By Matthew Young, Attorney
When your member defaults on his or her loan, your Credit Union is going to want your member to cure the default as quickly as possible or exercise the quickest and most cost effective means to recover the balance. Most commonly, this recovery will occur through offset or (setoff), which is the common law (and in some instances the contractual right) to apply funds in an account to a debt on which your member has defaulted.
Ordinarily, Credit Unions possess the right of setoff against general accounts held by the Credit Union when the member defaults on loan repayment. Pursuant to Regulation Z, however, Credit Unions do not possess the right of setoff against general accounts held by Credit Unions when the member defaults on payment of credit card balances. Regulation Z does, however, maintain a creditor’s right to obtain and enforce a consensual security interest.
Therefore, in order to qualify under Regulation Z as a security interest, both the consumer and the creditor must agree to it and the creditor must disclose this security interest in its initial disclosures. The security interest must not operate, however, as the functional equivalent of the right of setoff. Thus, routinely including contractual language within agreements indicating consumers’ consent to a security interest in any deposit accounts maintained by the credit union does not result in a security interest under Regulation Z. The consumer (member) must sign or initial a separate agreement indicating the granting of the security interest.
The terms and manner in which these terms are laid out are specific, in order to be enforceable. Many newer credit card applications/agreements provide this right in the account terms. Most commonly it is just above the signature line of the agreement, separately delineated from the rest of the document, usually in bold in its own paragraph. If you are uncertain if this language is in your agreement or if you are sure it is not, you should contact your legal counsel for forms provided to ensure that the appropriate language exists to allow for this right to setoff. A right to setoff can quickly rectify a defaulted credit card balance that may otherwise be expensive or impossible to recover. Please reach out to us with any questions or interest at weltman.com.