Friday, April 10, 2020

Commentary: CUs Should Temporarily Suspend Cross-Collateralization During Economic Downturn

Many credit unions have cross-collateralization clauses in their membership agreements and account opening documents.

This means a credit union member's debt and savings are connected. So if a credit union member defaults on a loan at a credit union, a credit union can seize funds in the member's checking or savings account to cover the loss.

WILX News 10 recently reported that a credit union member had funds taken from his account by the credit union and applied to his past due loan. Once News 10 contacted the credit union, the credit union stated it made a mistake and refunded the money to the account.

As the United States addresses the coronavirus, a large portion of our economy has been shut down.

In the last 3 weeks, almost 17 million people have filed claims for unemployment benefits. The unemployment rate for April is expected to exceed the peak reached during the financial crisis at 10 percent.

Loan defaults are only going to increase.

While the practice of cross-collateralization benefits credit unions, it harms financially struggling credit union members, especially those of modest means.

Given the economic dislocation due to the coronavirus, credit unions should temporarily suspend the practice of cross-collateralization, if they have not already done so.

If credit unions do not voluntarily suspend this practice, credit union regulators and the Consumer Financial Protection Bureau should require credit unions to temporarily suspend the implementation of these clauses.

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