I just read Mary Beth's article on this subject and the 9th COA opinion.

I work at a thrift in Ohio. I wanted to let others in Ohio know that the 9th COA opinion might not be viewed the same way in Ohio.

In 1986, the Ohio Supreme Court decided Daugherty vs. Central Trust. In that case, the Ohio Supreme Court said that a bank's right of setoff isnt like any other right or remedy of other creditors. As a result, a bank's right of setoff trumped its depositor's right to hold the money in the account exempt (as the customer had the right to do against other types of creditors).

The 9th COA opinion says that SSI benefits are exempt under the federal law definition of "other legal process". I think the Ohio Supreme Court might view the matter differently, since the Ohio Supreme Court already said in the Daugherty case that a bank's right of setoff isnt "other legal process". The Daugherty case wasnt about SSI benefits, so, I cant say for sure that the outcome in Ohio would be different.

Banks and thrifts operating in states outside of California might have similar judicial decisions (maybe even statutes), that might suggest an outcome different from that of the 9th COA opinion when it comes to setoff against SSI benefits.

Good point Geraldine. I've got a call/e-mail into our legal counsel in Raleigh for an interpretion on the applicability here in North Carolina.

I understand what you're saying, but remember that the OH State Supreme Court has no jurisdiction over federal issues, i.e. the 9th COA or whether SSA or SSI benefits are exempt.

It is a good idea to check with local legal counsel for local applicability - look at the YSP cases where different federal districts had come to different conclusions.

I live in CA and the 9th COA is a bit "out there" sometimes - blame the salt air.

A Tenth Circuit case also takes the same position as the new Lopez case in the 9th Circuit. http://caselaw.lp.findlaw.com/data2/circs/9th/0115303p.pdf

See Tom v. First American Credit Union. http://www.kscourts.org/ca10/cases/1998/08/97-2244.htm

In the Lopez case, a footnote on page 11 would appear to perhaps leave the door open for a customer to contemporaneously consent to the set off. For example, if the customer wrote a check and incurred an overdraft, then received a Social Security deposit, it might be possible for the bank to obtain permission to set off at that time, if the bank gave a notice reminding/informing the customer that the customer was not required to consent and that the funds could not automatically be used to offset the debt.

I understand what youre saying Michelle.

The point I should have made more clearly is that a federal court applying Ohio law might (I think should) look at how the Ohio Supreme Court has treated a bank's right of setoff vis a vis monies a depositor can claim as exempt. If the 6th COA views "other legal process" in the same way as the Ohio Supreme Court, a case similar to the Lopez case might be decided differently in Ohio/6th COA. Most likely a federal court would need to address the interplay between the federal law and Ohio law, because a bank in Ohio would raise state law to champion its right to the money.

I wanted Ohio thrifts to consider that the law in Ohio might be different from CA law and this might result in a different outcome.

P.S. I wonder why the bank in Lopez didnt argue that it had a right of recoupment (either in its deposit contract or under the UCC)? Although similar to a right of setoff, the right of recoupment arises from the same transaction between the parties (setoff could arise in different transactions).

UCC 4 allows recoupment any time a check deposit is returned unpaid (ie. the account can be debited for the amount of the check because the bank can recoup the monies it gave the depoistor access to before it learned the check wouldnt be paid).

P.S.S. I whole heatedly agree w/elcinea. The depositor may well have been issuing checks on the belief that the direct deposit would cover them. It bothers me when a court ignores the fact that the depositor wrote checks out before the money was in the account to cover them. I realize the courts can only interpret what Congress says, but even the 9th COA admits that it (not Congress) has taken a broad view of "other legal process".

BTW: The Ohio Supreme Court case said specifically that a bank's right of setoff isnt even "legal process"; it is a priority of right that a bank acquires when it acts a commercial middleman. Could be very persuasive.

I just had a semi-wicked thought and I'll throw it out for discussion -- but please note that I am NOT recommending this course of action . . . Let's say Cousin Icky has a deposit account at your bank and he receives a social security direct deposit. He writes several checks and they are presented for payment a couple of days before his direct deposit is due. Rather than either a) returning the checks unpaid by the midnight deadline or b) paying them into overdraft and risking a Title 42 violation by offsetting against the Social Security funds when they later come in, the bank simply waits to take action on them until the customer's account has enough funds to cover them -- in essence treating the checks more like drafts that aren't sight drafts. Obviously, if the direct deposit doesn't arrive and the bank has to ultimately return the items unpaid it could face a claim of late return from the depository bank. And the bigger risk is that a court would find this was a subterfuge to avoid the prohibition in Title 42. But, you know, it really does all boil down to a matter of timing and many customers write checks with the assumption they will take x number of days to reach the bank and by then they'll have enough money in the account to cover them. (I know, they're kiting and they aren't supposed to be, but Average Joe Customer doesn't understand that, typically.)

In any event, there's no prohibition against offsetting against other funds they deposit from non-SS sources. The problem is, you practically have to do a forensic examination of the account to determine source of funds before you take action.

In our thrift, the decision to pay or not is usually made at the branch level. I would worry about establishing a criteria that said: "If the customer has SSI direct deposit, you can hold their check beyond the midnight deadline and await a deposit of enough non-SSI money to cover the check. All others, dont hold the check, return it unpaid.". As soon as we ask people to draw this level of distinction, I worry that they will become confused and other problems will develop.

Ultimately, what could result is that SSI customers are inconvenienced, because now we cant take the risk of overdrawing their accounts, particulalry when SSI appears to be the only source of deposits to the account.

Actually, I think I would change nothing and take the risk that SSI customers and their lawyers arent aware of the cases against setoff and argue recoupment under UCC 4. I havent read the Tom case yet, but, if courts arent going to award punitive damages, you may simply need to restore the customer to where they were before the setoff occurred. I realize, however, that Lopez contained a class action request and, if a class is certified, this could create a nightmare for a bank.

