Levies & the Right of Offset

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Question:

We received a levy, and the customer has a CD that is pledged as security on a loan. Does our perfected security interest trump the levy or do we have to exercise our right of offset (cash the CD and pay the loan) in order to not be required to satisfy the levy with it? Secondly, if a customer we get a levy on has both deposit accounts and loans, do we have to exercise our right of offset or does simply that right trump the levy. Can the bank say there are no funds available to satisfy the levy, even if the right of offset is not actually invoked, assuming the customer owes more in loans than is in the deposit account?

Answer:

Offset only trumps a levy if the offset right was actually exercised prior to service of the levy. Don't forget that unless a loan is in default, there is no offset right in most states. Tax authorities, the IRS in particular, take a very dim view of attempts to sneak an offset in ahead of a duly served levy. The IRS can upset the offset and recover those funds.

When you actually have a security interest in a deposit account, exercising that security interest to pay the loan is not an offset. In the example of a CD-secured loan, one assumes there is equity in the CD beyond the amount of the loan. That excess is subject to the levy, and can be taken from the CD account as a partial withdrawal. In such cases, many banks waive any contractual right to an early withdrawal penalty. The bank would also want to consider whether to pay out the loan from the remaining CD balance.

First published on BankersOnline.com 4/05/10