A deposit account control agreement, or DACA, is a three-party contract signed by a lender, a borrower, and the bank that holds the borrower’s account. It gives the lender a legally enforceable claim over the cash in that account and, under Article 9 of the Uniform Commercial Code, “perfects” the lender’s security interest in those funds. Without that perfection, a lender claiming cash as collateral would lose to almost any competing creditor. DACAs appear in nearly every commercial loan where a borrower’s cash reserves back the debt.
Who Signs and What Each Party Does
A DACA needs three separate signatures. If any one party refuses, the agreement does not exist.
The secured party is the lender. The agreement gives the lender the right to direct what happens to the money in the account, either immediately or once a defined event occurs. The lender agrees in turn to exercise that right only under the conditions written into the agreement.
The debtor is the borrower who owns the account. By signing, the borrower pledges the balance as collateral and accepts some level of lender control over the funds. The level depends on whether the DACA is blocked or springing.
The depositary institution is the bank. Its role is mostly administrative: it acknowledges the lender’s interest and agrees to follow the lender’s instructions when the agreement calls for it. A bank is under no legal duty to sign a DACA for a customer, and most large banks insist on their own form rather than accepting a draft from the lender. Because the bank takes on potential liability by agreeing to follow a third party’s directions, DACAs almost always include an indemnification clause shielding the bank when it acts in good faith on the lender’s instructions or declines to act on a defective notice.
Why a DACA Exists: Control Under the UCC
Under Article 9 of the UCC, a security interest in a deposit account can be perfected only by obtaining “control” of the account. Filing a UCC-1 financing statement, which works for equipment, inventory, and most other collateral, does nothing for deposit accounts.
The UCC recognizes three ways to get control:
- The lender is the bank holding the account. Control is automatic; no separate agreement is needed.
- The lender becomes the bank’s customer on the account, which usually means re-titling it. This is the strongest form of control and carries special priority consequences.
- All three parties sign a DACA stating that the bank will follow the lender’s instructions on moving the funds without needing the borrower’s further consent.
The third method is the one almost everyone uses. The first two require either a pre-existing banking relationship or a restructuring of the account itself, which most borrowers will not accept.
One point confuses newcomers. The UCC says a lender has control even if the borrower keeps the right to use the account day to day. Control, as a legal matter, does not mean the borrower is locked out. It means the bank has committed to follow the lender’s instructions whenever the lender gives them. That is why a springing DACA, where the borrower operates the account freely until default, still satisfies the perfection requirement.
Blocked vs. Springing Control
DACAs come in two basic forms, and the choice between them shapes how the borrower can actually use its money.
Blocked Control
A blocked DACA, sometimes called an active control agreement, gives the lender authority over the account from the moment of signing. The borrower cannot transfer or withdraw funds without the lender’s written approval. The account is effectively frozen.
The lender gets certainty that the cash will be there when needed. The borrower gets zero liquidity from that account. Blocked DACAs are usually acceptable only on reserve accounts, escrow accounts, or other pools the borrower does not need for daily operations. Lenders demand them when cash is the primary or sole collateral.
Springing Control
A springing DACA, also called a passive control agreement, is the common choice for working capital accounts. The borrower keeps full access during normal operations. The lender’s control sits dormant until a trigger event, almost always a default under the loan agreement.
When the trigger hits, the lender sends a written notice to the bank. From that point on, the bank stops taking the borrower’s instructions and acts only on the lender’s. Control “springs” into effect.
The trade-off for the lender is uncertainty. By the time default is declared and the notice reaches the bank, the balance may already be depleted. The precise definition of “default” matters here. Vague or subjective trigger language invites disputes over whether a notice is valid, which can delay enforcement at exactly the wrong moment.
Priority Among Competing Creditors
Perfection by control is not a formality. It decides who gets paid first when multiple creditors claim the same account. The UCC sets a clear hierarchy:
- A lender with control beats any creditor without control, including one that relied on a financing statement alone.
- Among lenders that each have control, the one who got there first wins.
- The bank that holds the account outranks other secured parties that perfected by DACA.
- A lender who became the bank’s customer on the account outranks even the bank itself.
For most commercial loans, a DACA gives the lender strong priority against outside creditors but leaves the depositary bank in a superior position unless the lender takes the additional step of becoming a customer on the account.
The Bank’s Right of Setoff
Banks have an inherent right to apply funds in a customer’s account against debts the customer owes the bank. A DACA does not automatically eliminate that right. Under the UCC, a bank’s setoff against the account is generally effective even when another party holds a security interest perfected by control. The only statutory exception is for a secured party that perfected by becoming the bank’s customer on the account, which is the uncommon method.
Because the typical DACA uses the three-party agreement route, the UCC leaves the bank’s setoff right intact by default. Changing that result requires a contractual waiver of setoff written into the DACA itself. A typical waiver says the bank will not offset or deduct funds from the account until the lender confirms the borrower’s obligations are paid in full. Negotiating that waiver is often one of the most contested points in the whole process.
What the Document Has to Get Right
A DACA has to identify the account precisely: the exact account name, account number, and the location of the depositary institution.
It must specify which jurisdiction’s law governs. The UCC provides rules for determining the bank’s jurisdiction when the parties have not chosen one, but a clean governing-law clause avoids ambiguity in a priority fight.
Notice procedures matter too. The agreement should spell out the exact method, address, and format for delivering a notice of exclusive control. Banks routinely reject notices that depart from the agreed format or omit required attachments, including a copy of the executed DACA.
All three parties sign through authorized representatives. Execution delays are common. The bank’s internal legal review, personnel changes at the borrower, and the need for separate DACAs at each bank in a multi-account facility can stretch the process to several weeks.
How a DACA Ends
A DACA typically terminates when the underlying loan is repaid and the lender releases its security interest. The lender sends a termination notice to the bank, and the borrower regains unencumbered control of the account.
Standard terms also let the bank terminate in certain situations. The bank can terminate immediately if a law, regulation, or court order requires it. If any party breaches, the bank can usually terminate on five business days’ notice. Otherwise, the bank can exit on 30 days’ notice. The borrower cannot walk away alone; termination by the borrower requires a joint notice signed by both borrower and lender.
When the bank terminates, the agreement generally requires it to remit remaining funds at the lender’s direction if the lender provides instructions before the termination date. If no instructions arrive, the bank may send the funds to the lender’s address on file. Obligations that arose before termination, including indemnification, survive.