Just throwing something out as a hypothetical, and knowing full well that it would be onerous for these customers, would something like the following be a viable response?

What if we changed our direct deposit policies, based on the special nature of these types of payments (SSI,SSA, and veteran's benefits, all mentioned in the case), so as to only accept such deposits into non-DDA accounts. Following each deposit, if the customer wanted to have access to the funds in his or her DDA, they would then have to make a monthly transfer of the funds to their checking. The transfer authorization would then contain the express, clear and unequivocal consent that these funds be used to cover checks as well as any existing charges on the account.

Again, I understand that this would be an onerous process, but if you are currently within the 9th Circuit, this is the law until either congress or the supremes step into the fray. Just thought I'd throw it out for discussion. It just might be crazy enough to work, or at least to get enough attention so that someone fixes the problem.

Sounds like a good idea. Although it would generate customer service issues initially, I think (w/the right notice) it would be feasible.

After reading the Lopez opinion is there any way to provide overdraft protection to SSI,etc. direct deposit customers without getting consent EACH time the customer goes into the overdraft status? Is a blanket provision possible? Further, even if we did obtain consent EACH time the account goes into overdraft status if the customer changed his or her mind about the consent wouldn't we be responsible to return all that money that he or she previously consented to us paying? In other words, even if you received consent to withdraw the moneys from the direct deposit, at what point is the consent irrevocable? I guess I am answering my own questions. There is nothing to do except not provide overdraft protection to any account that has SSI, etc. directly deposited therein as the concurring opinion clearly states. I want to provide this service, but it does not seem "legal" or prudent to do so. Any ideas or suggestions would be greatly appreciated.

Does anybody know whether WaMu will (or can) appeal this decision?

What makes no sense to me is a comment the judge made in the last paragraph of the Lopez decision. The judge refers to the July 16,1999 Federal Register (64 FR 38510,38513) as evidence that "Treasury sees nothing illegal in a bank deducting certain fees and charges from an account containing Social Security deposits".

When you look at the Federal Register(38513), it states:

"Treasury will permit financial institutions to deduct from an ETA amounts representing certain obligations of the recipient that are directly related to the maintenance of the ETA itself. Those obligations include: (a) the monthly fee; (b) any other fees incurred by the recipient in connection with the maintenance of the ETA; (c) any amount mistakenly credited to an ETA to which the recipient has no legal right; (d) THE AMOUNT OF ANY OVERDRAFT ON AN ETA; (e) any amount the recipient is responsible for under Regulation E...

It would appear clear from this section of the Federal Register that the Treasury intended for the bank to have the ability to recover overdrafts from federal payments (such as Social Security) provided the overdraft is on the same account the benefits are deposited to. While this would have no effect on the Tom decision, it seems to fly right in the face of the Lopez decision (despite the fact that it was quoted in that decision!). I just hope that this decision is overturned, as it will hurt the benefit recipients as much as it will the financial institutions.

{If anybody is wondering, an ETA is an account established for the purpose of receiving federal benefit, wage, salary and retirement payments, such as Social Security. It is described in detail in the aforementioned Federal Register article}

Great post.

Perhaps the court thought the ability to recover overdrafts was obviously part of the inducement provided to the bank for offering the ETA; i.e. since the right is not mentioned elsewhere it only exists on ETA's?

I guess that could be the case, but if it is then it makes no sense for the judge to have quoted the FedReg ETA rules as proof that it is OK for banks to deduct fees from Social Security...either the FedReg issuance applies to this situation or it doesn't...

The quote from the opinion that you mention is in a concurring opinion. As I read it, the concurring judge says (on the one hand) "You are correct in the way that you have decided this case" and (on the other hand) "May I remind you that, although not dirtectly an issue in this case, the US Treasury syas recovering an overdraft and its fees from an acct w/SSI money is OK".

Sounds like there may have been a little politics in the decision, since the concurring judge seems to be saying to his/her colleagues "Hey, you forgot something important, like what the originator of SSI benefits (US Treasury) feels about a bank recovering overdrafts and fees from SSI money".

Seems to me that 1 sentence should have changed the entire decision, and the concurring judge was trying to point that out.

So - is the choice left to us to simply bounce Grandma's rent check?

It is not uncommon for people with Direct Deposit to write checks somewhat close to the date of the deposit because they know that the bank knows that the money will be there.
Based on this latest opinion, do we tell people who open up an account with Direct Deposit of SSI that we will bounce checks instead of overdrawing them because of that direct deposit?

This is an equal access issue. Not only is this disparate impact, it's disparate treatment and age discrimination.

So are we now supposed to wave this opinion in the face of the examiner who writes us up on an equal access issue.

Most of these people are living check to check and using life line accounts the regulators want us to open, so now we pay checks for those who should know better and bounce on the little old lady from Pasadena?

Just my opinion!

I can only hope that Washington Mutual will successfully appeal this ruling. If, however, this ruling sticks, then we may be facing the possibility of
a) Refusing to open accounts with Direct Deposit of Social Security (and similar benefits), and
b) closing any account that already has SSI or that may subsequently add SSI Direct Deposit.

Does anyone know if the Treasury Dept. has been made aware of this ruling? Is there a possibility that ABA can lobby Congress to look at this issue and pass additional regulations that would allow us to continue to service an account with SSI as we would any other account?

Hello...it has now been over 6 weeks since the WaMu/Lopez decision. Does anyone know if WaMu is appealing this decision?

Additionally, are you aware of any institutions that have made changes to their handling of ODs on accounts that receive SSI/SSA direct deposits as a result of this opinion?

Thanks...