Deposit Account Control Agreements

The first step a custodian needs to take to protect themselves is to start with a good DACA form. DACA forms provided to a custodian institution by a lender are not created taking into account the unique operational, business and legal needs of the depositary institution. And most likely, they will include provisions that are more favorable to lenders than the industry market. By creating and emphasizing the use of its own DACA form, a depositary institution can be assured that its unique operational needs are taken into account, including notification information and the time allotted to implement the instructions of other parties. In addition, through the consistent use of their own form, persons implementing DACs in the depositary institution are better acquainted with the depositary institution`s obligations under DACA, which reduces the likelihood of error or oversight in implementation. Often, those responsible for implementing CADAs are not familiar with the review and interpretation of agreements. Therefore, an unknown DACA form will be difficult to interpret in order to understand all the obligations of the custodian bank. If the custodian bank`s form is used consistently, any lawyer negotiating a DACA for the depositary institution can report changes to DACA that may change the depositary institution`s obligations. For a secured lender, cash is often the most critical security.

Borrowers usually hold money in deposit accounts with a bank. Therefore, a lender will want to obtain an advanced security on these deposit accounts in order to have a perfected security on that money. Regions has an experienced and centralized deposit account control team that can provide a number of benefits to lenders and clients, as well as their law firms. First instruction – An instruction to the bank issued by the lender to stop following the debtor`s disposition instructions. The initial instruction often includes a disposition order from the secured party that allows the secured party to control 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 the deposit account(s) and that the lender has full control over the funds. The most common “elastic” control agreement provides that the borrower can access the deposit accounts until the lender sends an exclusive control notice to the custodian bank. As a general rule, such notification can only be made by the lender if the borrower is in default with the underlying loan. Once this notice is given, the custodian bank will no longer be required to follow the borrower`s instructions with respect to the current account(s) and will comply with the lender`s instructions. Typically, an elastic DACA as an exposure contains some form of exclusive control notification.

The lender should receive a DACA from each third-party custodian when the borrower has a checking account. A custodian bank that signs a DACA agrees to follow the lender`s instructions regarding the money deposited by the borrower without further action or consent from the borrower. Such an agreement gives the lender “control” over the deposit account required for perfection under the UCC. Why do lenders use deposit account control 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 account control agreements as an additional layer of protection against defaults and to help them repay their loans. Deposit account control agreements are tripartite agreements between a lender, a borrower and a bank. These are often mentioned in other, sometimes better known terms, such as . B “lock-in box agreements”, “control agreements”, “account control agreements” or “ACA”. (However, these are not “fiduciary arrangements.”) Each custodian bank often has its own form of DACA, although the elements listed above are common to each form. CAACs are being discussed and negotiated. Therefore, borrowers and lenders should realize that it may take some time before a DACA is agreed to and signed by all parties so that the lender can obtain an advanced security on a deposit account. A private equity firm (lender) lends $30 million to a commercial real estate developer (borrower) who will use the funds to develop a new luxury hotel on vacant land.

The lender sets up a DACA at the borrower`s commercial bank and then finances the loan. The borrower has the total loan of $30 million, but DACA gives the lender some degree of control over how and when the funds are distributed. 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 Account Control Agreement (DACA) is important for both the lender and borrower. Debtor (Customer) — As one of three parties to DACA, the debtor provides the security and receives the deposits to the deposit account. CADAs are tripartite agreements between a lender (often referred to as a secured party), a borrower and a custodian institution. The purpose of a DACA is for a lender to take control of its borrower`s deposit accounts held with a custodian other than the lender so that the lender can perfect its security on the deposit accounts. Some DACs ARE STRUCTURED IN SUCH A WAY THAT THE LENDER HAS EXCLUSIVE CONTROL OVER THE DEPOSIT ACCOUNTS IMMEDIATELY AFTER THE DACA IS EXECUTED. Other CADAs allow the borrower to access, withdraw and transfer funds into deposit accounts until the lender notifies the custodian institution that the lender is taking sole control and the borrower is no longer authorized to access, withdraw or transfer funds from deposit accounts. Article 9 of the Uniform Commercial Code (CDU) defines a deposit account as a claim, time, savings, savings account or similar account held with a bank. Unlike most types of collateral, depositing a UCC-1 funding statement does not perfect a privilege on a deposit account. A lender can only perfect a lien on a deposit account by taking “control” of the account.

Deposit Account Control Agreements: While this unusual term may not ring a bell, it`s useful to know, especially for those who work in commercial real estate or alternative investments. Initially, the lender offers access to $20 million to make the immediate purchase of the property. The borrower may use these funds as described in the loan agreement. The lender then considers the remaining $10 million to be ancillary costs in the controlled account – but the borrower does not have access to that money until the lender starts receiving mortgage payments. Once the mortgage begins to be paid to the lender, the lender releases the $10 million on an approved schedule. Entering into a deposit account control agreement allows lenders to refine their interest on a debtor`s deposit accounts (UCC § 9-104) and define who can initiate disposition (transfer) instructions to the bank with respect to the controlled deposit account (controlled deposit accounts). . .

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