May 1, 2010
Couple learns the hard way of bank’s ‘right of setoff’
When Hope and Matt Hughes stopped for supplies at a pet store last month, they thought the trouble with their debit card was just a glitch. But it turned into a financial crisis.
They quickly discovered that their bank, Wachovia-turned-Wells Fargo, had deducted $4,059.82 from their checking account, wiping it out.
It was no glitch. It is called the right of setoff or offset, a long-accepted practice dating to early English common law.
When the right of setoff is applied to bank accounts, it works like this: When consumers place money in bank accounts, they are basically agreeing to let the bank borrow the money, with a promise to repay, usually backed by the Federal Deposit Insurance Corporation. If the consumer then takes out a loan with that same bank and falls behind, the bank can use the money in that account to offset the loan.
The trouble stemmed from Hope Hughes’ $10,000 student loan, which the bank called in.
Now, the couple, who rely on Matt Hughes’ once-a-month paycheck from Kimberly-Clark, have had to sell possessions on Craigslist, tap into his 401K and negotiate with creditors so they don’t put their house and car loans in danger. And they were charged $385 in overdraft fees for purchases that would have cleared their account the day it was cleaned out.
“We are so far behind,” said Hope, 36. “I don’t want anybody else to go through what we’ve been through. ... I was blind-sided.”
According to the Consumer Credit Counseling Service of Greater Atlanta, more people are finding themselves in this situation. CCCS is a nonprofit financial counseling agency.
“Our counselors are seeing more and more examples,” said CCCS spokesman John McCosh. “When people come to us and we go through their budget and various credit accounts and bank accounts to help them get an overall picture of their finances, we give advice on how to prioritize. ... And if we see that there is any vulnerability because someone has a delinquent account at the same place where they have their cash reserves, we will point out that it’s a vulnerability.”
In the Hugheses’ case, there seems to have been a layer of confusion, turning misunderstanding into financial crisis.
Hope Hughes said she thought she had six months to begin paying back her loans after her May graduation from Kennesaw State University. She got a degree in marketing with three loans, two of which were government-funded and the other through Campus Partners, a private student loan program at Wachovia.
After several rounds of calls and faxes to prove she graduated in May 2009, not December 2008, as the bank believed, and a last-ditch application for a deferment, she thought things were settled. Then in January, the bank apparently wrote off the loan, meaning it was sent to its collections department. She began receiving bills for the total amount, plus interest and fees: $11,338.60.
By April 1, the Hugheses’ checking account showed the bank deducted $140 in overdraft fees, even though it still held $4,302. The next day, the bank registered an “account transfer, zeroing out the account, and then charged $245 more in overdraft fees.
A few days after that, the Hugheses received a letter from Wells Fargo saying they were eligible for “a considerable settlement reduction” on the loan. The next day, yet another letter advised them the bank had exercised its right of setoff. The balance of the loan, nearly $7,300, is still due.
Jay Lawrence, Atlanta spokesman for Wachovia, which became a Wells Fargo company in 2008, said the bank uses the right of setoff as a last resort. Lawrence didn’t want to comment about the Hughes’ case except to say the bank’s records don’t support some of the Hugheses’ accounts.
“We don’t do this without lots of attempts to communicate with our customers and try to work things out,” Lawrence said. “When this happens, we don’t like to do this. We want our customers to succeed.”
Banks don’t have to give notice that they’re going to dip into or clean out an account, nor are there restrictions on how much they can take out, up to the loan amount.
David Oliver, a senior vice president in marketing and communications with the Georgia Bankers Association, said policies about right of setoff vary from bank to bank. He stresses that it is usually seen as collection of last resort.
“A lot hinges on the level and the amount and frequency of communication between the lender and the borrower,” he said. “If you have any concern about your financial situation or your ability to repay a loan or meet a financial obligation, by all means reach out to your financial institution. The last thing the bank needs right now is additional losses on their portfolio.”
The Hugheses took out the loan with Wachovia, they said, because they had banked there for about 10 years. They also have home and car loans there.
Such one-stop banking, or “relationship banking” has increased over the past 30 years and is something consumers should consider fully, says Kathleen Day of the Center for Responsible Lending, a nonpartisan research and policy agency. Often, consumers can get better service and lower interest rates this way.
The downside is, banks can exercise the right to setoff, Day said. “They come first in line to take it out. It’s something people should be aware of.”
Hope Hughes, who volunteers with Girls on the Run, a nonprofit program for girls in third through eighth grade that teaches healthy living, has been searching for work since graduation. She had her eye on getting a master’s degree in fitness and nutrition.
But that dream has been deferred.
“They may have had a right legally,” Hope Hughes said. “Ethically, should they have done it? No. Should they have wiped out my entire bank account? Absolutely not.”
Quick facts about the bank’s Right of setoff
● Generally, federally chartered banks can’t use offset to collect on credit card balances — unsecured or open-ended revolving accounts. But typically, smaller banks and credit unions can.
● Federal legal decisions in the past few years have restricted access to Social Security funds from the right of setoff.
● To learn about your bank’s policies and setoff guidelines, read the loan and account documents it provides.
