The term is “cross-collateralization”. I have dealt with this issue on many occasions over the years. However, when a most recent client came into my office and I had to explain why he would not be getting title to any of his cars, anytime soon, it was inspiration for me to shed light on this concept, to what I know is a very large and unsuspecting population of consumer borrowers. The following are the facts from a real life example.
The borrower, borrows $8,000.00, in May, 2010 and uses an older 2004 family vehicle as collateral. Of course, the credit union will hold title to the car until its projected payoff date of May, 2013. In February, 2012, that same borrower, purchases a new car and finances it for $19,000.00. Again, the credit union will hold title to that car until the projected payoff date of August, 2017. In June, 2012, the borrower returns to take out a personal loan for $20,000.00, that is scheduled to be fully repaid in 2022. This time, there is no specific collateral identified in the loan documents. By April, 2013, the borrower loses his job and has to make tough decisions with respect to what bills to pay. He is able to remain current on his auto loans, but has missed three payments towards the personal loan. In May, 2013, he makes the final payment on the 2004 vehicle and is looking to receive title to the car in an effort to sell it for much needed cash. Due to the default on the June, 2012 personal loan that was obtained after the 2010 car loan, the credit union refuses to release the title. How? Read the actual language from a credit union loan agreement. I’ve highlighted certain sections for emphasis.
This agreement is secured by all property described in the security section of the truth in lending disclosure (*see below for the exact wording). Property securing other loans, you with have us, also secures the loan, unless the property is a dwelling. A dwelling secures the loan only if it is described in the security section of the truth in lending disclosure for this loan. If credit union has a federal charter: Statutory lien – if you are in default on a financial obligation to us, federal law gives us the right to apply the balance of shares and dividends in all individual and joint accounts you have with us to satisfy that obligation. After you are in default, we may exercise this right without further notice to you. (We have a federal charter if I name includes the term “federal credit union”.) If credit union has a state charter, except in Ohio and Rhode Island: We have a statutory lien on the shares and dividends and, if any, the deposit and interest in all individual and joint accounts you have with us and may exercise our rights under the lien to the extent permitted by state law. (We have a state charter if our name does not include the term “federal credit union”). For all borrowers: you pledge as security for this loan all shares and dividends and, if any, all deposits and interest in all joint and individual accounts you have with the credit union now and in the future. The statutory lien and/or your pledge will allow us to apply the funds in your account(s) to what you owe when you are in default. The statutory lien and your pledge do not apply to any individual retirement account or any other account that would lose special tax treatment under state or federal law if given as security.
Default: You will be in default under this agreement if you do not make a payment of the amount required on or before the date it is due. You will be in the default if you break any promise you made a connection with this loan or if anyone is in default under any security agreement made in connection with this agreement. You’ll be in default if you die, filed for bankruptcy, become insolvent (that is, unable to pay your bills and loans as they become due), or if you made any false or misleading statements in your loan application. You will also be in default if something happened that we believe may seriously affect your ability to repay what you owe under this agreement or if you are in default under any other loan agreement you have with us. That last sentence is a real humdinger. The credit union gets to determine what that “something” is and make its decision based off of what “they believe” “may” seriously affect your ability to repay. Now that’s real unilateral power!
*Further, this is the broad and all-encompassing language that is contained in the security section of the truth-in-lending disclosure: Security: “Collateral securing other loans with the credit union may also secure this loan. You are giving a security interest in your shares and dividends and, if an any, your deposits and interest in the credit union; and the property described below”: (this section would include the description of a car or other item noted here)
So this is how the credit union is able to keep the title to his car until the other debt is paid. Notice that the personal loan isn’t slated to be paid off until 2022! And what if he doesn’t pay it to their satisfaction by the time the other car is paid off in 2017? Does that mean they can hold title to the cars until then? Well, potentially. And who agreed to this? You did when you signed the lending documents. For obvious reasons, the credit union that I used to provide this language shall remain nameless. However, if you have a car loan with a credit union along with a credit union credit card, personal loan, share, draft, savings or checking account, I urge you to read your loan documents carefully. It’s a safe bet that you will find that your loan documents contain the same or a very similar set of language. If this is the case, wouldn’t you like to know?
While credit unions offer a real benefit when it comes to borrowing, their default terms can be unforgiving. Because the only answer to this issue is knowledge, preparation, avoidance and/or bankruptcy, be sure and consider this information if you find that you may be facing a potential default on any existing credit union debt or better yet, if you are considering using any credit union for multiple borrowings, before you enter into such an agreement.
Oh and was I able to help my client? Of course I was!
Thanks for reading. Please note that I am licensed to practice law in Maryland and the District of Columbia. As such, this blog is based largely off of the laws of those jurisdictions and is not intended as specific legal advice.
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Categories: Debt Collection