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By Kaufman & Canoles
Caution! Credit unions can easily miss one or more legal requirements when repossessing collateral upon a member’s default. The number of lawsuits over repossessions is increasing. Because forms are often used for this process, one omission or error can turn into multiple violations. Increased class action litigation in this area elevates the importance of reviewing forms and processes related to repossession.
Repossession laws vary by state. Most states have adopted a version of the Uniform Commercial Code (UCC), which provides form notice language to fulfill statutory requirements. For example, Maryland and Washington, DC, have adopted standard UCC provisions to govern repossession and the notices that must be provided to consumers before disposition of property. Credit unions also need to ensure their repossession practices comply with local law.
Credit unions should assess the following five key areas in their repossession process. A mistake in any area of their process likely will affect numerous members in a similar fashion enabling plaintiffs’ lawyers to make class action allegations.
Multiple requirements related to notices and their content apply when credit unions seek to repossess and sell collateral. Some states require a notice that the credit union intends to repossess the property. Other jurisdictions, like Maryland, do not require that notice; however, if it is sent, specific requirements govern its substance.
Once repossessed, but before the collateral is sold, credit unions in most states are required to send a notification. Maryland and DC require this notification. The debtor and any other lien-holder or secured party must receive this notice. This notification must include items such as identification of the collateral, how the credit union intends to dispose of the collateral (including the date and place of sale), and the consumer’s right to redeem the property and receive an accounting. Failure to include necessary provisions can result in a violation of law.
After selling collateral, credit unions are required to send a deficiency or surplus letter, depending on the sale’s outcome. This notice must include specific information such as the amount of sale proceeds, an itemization of the expenses and fees charged, and an explanation of the deficiency or surplus calculation.
Credit unions should understand the requirements for a collateral sale. Most statutes impose a standard of commercial reasonableness, including every aspect of the sale from the method to the time of sale.
The timing of notices varies by state. Notices of repossession, whether discretionary or required, likely have to be sent a certain number of days before the repossession. Most states require the notification sent before a sale to be sent within a reasonable time before the disposition. The member and other secured parties need time to react to the notice whether it be redeeming the property or attending the sale. There might also be timing requirements associated with the deficiency or surplus letter. For example, Washington, DC, requires such notice to be sent within five days of the sale.
Following the sale, the UCC specifies how the funds must be applied. For example, the reasonable expenses of collection and enforcement are the first items to be satisfied.
Credit unions need to be familiar with all regulations imposed by their state that are not part of the UCC and any restrictions contained in their loan agreements. Failure to follow these rules could result in additional penalties. For example, a DC regulation restricts where an automobile can be stored once repossessed. Furthermore, although the credit union likely prepared its loan documents, those agreements might contain notice provisions that impose a contractual obligation on the credit union.
An error or omission in a credit union’s repossession process likely will be uniformly made across a segment of members, i.e., all residents of DC who had a vehicle reposed by the credit union during the past four years. That uniformity across a class of affected members enables a named plaintiff to allege claims in a lawsuit brought on behalf of himself or herself “and all others similarly situated.” The filing of such a lawsuit is the first step in the class action process. Certification of a specifically defined class of members is the next step.
To obtain certification of a class, a member of the credit union who is seeking to become the class’ representative must demonstrate the following:
Upon demonstrating those four elements, the court will enter an order certifying a class.
In the repossession context, a single mistake in the process can be repeated countlessly over a specified period of time. To avoid the possibility of defending against a class action, the credit union repossession process must strictly conform to all applicable state and local laws and be rigorously followed every time it is utilized. Repeating a mistake or cutting a corner could prove enormously costly to a credit union.
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May 5, 2014
5/1/2015 10:00 PM
This article addresses every error the Maine Credit Union I belonged to and conducted business with for 10 years. They repossessed my car which was financed in 2006 and paid on for 5 years in and accepted payments right up until they repossessed. No notification of sale, balance due upon sale, location etc. The repossession was a breach of properties and a forced, threatening experience. The most humiliating experience of my life. Needless to say the repossession of my car affected my self-employment income, caring for my daughter, and ruining my credit for the last 4 years making it next to impossible to receive a respectable interest rate or lease on a vehicle. The attorney I contacted just did not have the time due to the nature of their business, real estate and bankruptcy. I am looking for direction and resolution to this matter. The Maine Credit Union should definitely have a lawsuit brought against them for all of the above stated regulations they broke. My daughter and I have suffered terribly as a result of their unlawful, unethical practices.
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