What is a DACA (Deposit Account Control Agreement)?

Deposit account control agreements (DACAs) are an important but little-known aspect of business banking, especially for startups and companies involved in commercial real estate or alternative investments. In essence, a DACA is a tri-party agreement between a bank, a borrower (the bank’s customer), and a lender that gives the lender more control over loan funds as collateral in case the borrower defaults.

While that may sound very technical, understanding DACAs can be invaluable for certain businesses looking to secure financing. Read on for a plain-English guide to how DACAs work, their benefits, finding the right banking partner, use cases, and key takeaways for business banking customers.

What is a Deposit Account Control Agreement?

A deposit account control agreement (DACA) is a legal agreement entered into by three parties:

1. The bank where the borrower holds deposits

2. The business customer of the bank (the borrower)

3. The lender providing financing to the borrower

The DACA gives the lender oversight and some control over the customer’s bank account, to guarantee repayment of the loan and minimize the lender’s risk.

Specifically, the borrower pledges their bank account funds as collateral for the loan. The DACA allows the lender to control distributions from the account if the borrower defaults or other conditions are triggered. There are two main structures, known as “passive” and “active” DACAs:

• Passive DACAs: The borrower retains access to account funds, unless the lender decides to block access due to default or other conditions being met. This is the more common structure.
• Active DACAs: The lender has sole control over transferring or withdrawing funds from the account. The borrower cannot access any funds without the lender’s express permission.

In either case, the DACA gives lenders an added layer of security. Other names sometimes used for DACAs include “control agreements,” “account control agreements,” or “lockbox agreements.”

How Do DACAs Help Lenders Manage Risk?

For lenders, DACAs help mitigate the risk of extending credit and loans to businesses:

• Protection in case of default: DACAs give lenders the ability to control account funds, limit borrower access, or even seize funds to repay loans if the borrower defaults. This access to collateral provides considerable risk protection.
• Flexibility in distributing funds: Lenders can set customized distribution schedules in DACAs, like permitting access to loan funds in installments once certain milestones are hit. Terms can also be adjusted at the lender’s discretion. This control over cash flow allows for lending to riskier borrowers.
• Peace of mind: With a DACA, lenders have assurance that loan repayment accounts are handled by an independent, professional third party (the bank). Banks also tend to have standardized DACA templates to ensure enforceability.

Key Benefits of Using Deposit Account Control Agreements

DACAs offer advantages beyond just downside risk protection for lenders. Benefits include:

• Minimizing risks beyond outright default: DACAs give lenders the flexibility to respond not just to a default but also more minor contract breaches or missed milestones. Access to funds can be restricted quickly.
• Locking in specific repayment terms: The distribution schedules and account controls spelled out in DACAs ensure both parties live up to contractual repayment plans, rather than relying on “good faith.”
• Streamlining conflict resolution: DACAs define clear procedures should disagreements over payment timing, schedule changes, fees due, or other issues arise. Banks help mediate disputes.
• Standardizing language and protocols: Established, legally-vetted DACA templates used by banks speed up negotiations and contract review.
• Facilitating specialized lending: The ability to segment cash flows and collateral with DACAs allows lenders to underwrite more complex deals like construction projects, securitizations, and structured investments. These deals may not be possible absent mechanisms like DACAs to control risk.
  

Choosing the Right Banking Partner

Finding an experienced bank partner is vital when DACAs are involved in lending deals. To leverage the full benefits of a DACA, it's ideal to find a bank that:

• Moves quickly: For time-sensitive deals and active DACAs especially, fast execution is critical. Approvals, reviews, and setting up accounts can drag on at some institutions. Meow is well versed in providing DACAs to users of it's business checking account product for more information visit https://www.meow.com/maximum
• Understands DACA intricacies: Given their specialized nature, DACAs require bank staff with expertise across legal, risk, and compliance. The nuances matter.
• Provides customized terms: While banks have standard DACA templates to comply with regulations, the best banks work with all parties to tweak agreements for specific situations.
• Has existing bank services: Beyond DACAs, borrowers need operating accounts, payments capabilities, and other treasury services. Consolidating with a full-service bank maximizes convenience.

Use Cases and Examples

DACAs tend to show up most often in these business contexts:

• Commercial real estate loans: A lender financing an office building construction mandates a DACA to control payouts to contractors from the development company’s account.
• Securities offerings: An investment bank lending to a startup developing a new medicine stipulates that IPO proceeds be routed to an account with a DACA, to guarantee loan repayment.
• Alternative investments: A firm issues a loan to a hedge fund focused on distressed mining assets. Due to the risky nature of the investments, the lender imposes a DACA on the hedge fund’s accounts to protect its downside.
• Energy industry deals: An oil driller takes on debt from a private equity giant to expand drilling sites. The financing agreement calls for a DACA to segment cash flows from existing and new sites.

Takeaways for Business Banking Customers

While relatively obscure, DACAs deserve more attention from startups and any business involved in specialized lending situations like real estate development, securitizations, venture lending, and other complex finance deals. As a banking customer, it's worth considering whether DACAs could make sense for your needs. Be sure to choose an experienced bank partner to optimize the process and terms if so. Like any contract, be sure to fully understand the flexibility and control granted to lenders before agreeing to a DACA.