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Explaining Offset
I have a checking account and a mortgage with the same financial institution (in DC). I am thirty-two days late with the mortgage payment and the bank, without prior notice or authorization, withdrew funds from my checking account under the theory of "offset". I cannot find the authority to offset in the bank's regulations.
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 Offset is a common concept that has been codified in the laws of many states and other jurisdictions. Here's how it works, as explained by a grandmother who told us tales years ago of managing books for her husband's coal and oil business.
The Oil Company sold coal and oil to many accounts, including many area merchants, who used the fuels for heat. The grandmother shopped for clothing, food and household goods to manage her home. The merchants bought their coal and oil on credit with the Oil Company. The grandparents made their purchases from many of those same merchants on credit.
Periodically, the merchants would issue a statement of the grandparents' accounts with them, and the Oil Company, being a sole proprietorship, would pay their account by issuing a credit to the merchant's account at the Oil Company. One account was "offset" or "set off" against the other.
The Internal Revenue Code and laws have all become more complicated since those days, and the practice of setting off of debts like that has largely faded away. However, it is still practiced by the banking industry when a debt is past due and the creditor bank has funds on deposit for the debtor. The loan is owed by the debtor to the bank; the deposit account is owed by the bank to the depositor. The laws of the states determine whether a bank can exercise an offset and whether advance notice must be provided.
Published on BankingQuestions.com 2/04/10
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