What is Deposit Account Control Agreement (DACAs)
When you extend credit, especially in high-risk scenarios, when the borrower does not have the best financial history, the concern is not just about getting the money back. It extends to whether you can act fast enough to recover it, with legal backing. And for a borrower, proving financial reliability and trustworthiness can mean everything in securing a loan on the best terms possible.
That’s where DACA finance becomes relevant. Whether you are part of a bank, a lending institution, or someone seeking a loan, it can be essential to know what DACAs are, how they work, and how they can help you out in your particular situation.
What Is A DACA Account?
In essence, a Deposit Account Control Agreement (DACA) is a tri-party legal contract among a borrower, a lender, and a bank. A DACA account gives the lender a certain degree of control over the borrower's deposit account. With this agreement signed, the borrower's deposit account can serve as collateral for a loan. If and when the borrower defaults, the lender can access the funds in the corresponding account to recover the amount owed to them.
With DACA, there is no waiting for courts or approvals. If the loan agreement is breached, DACA allows you to access the funds in the deposit account immediately. With this financial security, not only is it easier for you to disburse loans, but for borrowers to prove their financial reliability, too.
How Are DACA Accounts Used?
DACA accounts typically show up in commercial lending, with high stakes.
As a lender, DACA lets you perfect your security interest in the borrower’s deposit account, legally securing your claim to the account’s funds if the borrower defaults.
The agreement’s terms are finalized before all three parties sign. During the period of the agreement, the lender has a “priority” claim on the account’s funds. If the terms state so, the lender can also control the flow of funds in the corresponding account. Under the umbrella of a DACA account, the lender’s risk is reduced, and financial peace of mind for the institution is guaranteed.
How Do DACA Accounts Work?
There are two primary types of DACAs:
- Active DACA: In this case, the lender gets immediate control over the corresponding account. Also called a blocked DACA, the debtor’s access to the account is cut off, and the bank follows the disposition instructions of the lender only.
- Passive DACA: Passive DACA, also called a springing DACA, is the more common of the two options. The bank initially takes instructions from the debtor, but if the lender provides the bank with a notice of default, it stops complying with the instructions of the debtor. This notice, which is the “initial instruction”, essentially converts a passive DACA to an active DACA.
Regardless of specifics, both DACAs make sure that lenders get control of the DACA account if the borrower defaults.
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All About UCC On DACA Account
Let’s explore the legal terms that make DACAs effective: the Uniform Commercial Code (UCC).
What Is The UCC And How Does It Influence DACA Accounts?
The Uniform Commercial Code, or the UCC, are the laws and guidelines that govern transactions in the United States, across all 50 states. All DACAs need to meet requirements under Article 9 of the UCC.
Article 9 covers secured transactions, including the use of deposit accounts as collateral. To enforce a claim over a deposit account, a lender must establish control, and that is through a DACA.
The UCC establishes the lender’s legal rights when it comes to the loan’s terms, how to enforce them, and instructions on how to resolve conflicts, if any arise.
UCC And Secured Transactions
Without control, a lender’s interest in a deposit account isn’t perfected.
Perfecting a security interest means making it enforceable against third parties (like other creditors or bankruptcy trustees). Under the UCC, control equals perfection. And control happens through a well-drafted DACA.
Influence Of UCC On DACA Accounts
The UCC's provisions ensure that DACAs are enforceable and provide a clear legal framework for the rights and obligations of all parties involved. There is room for movement based on the particular DACA agreement terms and conditions. Largely, however, DACAs are a reliable control tool for lenders. For one, the UCC allows for perfection of security interest, with priority over other creditors who may have loaned money to the borrower.
How The UCC Affects DACA Operations
Legally, the UCC states that the bank must comply with the lender's instructions for a lender to have control over a deposit account. No further consent from the borrower is needed in such a case. However, this doesn’t happen at the lender's whim and fancy. DACA outlines the terms and the circumstances under which the lender can take these steps.
