Compliance Question of the Week
December 4, 2012
December 4, 2012
In our membership and account agreement, the section regarding our Credit Union Lien and Security Interest reads: “…In addition, you grant the Credit Union a consensual security interest in your accounts and agree the Credit Union may use the funds from your accounts to pay any debt or amount owed the Credit Union, except obligations secured by your dwelling, unless prohibited by applicable law.”
Is the verbiage regarding “except obligations secured by your dwelling” required per any state law or federal regulation? Do you know why this is included in our agreement?
No, the verbiage is not required to be in your agreement per any state law or federal regulation.
However, the language was added into the statement (most likely by your attorney) to help protect the credit union in the event that a member files Chapter 13 bankruptcy. Generally, with Chapter 13 bankruptcy, the items serving as collateral for a loan will have any debt over and above the value of the collateral written off as unsecured. For example, if a debtor has a car loan for $25,000, but the vehicle is only valued at $20,000, the credit union will only recoup the $20,000 from the borrower. The $5,000 that is still owed will be treated as unsecured.
An exception to this rule exists when dealing with claims secured solely by the debtor’s principal residence. Generally, any liens against the home will have to be paid, regardless of the value of the home at the time of the Chapter 13 filing. However, if the credit union secures an interest in the debtor’s deposit accounts and does not apply the exception (as listed in the agreement noted in the question), it will lose the special treatment for the dwelling-secured loan should the debtor file Chapter 13.
Questions? Contact the Compliance Hotline: 1.800.546.4465, firstname.lastname@example.org.