A Brief Introduction About the Agreement
A tri-party agreement that involves a borrower, a lender, and a depository body or institute is known as the Deposit Account Control Agreement. These three parties pay a huge role in deciding the terms and conditions of a DACA agreement. The agreement can also be seen as a beneficial document for the lender because it allows the lender to have a secure lien over the borrower’s deposit accounts held at the same bank or any other financial institute.
The cash is extremely crucial collateral for any financial institute or bank. The lender always wants to attain a perfected security interest on the deposit accounts of the borrower.
It is essential to note when we talk about DACA, meaning that it can be of two types, one is “blocked” control agreement that gives the lender full rights over the borrower’s deposit account funds and prohibits the borrower from accessing the funds. The other one is “springing” that allows the borrower access to his depository account(s) until there is a situation of default, and the lender delivers a notice of exclusive control to the depository bank. These two DACA forms are important to consider in mind.
Who Takes the Deposit Account Control Agreement? – People Involved
As discussed, the Deposit Account Control Agreement is signed between three parties, a lender, a borrower, and a depository institute. It should be noted that the borrower can also have depository accounts in the same bank itself. A lender can get control over a borrower’s deposit account(s) in many ways, and one of them is having the borrower’s deposit accounts with itself.
Purpose of the Deposit Account Control Agreement – Why Do You Need It
In the US, the Deposit Account Control Agreement is needed to perfect security interest as per UCC. In other countries, the rules may differ, but the bottom line is that the lenders need some security from the borrowers in exchange for a loan and, cash is one of the most important collateral. Lenders prefer cash as collateral more than any other collateral agreement. DDCA allows the lenders to have control over the deposit funds of the borrowers and put a lien on that fund.
As per the article 9 of the UCC (Uniform Commercial Code) in the US, unlike most other types of collateral, there is no perfect lien on a deposit account. It can be obtained by the lender only by getting control over the account. Simply put, filing of a UCC-1 is not enough for the lenders.
The main purpose of DACA is indeed to provide more security to the lenders and to perfect the security interest. In the case of any default by the borrower, the lender needs some assurance. DDCA gives security and control to the lenders.
Purpose of the Agreement in pointers –
- Secures the lender
- Allows the lender to put a lien on the deposit account(s) of the borrower
- Allows the lender to have a perfected security interest
- Gives the lender control over borrower’s deposit fund
- Gives the lender choice to combat any default performed by the borrower
Contents of the Deposit Account Control Agreement – Inclusions
The DACA would have names, addresses, and all other details of all three involved parties. It must also have all the details of the deposit account(s).
It should be noted that the depository bank or institute may have its own form of DACA, so it is paramount for all the involved parties first to sit, discuss and negotiate on the terms and provisions. This process can also be time-taking, but it is required for the lender to obtain a perfected security interest in a deposit account.
A lender is an important member of the agreement so from his perspective, here are a few provisions that must be included in the agreement –
- Some representation or acknowledgment by the depository bank or the borrower that the account is a “deposit account.”
- An acknowledgment by the depository bank that the DACA will provide the lender “control” on the borrower’s funds
- An agreement by the depository bank that it will not change the name or account number of the deposit account(s) without the written consent of the lender
- An agreement by the depository bank and the borrower to notify the lender prior to closing any deposit account(s)
It is necessary to see what are the important inclusions from the perspective of the borrower. A borrower should decide if he wants to give the lender full control by getting into a blocked agreement. Most borrowers would want to have access to their funds even after filing the DACA, so the borrowers must discuss these terms with the other two parties.
How to Draft the Deposit Account Control Agreement?
First and foremost, the borrower must pay attention to the type of control he or she wants to give to the lender. In exchange for the loan, the lender must get a perfect security interest, but the borrower, in most cases, would also want to have access to his or her deposit account.
Thus, the borrower must specify if they are fine with giving complete control to the lender and they won’t need access to the deposit account, or they want access until the lender provides a notice to the depository institution saying that the lender is taking exclusive control and that borrower is no more permitted to access the deposit account(s). The lender gives such a notice mostly after the case of default.
The depository body or institute can also pay a huge role in the DACA; after all, the lender comes to the body in case of any default. The body incurs some obligations to both the other parties. In case they fail to oblige, the depository body can take significant action as rules out in the DACA form. Both the borrower and the lender should be aware of all such obligations by the institute.
The depository body. In most cases, it has its own form of DACA. All three parties involved should first negotiate on different terms and provisions provided in the form. For the lender, the aim is to secure the loan given by him to the borrower, and the borrower would want not to risk the deposit funds. Both parties need to find common ground, and the former should ensure that there will be no default from his side. As per UCC, the lender will still have to take some control over the deposit account, but at least, the borrower will get access to his funds using such negotiations.
Benefits & Drawbacks of the Deposit Account Control Agreement
A DACA is a crucial document for the lenders when deposit accounts are not perfected for a security interest. The benefits of DACA for all parties involved are huge, so if you are a borrower, lender, or a depository institute, you must study the DACA carefully before drafting.
Here are some of the benefits of the Deposit Account Control Agreement –
- Provides security linen on the deposit accounts of the borrower
- Risk reduction for the lender
- Provides security to the lender against any default by the borrower
- Gives the lender cash as collateral by allowing them to control deposit account funds of the borrower
- Depository body or institute implements DACA with its proper team
- Three parties’ involvement so more reliability and accountability
The biggest drawback in this entire process of filing a DACA form is if the depository body doesn’t implement the task carefully and doesn’t have a proper review and implementation process, then it can be dangerous for both the lender and the borrower.
Borrower’s right to access his own deposit account is also one very crucial aspect of the form. Before signing the agreement, the borrower must make sure that any drawback of the form in this regard doesn’t take away the real benefit of it.
What Happens in Case of Violation?
In case of any violation or breach, all involved parties can approach the court. Each party is well within its rights to protect itself as long as they are abiding the obligations promised by them in the Deposit Account Control Agreement. The DACA must include such provisions in the form that gives assurance to all parties involved in the default recovery. The obligation of all the parties involved should be adequately mentioned in the form to avoid any future conflict and confusion. It is always better to solve disputes without the involvement of state laws(1).
A lender can get control over a borrower’s deposit account(s) in many ways, and one of them is to have the borrower’s deposit accounts with itself. The lender can have control in mainly three types of forms
- the borrower can have its deposit account with the lender,
- the lender can become the actual owner of the borrower’s deposit accounts with the borrower’s depository banks.
But, it is the easiest and common way these days for all three parties to sign a tri-agreement(2), DACA.
DACA is a crucial piece of document for all the parties involved and especially for the lenders. One must perform extreme caution while drafting the agreement and while negotiating for it. One must also be aware of the renewal process and DACA renewal forms.