What Can You Do About Those Late Credit Card Payments?

August 24, 2015 at 9:03 am Leave a comment

I am a firm believer in not making the same mistake twice; I prefer to make new ones instead.  In that vein, please do me a favor and double-check the way your credit union handles delinquent credit card accounts.

Late last week, a federal district court in Massachusetts ruled that American Airlines Federal Credit Union violated both the Truth in Lending Act and a similarly worded Massachusetts state law by seizing funds in the member’s account after she became delinquent on credit card payments due to the credit union.  A recurring question that the Association’s Compliance Department fields is just what steps credit unions can take to “offset” member funds when they fall behind on credit card payments.  The case provides a great opportunity for everyone to remember the basic rules and double-check their procedures.  (See Martino v. Am. Airlines Fed. Credit Union, No. 14-10310-DPW, 2015 WL 4920015, at *4 (D. Mass. Aug. 18, 2015)).

The most important thing to keep in mind is that the Truth in Lending Act extends added protections to credit card holders.  Consequently, if you want the option of claiming funds to recover delinquent credit card payments, there are several steps you must take ahead of time.  Fortunately, this is one area where the regulations are self-explanatory.

The best place to go is 12 CFR 1026.12(d)(2) and its official staff interpretation conveniently provided for us on the CFPB’s excellent website.  Most importantly, a credit card holder must affirmatively agree to a card issuer having a security interest to pay off delinquent credit card debts.  A technical but critical distinction is that the agreement must create a security interest, which defines with specificity the funds that can be accessed to pay off delinquencies.  For this security interest to be valid, the consumer must be aware that he is granting it.

There are three basic indicia to be reviewed in determining whether a consumer has been given adequate notice:

  1. Separate signature or initials on the agreement indicating that a security interest is being given.
  2. Placement of the security agreement on a separate page, or otherwise separating the security interest provisions from other contract and disclosure provisions.
  3. Reference to a specific amount of deposited funds or to a specific deposit account number.

Of these three indicia, perhaps the most challenging to implement involves referencing a specific amount of deposited funds.  In the American Airlines case, the court noted that courts are split as to how specific the reference language must be. In this case, the court held that reference to accessing “all” accounts is insufficient.  Instead, the credit union should have referred to a specific account number, or highlighted the full amount that could be taken in the event the security interest was executed.

So ends your compliance lesson for the day.  I hope you enjoyed your weekend.



Entry filed under: Compliance. Tags: .

Further Proof That MBL Reform Would Help Small Businesses The Ralph Kiner Correction

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

Trackback this post  |  Subscribe to the comments via RSS Feed

Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 503 other followers