Couple learns the hard way of bank’s ‘right of setoff’
When Hope and Matt Hughes stopped for supplies at a pet store last month, they thought the trouble with their debit card was just a glitch. But it turned into a financial crisis.
They quickly discovered that their bank, Wachovia-turned-Wells Fargo, had deducted $4,059.82 from their checking account, wiping it out.
It was no glitch. It is called the right of setoff or offset, a long-accepted practice dating to early English common law.
When the right of setoff is applied to bank accounts, it works like this: When consumers place money in bank accounts, they are basically agreeing to let the bank borrow the money, with a promise to repay, usually backed by the Federal Deposit Insurance Corporation. If the consumer then takes out a loan with that same bank and falls behind, the bank can use the money in that account to offset the loan.
The trouble stemmed from Hope Hughes’ $10,000 student loan, which the bank called in.
Now, the couple, who rely on Matt Hughes’ once-a-month paycheck from Kimberly-Clark, have had to sell possessions on Craigslist, tap into his 401K and negotiate with creditors so they don’t put their house and car loans in danger. And they were charged $385 in overdraft fees for purchases that would have cleared their account the day it was cleaned out.
“We are so far behind,” said Hope, 36. “I don’t want anybody else to go through what we’ve been through. ... I was blind-sided.”
According to the Consumer Credit Counseling Service of Greater Atlanta, more people are finding themselves in this situation. CCCS is a nonprofit financial counseling agency.
“Our counselors are seeing more and more examples,” said CCCS spokesman John McCosh. “When people come to us and we go through their budget and various credit accounts and bank accounts to help them get an overall picture of their finances, we give advice on how to prioritize. ... And if we see that there is any vulnerability because someone has a delinquent account at the same place where they have their cash reserves, we will point out that it’s a vulnerability.”
In the Hugheses’ case, there seems to have been a layer of confusion, turning misunderstanding into financial crisis.
Hope Hughes said she thought she had six months to begin paying back her loans after her May graduation from Kennesaw State University. She got a degree in marketing with three loans, two of which were government-funded and the other through Campus Partners, a private student loan program at Wachovia.
After several rounds of calls and faxes to prove she graduated in May 2009, not December 2008, as the bank believed, and a last-ditch application for a deferment, she thought things were settled. Then in January, the bank apparently wrote off the loan, meaning it was sent to its collections department. She began receiving bills for the total amount, plus interest and fees: $11,338.60.
By April 1, the Hugheses’ checking account showed the bank deducted $140 in overdraft fees, even though it still held $4,302. The next day, the bank registered an “account transfer, zeroing out the account, and then charged $245 more in overdraft fees.
A few days after that, the Hugheses received a letter from Wells Fargo saying they were eligible for “a considerable settlement reduction” on the loan. The next day, yet another letter advised them the bank had exercised its right of setoff. The balance of the loan, nearly $7,300, is still due.
Jay Lawrence, Atlanta spokesman for Wachovia, which became a Wells Fargo company in 2008, said the bank uses the right of setoff as a last resort. Lawrence didn’t want to comment about the Hughes’ case except to say the bank’s records don’t support some of the Hugheses’ accounts.
“We don’t do this without lots of attempts to communicate with our customers and try to work things out,” Lawrence said. “When this happens, we don’t like to do this. We want our customers to succeed.”
Banks don’t have to give notice that they’re going to dip into or clean out an account, nor are there restrictions on how much they can take out, up to the loan amount.
David Oliver, a senior vice president in marketing and communications with the Georgia Bankers Association, said policies about right of setoff vary from bank to bank. He stresses that it is usually seen as collection of last resort.
“A lot hinges on the level and the amount and frequency of communication between the lender and the borrower,” he said. “If you have any concern about your financial situation or your ability to repay a loan or meet a financial obligation, by all means reach out to your financial institution. The last thing the bank needs right now is additional losses on their portfolio.”
The Hugheses took out the loan with Wachovia, they said, because they had banked there for about 10 years. They also have home and car loans there.
Such one-stop banking, or “relationship banking” has increased over the past 30 years and is something consumers should consider fully, says Kathleen Day of the Center for Responsible Lending, a nonpartisan research and policy agency. Often, consumers can get better service and lower interest rates this way.
The downside is, banks can exercise the right to setoff, Day said. “They come first in line to take it out. It’s something people should be aware of.”
Hope Hughes, who volunteers with Girls on the Run, a nonprofit program for girls in third through eighth grade that teaches healthy living, has been searching for work since graduation. She had her eye on getting a master’s degree in fitness and nutrition.
But that dream has been deferred.
“They may have had a right legally,” Hope Hughes said. “Ethically, should they have done it? No. Should they have wiped out my entire bank account? Absolutely not.”
Quick facts about the bank’s Right of setoff
● Generally, federally chartered banks can’t use offset to collect on credit card balances — unsecured or open-ended revolving accounts. But typically, smaller banks and credit unions can.
● Federal legal decisions in the past few years have restricted access to Social Security funds from the right of setoff.
● To learn about your bank’s policies and setoff guidelines, read the loan and account documents it provides.
Closed November 2010
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