What is a Deposit Account Control Agreement (DACA)?

A deposit account control agreement, commonly referred to as a DACA, is a tri-party agreement between a borrower, a lender, and the bank holding the borrower's deposit account that gives the lender legal control over the account as collateral security. It is the mechanism by which a lender perfects a security interest in a borrower's cash under Article 9 of the Uniform Commercial Code (UCC).

DACAs are a standard feature of commercial lending transactions. Any lender taking a deposit account as collateral needs one to ensure its claim on the funds has legal priority over other creditors.

Why DACAs exist: the UCC problem

Under the UCC, most types of collateral can be secured by filing a UCC-1 financing statement. Filing gives public notice of the lender's security interest and establishes its priority. Deposit accounts are an exception.

A UCC-1 filing alone is not sufficient to perfect a security interest in a deposit account. Under UCC Article 9, the only way to perfect a security interest in a deposit account is for the lender to take control of it. Control, in the UCC sense, means the depository bank has agreed to follow the lender's instructions regarding the account without needing the borrower's consent.

A DACA is how that control is established. Without it, a lender extending credit secured by cash in a deposit account has an unperfected security interest, which means other creditors could take priority over it in a bankruptcy or default scenario.

The three parties to a DACA

Every DACA involves three parties, each with a distinct role:

• The debtor (borrower): The entity that owns the deposit account and is pledging it as collateral for a loan or credit facility. The debtor enters the DACA to enable the financing.
• The secured party (lender): The entity extending credit and seeking to protect its position by taking control of the deposit account. The lender's goal is to ensure it can access the funds if the borrower defaults.
• The depository bank: The bank holding the account. By signing the DACA, the bank acknowledges the lender's control rights and agrees to follow disposition instructions as specified in the agreement. The bank's role is critical because control under the UCC is defined by the bank's agreement to comply with the lender's instructions.

Active vs. passive DACAs

The two main types of DACA differ in who controls the account and when that control takes effect.

• Passive DACA (also called a springing DACA): The borrower retains normal access to the deposit account and can continue using it for day-to-day operations. The lender's control only activates upon a specified trigger event, typically a default. Until that event occurs, the bank takes instructions from the borrower as normal. Upon the trigger, control springs to the lender.‍
• Active DACA (also called a blocked DACA): The lender has immediate and exclusive control over the account from the moment the agreement is executed. The bank takes disposition instructions only from the lender, not the borrower. The borrower cannot access or move funds without lender consent.

The choice between the two reflects the negotiated risk allocation between borrower and lender. Passive DACAs are more common in working capital facilities where the borrower needs ongoing access to its operating accounts. Active DACAs are used where the lender wants tighter control, such as in asset-based lending arrangements where the collateral account is a dedicated collections account rather than a general operating account.

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What happens when a DACA is triggered

In a passive DACA, the lender activates its control by sending an initial instruction to the bank. This is a formal notice directing the bank to stop following the borrower's instructions and to comply only with the lender's instructions going forward. Once received, the bank is required to act on it.

A December 2024 ruling by the US District Court for the Western District of Pennsylvania found that a depository bank materially breached a DACA by failing to comply with a lender's disposition instructions after an initial instruction was delivered. The case reinforced that banks have a binding obligation to honor DACA instructions once control has been established, and that failure to do so creates legal liability.

DACAs in fintech and payments

DACAs are most commonly associated with commercial lending, but they arise in payments and fintech contexts in several ways.

Fintechs that maintain significant deposit balances, whether operating accounts, client fund accounts, or reserve accounts, may be required to execute DACAs in favor of their lenders as part of a credit facility. A venture debt lender or a revolving credit facility provider will typically require a DACA over any material deposit account as a condition of funding.

For platforms using virtual accounts or FBO structures to hold client funds, a DACA over the underlying pooled account creates a tension worth understanding. If a lender has control over an account that holds client funds, the client fund segregation structure may be affected in a default scenario. This is a flow of funds design issue that should be addressed explicitly in both the DACA and the client fund agreements before a facility is put in place.

Sweep account arrangements and DACA obligations can also interact. If an account subject to a DACA is part of a sweep structure, the lender's control rights and the sweep mechanics need to be reconciled, typically by carving out or specifically addressing sweep participation in the DACA terms.

Treasury management and liquidity management teams at any company with material credit facilities should know which of their deposit accounts are subject to DACAs, what the trigger conditions are, and what operational restrictions apply. A DACA that springs without warning can disrupt payment operations if the team is not prepared for it.