific requirements on the form. Second, if you have the requirements on your request form but not on your deposit account agreement, the customer will have never agreed to the requirements prior to when he needs to stop payment on a check for the first time. It may be more difficult to argue that the requirements are reasonable when the customer is not told of them prior to when they are invoked.

The court decided that this notice was not accurate since the only piece of information that actually needed to be accurate was the amount of the check. Since the notice was not technically a true statement, said the court, it could not be enforced. Staff Service Associates, Inc. v. Midlantic National Bank, 42 UCC Rep Serv 968 (1985).

See our chapter in Part II of this manual on stop-payment orders for more details.

Depositor’s duty to promptly notify you of forgeries, alterations, and statement errors

The Uniform Commercial Code Section 4-406, imposes some burdens on both the depositor and the institution in dealing with checks containing forged signatures or unauthorized alterations. Section 4-406 is quite complicated and some of the burdens it imposes on institutions are hard to meet. We feel it is a good idea to include some language in your account agreement that simplifies the rules and eases the burden on the institution.

We analyze Section 4-406 in depth in our chapter in Part II of this manual entitled “Altered Checks and Checks With Unauthorized Signatures.” We also spell out in detail the sort of contractual language that might be included in your account agreement. We refer you to that chapter for more details.

Authority to correct direct deposit errors

account by way of a federal direct deposit program. This might occur, for instance, when the beneficiary of a government program dies, but the government doesn’t find out about it and continues to arrange for direct deposit of benefits to the beneficiary’s account. The financial institution holding the account is liable, under the regulations, to the Treasury for amounts deposited to the account that should not have been. However, the regulations do not authorize the institution to correct the error by taking the funds out of the account. You can contract for that authority in your deposit account agreement. You might include a provision that authorizes you to deduct the amount of your liability to the federal government from the account or from any other account the depositor has with you. You might also want to state that you can still use any other legal remedy to recover the funds from the depositor, so that your right to deduct the amount from the account is not read to be an exclusive remedy.

Deposit Account Reconciliation

Deposit reconciliation occurs when the institution determines the amount of the deposit is a different amount than the amount provided on a deposit slip, and the institution reconciles the deposit to the actual amount of the deposit. Some institutions only reconcile a deposit discrepancy if the amount of the discrepancy was greater than a threshold amount. Otherwise, the amount of the deposit was recorded as the amount on the deposit slip. This means that if the actual amount of the deposit was less than the amount stated on the deposit slip, and the difference was less than the threshold amount, the customer would benefit by the amount of the error. On the other hand, if the amount of the deposit was more than the amount on the deposit slip and again the difference was less than the threshold amount, the bank would benefit by the amount of the error.

The FFIEC issued an interagency guidance on account reconciliation on May 18, 2016. Among other things, it declares that technological and other processes exist that allow financial institutions to fully reconcile discrepancies in deposit accounts. The Agencies did acknowledge, however, that under limited circumstances, items cannot be reconciled. Their example of that is when an item is damaged to the point that its true amount cannot be determined. Arguably, that isn’t really a deposit discrepancy circumstance. That situation does not deal with two conflicting amounts, it deals with a stated amount and an unknown. But in any event, it seems clear that the agencies position is that the institution should reconcile deposits whenever possible. They don’t give approval to the idea of a threshold amount.

Furthermore, the Guidance notes that various laws and regulations may be relevant to deposit reconciliation practices. Financial institutions’ policies or practices that do not appropriately reconcile credit discrepancies within the prescribed time frames may raise Regulation CC concerns if such discrepancies leave customers without timely access to the correct amount of funds. And the Guidance says that failure to comply with the funds availability requirements in the EFAA and Regulation CC may subject the financial institution to civil liability and possible action by the appropriate Agency.

Also, the Guidance warns that a financial institution’s deposit reconciliation practices may violate the FTC Act or Dodd-Frank Act—which both prohibit unfair and deceptive acts.

We think there are a couple of additional concerns the Guidance doesn’t address. Truth-in-Savings requires interest-earning accounts pay interest on all funds in the account, and there might be a violation if all of the funds have not been credited. There could also be a problem with reversals. If a check for $105 was deposited but the deposit slip indicated the deposit was $100, the account would be credited $100, assuming the threshold was greater than $5. If that check was returned, because of automated processing, there would be a $105 reversal, resulting in a loss of $5 to the depositor. This loss could be significantly increased if the depositor incurs an overdraft or return check charge because of the discrepancy.

The CFPB and other banking agencies have taken action against at least one institution regarding this practice. In reaction, some institutions have amended their account agreements to clarify their deposit discrepancy reconciliation policies and the effect of the threshold. That may help mitigate the risk of being found to be engaged in a deceptive practice, but we think there is still a significant risk that such a practice could be found to be unfair or abusive. Even if you always reconcile deposit discrepancies, we think it is a good idea to explain your policy in your account agreement.

Your right of setoff or offset

(We call it setoff. Credit unions that have share accounts rather than deposit accounts have a lien on those accounts that they can enforce, rather than exercise a right of setoff. But in practice the lien operates very much like the right of setoff and this section will refer to both as setoff.) The law generally allows financial institutions to set off a depositor’s debts against the depositor’s account balance whether the depositor and institution have a contractual agreement to that effect or not. That is because there are mutual debts—the depositor’s debt to the financial institution and the institution’s debt to the depositor, which is, the amount of the account. The reason credit unions have a lien instead of a right of setoff is because a share account is not a debt of the credit union.

But “mutuality” of the debt generally requires that the parties to the each debt be identical. So if the debt was owed jointly but the account was owned by only one of the debtors, the debts would not be mutual and setoff would not be appropriate. Similarly, if the account was a joint account and the debt was owed by only one of the debtors, the debts would not be mutual. But you may be able to expand the right to setoff in your deposit agreement.

The approach we have taken in our forms is to provide that the institution can set off funds in the account against a debt any of the owners owe. We also provide that partnership debt can be set off on an account owned by a partner to the extent the partner is liable for the partnership debt.

After we state the overall right of setoff, we list the most significant limitations that exist on that right. Generally, there are four: (1) you cannot set off against an IRA or other tax-deferred retirement account; (2) you cannot exercise your right of setoff if the debt arises under a credit card plan subject to Regulation Z (Truth-in-Lending); (3) you cannot set off against an account if the debtor has withdrawal rights only in a representative capacity (the debtor’s authority to make withdrawals is only on behalf of an owner of the account; the debtor himself or herself has no ownership interest); or (4) setoff is prohibited by the Military Lending Act or its implementing regulations. Your state law may impose other restrictions on your right of setoff and, if so, you should also list them in your deposit account agreement to avoid overstating your right of setoff.