Credit Union Cross-Collateralization Clauses Violate TILA

by Ron Siegel on April 4, 2011

By Christine Wilton

I’m a member of a Credit Union and have several accounts with them.  I’ve heard of this mysterious ‘cross-collateralization’ CLAUSE and thought I would do some investigation so we can all sleep better.  Arizona Bankruptcy Attorney John Skiba wrote, Bankruptcy, Credit Unions & Cross Collateralization Agreements, over at JDSupra, which provides a very brief and technically incorrect overview of Credit Union’s dirty little tricks to get you to pay all your debts owed to them.  What we all need to know is, Can they get away with it?

The term cross-collateralization is not an agreement on its own, but rather it is a clause contained in other agreements that you might enter into with your credit union.  A contract clause is a term or condition that is written into the agreement that becomes part of the contract.  The trouble with these nasty little clauses is that credit unions are the only entities that think they’re a good idea and these clauses are not disclosed to the consumer and buried in the fine print or what we call ‘boilerplate’ language. I liken this baby clause as happy when you’re paying your debts and an incessant whiner when you stop.

Whenever you borrow money to buy say an automobile, or home, you list that property as collateral. The promissory note you sign has certain Truth in Lending Act (“TILA”) Disclosures that are required. The problem comes in when you obtain unsecured credit lines with the credit union that contain this cross-collateralization clause that says that they can attach other debts to any collateralized loans obtained from this credit union.  This clause is buried in the credit agreements that are usually discarded by debtors without so much as a glance and do not contain any TILA disclosures. At their most fundamental level, these clauses violate Truth in Lending.

What also jumps out to me is Unfair and Deceptive Trade Practices in the Credit Union’s use and enforcement of these junk clauses. It is patently offensive and unconscionable to include this cross-collateralization clause buried in a consumer loan agreement that is not disclosed to the consumer prior to entering into that agreement.  Then, when a consumer defaults on the loan or credit, then the Credit Union violates Fair Debt Collection Practices in their attempts to enforce this clause.

What happens in bankruptcy is that we must look at whether the agreements are enforceable.  If they are enforceable, then the debts owed are secured.  If the agreements are unenforceable, we will treat them as unsecured debts.

Posted By Ron Siegel

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