Compliance Center: How Does Your 2007 Credit Card Agreement Hold-Up?

In a civil action case in District Court of Massachusetts, Judge Douglas Woodlock ruled that American Airlines Federal Credit Union (AAFCU) violated anti-offset provisions of both the Massachusetts Consumer Credit Card Disclosure Act (MCCCDA) and the Federal Truth in Lending Act (Reg Z) when it debited amounts owed on the member’s credit from her deposit accounts.

The MCCCDA provisions were based on the Reg Z requirements, which will be referenced in this article.

A little history of the action. The member opened her first account with AAFCU in the early nineties, in her name only. She later opened additional joint accounts in 2001with her children. In 2007, she opened a credit card account with AAFCU in response to a pre-screened offer. In 2012, AAFCU withdrew money from her accounts to pay the credit card debt as “CC CHG OFF RECOVERY”.

When her card was opened, the member had first signed and returned Pre-Approved Acceptance Certificate to indicate she wished to receive the card. The Pre-Approved Acceptance Certificate contained a certification that the member has “read and agree[d] to all terms and disclosures contained in this application…and will be subject to the terms and conditions of the Visa Platinum Reward Credit Card Agreement.” The reverse side of the application contained the required Schumer Box and Regulation Z disclosures circa 2007.

The application was approved and the member was mailed her VISA Card and the account terms and conditions. Item #10 of the Account Terms and Conditions was in bold and had a box around it. It highlighted that the member was granting a consensual security interest in all individual and joint accounts held at the credit union. After receiving her card and activating it, the member started using her card to make purchases. In 2012 she defaulted on her credit card, at which time AAFCU took the money out of her account to pay the credit card debt owed.

At issue is the prohibition on Regulation Z against offset. While the Credit Card Act made a number of changes to Regulation Z with regards to credit cards, the prohibition against offset predates the Credit Card Act. A 2008 version of 12 CFR 226.12, part (d) is identical to what is found in 12 CFR 1026.12(d) today.

(d) Offsets by card issuer prohibited. (1) A card issuer may not take any action, either before or after termination of credit card privileges, to offset a cardholder’s indebtedness arising from a consumer credit transaction under the relevant credit card plan against funds of the cardholder held on deposit with the card issuer.

(2) This paragraph does not alter or affect the right of a card issuer acting under state or Federal law to do any of the following with regard to funds of a cardholder held on deposit with the card issuer if the same procedure is constitutionally available to creditors generally: Obtain or enforce a consensual security interest in the funds; attach or otherwise levy upon the funds; or obtain or enforce a court order relating to the funds.

In his ruling, the judge focused on the Official Commentary of Regulation Z with regards to the member being aware that they are granting a consensual security interest:

i. The consumer must be aware that granting a security interest is a condition for the credit card account (or for more favorable account terms) and must specifically intend to grant a security interest in a deposit account. Indicia of the consumer’s awareness and intent could include, for example:

– Separate signature or initials on the agreement indicating that a security interest is being given.

– Placement of the security agreement on a separate page, or otherwise separating the security interest provisions from other contract and disclosure provisions.

– Reference to a specific amount of deposited funds or to a specific deposit account number.

In his conclusion, Judge Woodlock stated, “I conclude that the combination of the Pre-Approved Certificate, the Credit Card Agreement, and Martino’s subsequent use of the credit card is insufficient to create a consensual security interest under both TILA and MCCCDA.”

In light of this ruling, credit unions may wish to review their credit card agreements for language regarding the granting of a consensual security interest in the members’ accounts and determine if it would meet the Official Commentary with regards to whether or not the member would be aware they are granting the security interest. If you have questions, you may even wish to consult with your legal counsel on the matter.

Compliance Question of the Week

Under the TILA/RESPA Integrated Disclosure rule, what are our timing requirements if we need to send the Loan Estimate through the U.S. mail?

The Loan Estimate must be provided to the customer either by delivering the disclosure by hand to the applicant or placing the Loan Estimate in the mail no later than three business days of the receipt of an application.  Additionally, under Regulation Z, a consumer is considered to have received the mailed disclosures three business days after they were placed in the mail.

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Federal Deposit Insurance Corporation (FDIC)

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Federal Trade Commission (FTC)

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Questions? Contact the Compliance Hotline: 1.800.546.4465, compliance@nwcua.org.

Posted in Compliance News, Federal.