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. To take control of a borrower`s income deposited with a third-party bank, a blocked account agreement (a “BAA”) may be used to require the third-party bank to direct and pay that income to the lender. A BAA will be under the lender, borrower and third party bank that provides the borrower`s collection account(s). Although a blocked account remains in the borrower`s name, its rights to access and transfer funds to the account are “blocked” by the terms of the BAA and can only be exercised by the lender, which is the sole authority to provide instructions relating to the account. Other rights of the account holder that may be “suspended” by a BAA include the rights to direct the scanning of funds, the right to transfer ownership of the account, and the right to close the account. Under the terms of the BAA, the lender may be able to exercise these rights from the outset and for the duration of the loan or only after a triggering event. Similarly, the terms of the BAA may provide that once an account is “locked”, the lender must give instructions to the third-party bank to perform certain actions, or that the third-party bank is required to perform certain actions if the account is “suspended” without the need for further instructions from the lender. First of all, working with a trusted bank is paramount. The right banking partner will be willing to work with the parties to ensure that the terms of the contract are in line with the situation. Once the specific terms of a DACA have been established, a banking partner must comply with all the points set out in the agreement. It`s important to have a partner who understands and follows all the nuances of a particular DACA, especially since DAACs are designed for specific transactions. A BAA is often used in asset-based lending operations where the borrower`s accounts are held with a third-party bank. In an asset-based lending transaction, the borrower`s claims are a fundamental component of the lender`s overall collateral.
The lender often requires a BAA with respect to the borrower`s collection accounts to ensure that it is able to control payments and transfers from those accounts. For asset-based lending operations, a BAA is likely to be part of a larger cash management system, which may also include lockers, cash scan agreements, and consolidation accounts. In addition, the right banking partner is crucial for urgent transactions. A strong banking partner can act quickly to execute DACA among all parties. The bank service level agreements (SLAs) required to secure CASSs can range from days to weeks. Working with a bank that understands time sensitivity and strives to operate within your constraints is essential to ensure the smooth running of transactions. One action that a third-party bank must take as part of a BAA is to collect funds from one or more accounts blocked in a consolidation account. Scanning is important because it concentrates funds into a single account from which payments to the lender can be easily made. If the lender is a bank and maintains the consolidation account on which the funds are swept, it is he, not the third-party bank, that controls the funds. To do this, a lender may need frequent hairpin turns to minimize the risks associated with a potentially less credible bank holding the funds.
This can be a point of contention with the borrower, as more frequent scans could lead to an increase in transfer costs and management fees charged by the third-party bank. 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 deposit accounts and that the lender has full control over the funds. The most common “jumping” control agreement provides that the borrower can access the deposit account(s) until the lender sends an exclusive control notification to the custodian bank. In general, such notification can only be made by the lender if the borrower is in default under the underlying loan. Once such notification is made, the custodian bank must cease to comply with the borrower`s instructions with respect to deposit accounts and follow the lender`s instructions. Typically, a jump DACA as an exposure contains some form of exclusive control notification. Every major bank in Canada has its own standard form of BAA. Account banks generally prefer to use their own forms to ensure that all blocked accounts are managed consistently.
However, there are several important provisions that a lender wants to negotiate before signing a BAA, including the following: Debtor (customer) – As one of three parties to DACA, the debtor provides the security and receives the deposits in the deposit account. A lender may establish “control” in one of the following ways: (i) the borrower maintains his or her deposit account directly with the lender; (2) the creditor becomes the beneficial owner of the borrower`s deposit accounts with the borrower`s custodian banks; or (3) the lender and borrower enter into a deposit guarantee agreement (known as DACA) with the borrower`s custodian bank. These agreements are in any case in addition to the guarantee contract by which the borrower grants a security right in his current accounts. Article 9 of the Uniform Commercial Code (CDU) defines a deposit account as a current, time, savings, savings or similar account held with a bank. Unlike most types of collateral, depositing a UCC-1 proof of funding 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. For a secured lender, cash is often the most critical security. Borrowers usually carry cash into 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. For example, a bank may limit withdrawals of money through policies to $2,000 per week for its core customers, or a judge may rule that no party to a divorce spends more than $500 of bank accounts per week on personal expenses. A Deposit Guarantee Agreement (DACA), also known as a control agreement, is a tripartite agreement between a depositing customer (the debtor), the lender of a depositing customer (the secured party) and a bank. Disposition Instruction – An instruction to the bank that orders the disposition of funds in the deposit account. A blocked account usually refers to a financial account that has been temporarily or permanently subject to certain restrictions or restrictions that may arise for various reasons and reasons. Fees and chargebacks – A BAA often allows the account bank to debit the requesting account for all fees and chargeback amounts associated with such an account. If there are not enough funds in the account in question for these fees and chargeback amounts, the bank of the account is usually entitled to pay these amounts from the borrower or lender. From the creditor`s point of view, the extent of its liability for costs and chargebacks should be limited as far as possible. In practice, the lender`s liability for these amounts is often limited to the total amount transferred from the relevant account to the lender in accordance with the BAA or the lender`s instructions. 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. Termination rights – A BAA often allows the account bank to terminate the BAA after written notice to the lender. The creditor should consider whether the notice period allows sufficient time for the creditor and the borrower to enter into alternative arrangements to ensure that the creditor retains control of the accounts concerned. .