What Is a Bank Control Agreement

Why do lenders use deposit guarantee agreements? Often, customers do not account for their deposits with their lenders and some lenders do not offer deposit accounts. Lenders are putting in place deposit guarantee agreements as an additional protection against defaults and to help them repay their loans. Custodian banks should have an experienced internal team responsible for the implementation of all CAACs. Relationship officers should not implement DAACs, but should be informed of the importance of sending DACA requests through the custodian`s DACA preparation, review and implementation protocol. As long as DACA is carefully prepared and properly negotiated by the custodian institution`s lawyer, the incorrect implementation of a DACA is the main source of risk for a custodian institution. The deposit-taking institution shall ensure that all necessary checks have been carried out on the relevant deposit accounts and that the depositary institution is ready and able to implement and implement all instructions it receives within the time limits set out in DACA. In particular, small custodian banks should pay attention to the lack of key personnel and put in place safeguard procedures so that DACA instructions are always implemented immediately. For example, if the depositary institution does not respond to a creditor`s notification requesting exclusive control of the deposit accounts within the time limit prescribed by DACA, the depositary institution could be held liable to the lender for all withdrawals from deposit accounts by the borrower after the date of the exclusive control should have been made. The inclusion of such wording could avoid the risks and uncertainties that would arise if the application of the provisions of Article 9(304)(b) of the UCC led to the identification of two separate jurisdictions under two separate agreements. If the secured party is also the bank where the deposit account is held, the UCC provides that the secured party automatically has “control” over the account. If the account is held with a bank that is not the secured party, a secured party may take “control” of that account by obtaining the account in its own name (i.e., it is the secured party`s account held with the custodian bank) for the benefit of the debtor or, more often, by entering into a “control agreement”; in which the custodian bank agrees to comply with the instructions it receives from the secured party. in respect of funds in the account without further consent of the debtor.

In addition, the right banking partner is crucial for urgent transactions. A strong banking partner can act quickly to execute DACA among all parties. The bank service level agreements (SLAs) required to secure CASSs can range from days to weeks. Working with a bank that understands time sensitivity and strives to operate within your constraints is essential to ensure the smooth running of transactions. Disposition Instruction – An instruction to the bank that orders the disposition of funds in the deposit account. These arrangements are made when a borrower obtains a loan from a third party and help lenders maintain a certain degree of control and minimize their risk during a transaction. Understanding the intricacies of a Deposit Guarantee Agreement (DACA) is important for both the lender and borrower. Although a security right in a deposit account can be further developed as a “product” of other collateral (e.g. B debt collection) as long as the proceeds are “identifiable” under the Unified Commercial Code (the “UCC”), there is the only way to perfect a security right in a deposit account as the primary collateral (and to prevail over a competing hedge interest based on an income claim), to have “control” over the deposit account. Submitting a UCC funding statement is completely ineffective for this purpose.

A Deposit Guarantee Agreement (DACA), also known as a control agreement, is a tripartite agreement between a depositing customer (the debtor), the lender of a depositing customer (the secured party) and a bank. Original direction – An instruction to the bank that comes from the lender and orders the lender to stop complying with the debtor`s disposition instructions. The initial direction often includes a disposition order from the secured party that allows the secured party to direct the flow of money from the deposit account. There are two main forms of DAAC, each of which is sufficient for the purposes of control and perfection under the UCC. A “frozen” control agreement provides that the borrower does not have access to funds from deposit accounts and that the lender has full control over the funds. The most common “jumping” control agreement provides that the borrower can access the deposit account(s) until the lender sends an exclusive control notification to the custodian bank. In general, such notification can only be made by the lender if the borrower is in default under the underlying loan. Once such notification is made, the custodian bank must cease to comply with the borrower`s instructions with respect to deposit accounts and follow the lender`s instructions. Typically, a jump DACA as an exposure contains some form of exclusive control notification. A problem could arise if the control agreement and the “customer contract” concluded between the custodian bank and the debtor as a customer in connection with the opening of the account each expressly provide for a specific but different jurisdiction from that of the bank for the purposes of the UCC, since any agreement would be “an agreement between the bank and its customer on the deposit account”.

The same problem could arise if neither the control contract nor the customer contract expressly provides for the competence of the bank, but each of these agreements provides that it is subject to the law of a particular but different jurisdiction. To avoid such problems, all secured parties should (i) explicitly state in their review agreements that a particular jurisdiction is the jurisdiction of the bank for the purposes of the UCC, and (ii) consider adding the following provision (or equivalent words) to their control agreements: Establishing a deposit account control agreement allows lenders to perfect their interest in a debtor`s deposit accounts (UCC § § 9-104) and define which issues disposition instructions (transfer instructions) to the bank in respect of the controlled deposit account(s). Even if a custodian institution requires its own DACA form, custodians should always be vigilant about any changes a lender or borrower and their lawyer make to the DACA form before signing. Often, other parties to DACA will seek to significantly modify important provisions to protect the custodian, including indemnification, pledge priority, and termination provisions. Custodian banks should have the proposed changes reviewed by a lawyer who is familiar with cadala trading from a custodian institution`s perspective (i.e., banking, cash management and deposit activities, as well as the importance of certain legal safeguards to the custodian institution). Counsel for the custodian institution must inform the custodian institution of how the proposed changes will affect each party`s rights and obligations under DACA and the practical consequences of these changes for the custodian institution`s relations, affairs and operations teams. In addition, the custodian institution`s lawyer must have a thorough understanding of what the market is and reject inappropriate requests from other parties that are not in compliance with the market. Alternatively, the lender may release the loan funds to the borrower, but as a condition of the loan, require that all hotel income go through the controlled DACA account.