From how control is triggered to how notices must be delivered, the UCC governs the fine print. If your institution is relying on DACAs in any material volume, UCC compliance is not optional—it’s mission-critical. The agreement is only as strong as its legal foundation.
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Benefits Of DACA Accounts For Lenders And Borrowers
DACA accounts are perfect because they add a financial safety net for lenders and borrowers in the equation. Here’s how.
For the lenders, DACAs provide security, with a direct claim to the borrower’s deposit account through the bank. In cases of default, the lenders are financially secured. Moreover, they get a “priority in claims” when it comes to the funds in the deposit account. Finally, lenders can monitor activity in the deposit account, adding to peace of mind.
But this arrangement is not just for the lender’s sake. For borrowers, signing a DACA agreement can make them more attractive and financially reliable, facilitating access to financing. This can also lead to more agreeable loan terms, like lower interest rates. As a borrower, you appear more financially credible.
In other words, DACA accounts represent trust between both parties.
Challenges That Come With DACA Accounts
However, DACA accounts do not come without friction.
- Complexity: Every party, lender, borrower, bank, must agree on terms, which often requires back-and-forth legal work.
- Bank Reluctance: Not all depository banks are cooperative. Some resist signing DACAs due to liability concerns or operational limitations.
- Maintenance: Managing large portfolios of DACAs manually is a compliance risk. A missed notice or faulty filing could make your claim invalid.
- Legal Nuance: While the UCC is standardized, local interpretations in the 50 states can vary. If you’re dealing across states, or even internationally, this adds another layer of risk.
- Reconciliation Challenges: Since multiple parties and legal specifics are involved in DACA accounts, reconciling them can be tough as matching needs to be performed across various sources. This becomes even more challenging if your institution is involved in multiple DACA accounts.
- Audits: Similar to reconciliation challenges, audits can be cumbersome because of the nature of DACA accounts. It’s important to keep up with audit deadlines in order to maintain DACA agreements.
If your team is working with DACAs, these operational gaps can become expensive liabilities. In such a case, it might be helpful to automate parts of the process, so that you and your team can focus on what’s important.
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Achieve Operational Efficiency with Osfin.ai
In an era of fast finance and rising risk, DACAs offer certainty in uncertainty. Whether you’re lending to a startup, funding a complex real estate project, or issuing loans backed by crypto collateral, DACAs offer one of the cleanest paths to secure your money against risks. However, like any tool, they’re only as effective as the way you use them.
Built to simplify financial operations and loan reconciliations, Osfin.ai reduces the friction at every step of the way. With Osfin’s toolkit, you can reconcile faster, with fewer errors, and stay on top of your auditing schedule with reminders and updates. To top it off, Osfin’s automation capacities scale to as much financial data as you have, reconciling millions of payments across multiple rails in just minutes and helping you achieve compliance with local and international standards.
Book a demo with Osfin.ai today to find out how our solution can speed up your daily operations!
FAQs
1. What is a DACA/Deposit Account Control Agreement?
A DACA is a legal contract that provides a lender control over a borrower's deposit account in case of default, ensuring the lender can access funds for debt recovery.
2. What are the two types of DACAs?
An active DACA (or blocked DACA) gives the lender full control over the deposit account, only the lender can instruct the bank, and the debtor has no say. A passive DACA (or springing DACA) allows the debtor to manage the account until a default occurs. If that happens, the lender can trigger control by sending an “initial instruction,” converting it to an active DACA.
3. What are the four types of deposit accounts?
The four types of deposit accounts are checking accounts, savings accounts, money market accounts, and certificates of deposit (CDs).
4. What is an account control agreement?
An account control agreement is a legal agreement that allows a lender to control a borrower's deposit account. This agreement is used as collateral in loans that are secured.
5. What is a DACA borrower?
A DACA borrower is an individual or business that enters into a DACA agreement with a lender, pledging their deposit account as collateral for a loan. If the borrower defaults, the lender gains control over the account to recover the owed amount.
