Written by Benjamin M. Litchfield, Regulatory Compliance Counsel
Greetings to all of you out there in regulatory compliance land. In light of the CFPB’s recent consent order with Navy Federal Credit Union, we received some questions asking under what circumstances federal credit unions are permitted to freeze or restrict access to a share account when a member is delinquent on a loan.
Article II, Section 4 of the Federal Credit Union Bylaws grant federal credit unions the authority to limit services or access to credit union facilities to a member who is disruptive to credit union operations. Here is the relevant section of the Bylaws:
ARTICLE II. QUALIFICATIONS FOR MEMBERSHIP
[…]
Section 4. Continuation of membership. Once a member becomes a member that person may remain a member until the person or organization chooses to withdraw or is expelled in accordance with the Act and Article XIV of these bylaws. A member who is disruptive to credit union operations may be subject to limitations on services and access to credit union facilities. A credit union that wishes to restrict services to members no longer within the field of membership should specify the restrictions in this section. (Emphasis added).
Through various Legal Opinion Letters, the Office of General Counsel has interpreted this authority to include limiting services to members that have caused a loss to the credit union. See, e.g., NCUA Legal Opinion Letter 96-0530 (June 10, 1996); NCUA Legal Opinion Letter 08-0431 (Aug. 12, 2008). In each case, the Office of General Counsel has required there to be some “logical relationship between the objectionable conduct and the services to be suspended” and that members receive notice of the policy.
However, the Office of General Counsel has cautioned that contract provisions in account and other member services agreements, as well as federal and state laws, may affect a federal credit union’s ability to implement a suspension of services policy. For example, in NCUA Legal Opinion Letter 08-0431, the Office of General Counsel notes that Regulation B may prohibit credit unions from implementing a suspension of services policy that has a disparate impact on minority borrowers and suggests that credit unions discuss this issue with legal counsel to determine the applicability of Regulation B and other requirements to the credit union’s suspension of services policy.
Another example of where federal law may prohibit a federal credit union from implementing a suspension of services policy involves consumer credit cards. Section 1026.12 of Regulation Z prohibits the use of offsets to satisfy a cardholder’s indebtedness to the credit union unless the member has granted a consensual security interest in the account to the credit union. Here is the relevant portion of the regulation:
(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.
(3) This paragraph does not prohibit a plan, if authorized in writing by the cardholder, under which the card issuer may periodically deduct all or part of the cardholder's credit card debt from a deposit account held with the card issuer (subject to the limitations in §1026.13(d)(1)).
Commentary to this provision notes that holds on accounts or “freezing” accounts are considered to be the functional equivalent of an offset and are likewise prohibited unless the cardholder and the credit union have a consensual security agreement that permits the credit union to place a hold on the account. See, 12 C.F.R. pt. 1026, Supp. I, comment 12(d)(1)-1. Therefore, credit unions may wish to review credit card agreements with legal counsel to determine whether the necessary legal formalities have been observed to grant a security interest and permit the credit union to freeze an account.
So, practically speaking, what does this mean? Each situation is fact specific and credit unions seeking to adopt such a policy may wish to consult competent local counsel to review proposed programs and determine whether such programs comply with relevant legal requirements. But there is the rub. What are all the relevant legal requirements? The CFPB cited its authority under UDAAP in the Navy consent order. Whether the CFPB considers something to be unfair and deceptive is still not spelled out in regulation but rather is based on the bureau's own opinion as reflected in their enforcement orders.
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